The Beginner’s Guide to Cardano

Cardano claims to be a third-generation cryptocurrency that seeks to provide a scalable, interoperable and sustainable ecosystem with a two-layer architecture using a peer review-based approach to development

Generations of cryptocurrencies

According to Cardano founder Charles Hoskinson, cryptocurrencies can be divided into three generations.

The first generation commenced with the creation of Bitcoin which paved the way for countless clones and knock-offs. The original cryptocurrency was predicated on the idea of transferring value over the internet without any third parties. We needed a way to send money directly to other people. This is exactly what Bitcoin achieved. With Bitcoin, Alice could now send money over to Bob without asking anyone’s permission or relying on someone in the middle. This is why Bitcoin is the first-generation cryptocurrency.

Bitcoin is an incredibly powerful tool that gives people absolute control over their money but from the technical viewpoint Bitcoin is very simple. Bitcoin uses a scripting system for transactions. Script is a simple programming language that can execute simple commands. Script is not Turing-complete meaning it cannot make complex mathematical calculations. However, it was intentionally designed this way for security purposes. For example, it does not support loops which prevents someone from overloading the system by having it execute the same piece of code over and over.

Soon after Bitcoin had started to gain popularity, we realized that due to its simple design Bitcoin was limited in its functionality. Bitcoin cannot cover a range of financial operations that traditional banks have been providing since a long a time ago. What if Alice wanted to pay Bob only if he fixed her vacuum cleaner? The need for decentralized financial tools resulted in the invention of Ethereum and with it began the second generation of cryptocurrencies. Ethereum offered a way of expressing agreements in smart contracts, autonomous self-executable persistent scripts. Now Alice could create a smart contract that would hold her money and send it to Bob only after he proved he fixed the vacuum cleaner.

Contract-oriented programming languages, mainly Solidity used for Ethereum contracts, did to blockchains what JavaScript did to websites. Before JavaScript, websites were boring static pages containing text and links to other boring static pages. Unlike Bitcoin’s Script, Solidity supports loops and to prevent someone from overloading Ethereum, Vitalik Buterin and other founding developers introduced the concept of gas, a scarce resource that needs to be paid to execute contracts. So, if you want to run a loop forever, you need an infinite amount of gas, and gas costs money.

Ethereum helped blockchains realize their potential as platforms for decentralized applications. Soon, however, we found out that these blockchain platforms are not perfect and have a number of issues. Cryptokitties, a popular collectibles-based game, for example, showed us that Ethereum could not support a large amount of transactions per second, which led to bottlenecks and ‘stuck’ transactions. The DAO hack, an attack on the Ethereum blockchain that resulted in millions of dollars worth of ETH stolen, and the hardfork (Ethereum Classic) that followed it revealed the urgent need for a more thorough approach to both development and governance.

Cardano, the third-generation cryptocurrency

Cardano approaches development in a peer review-based scientific manner. This means that before publishing any whitepapers or rolling out code, the Cardano team makes sure that the papers and code are reviewed and approved by scientists and experts from all over the world.

Cardano was launched on September 27, 2017. The Cardano team consists of three companies each having their role in the project:

  • Cardano Foundation, a non-profit organization that aims to promote Cardano and form partnerships with enterprises and open-source projects;
  • IOHK, a world-class technological company that develops and maintains Cardano;
  • Emurgo, a company formed to integrate, develop and support businesses who want to utilize Cardano's decentralized blockchain.

Founder and CEO of Cardano Charles Hoskinson was also one of the founding members of Ethereum.

ADA is the native currency of Cardano and is available for trading on Bittrex, Binance, BitMEX, Upbit, HitBTC, Huobi, Bithumb, and Etoro. The total max supply of ADA is 45,000,000,000 tokens. Daedalus is the official wallet of Cardano.

Cardano implements a two-layer architecture: the settlement layer where all transactions take place, and the compute layer that hosts and executes smart contracts. Such architecture, the team assures, will make it easier to deploy improvements and to manage the system in general.

Cardano seeks to address the three following core issues present in existing cryptocurrencies:

  • scalability,
  • interoperability,
  • and sustainability.

Scalability

Cardano believes there are three components to scalability that need to be addressed separately:

  • throughput, i.e. transactions per second;
  • bandwidth of the network;
  • and data storage.

Throughput

Transaction throughput is perhaps the most pressing and talked about problem that blockchains nowadays face. Cardano approaches this matter by developing a unique consensus algorithm called Ouroboros which has been reviewed and approved at Crypto 2017.

Ouroboros is a proof-of-stake algorithm which means that Cardano establishes the truth in the system by way of staking. Cardano puts the responsibility of keeping the system secure and safe into the hands of those people who are most interested in it, i.e. users with high balances.

Ouroboros divides the history of transactions into epochs. An epoch, in turn, consists of slots. Each slot has a slot leader assigned to it. Slot leaders are the stakers of the Cardano network and have the power to produce blocks. Slot leaders are elected randomly.

The election process uses a special selection algorithm called Follow The Satoshi and is as follows:

  • users lock in a certain amount of ADA necessary to become stakers,
  • all eligible users become stakers and participate in a multi-party seed generation that ensures that the elections are absolutely random;
  • the seed is then fed to the Follow The Satoshi algorithm which chooses a random ADA coin,
  • the holder of that coin is then assigned the slot leader, therefore the more ADA one owns, the higher their chance of being elected.

Slot leaders need to be online to generate the block for their slot and if they are not, they miss their turn and the slot remains blockless. Slot leaders can delegate their authority to other stakers, so in a way, Ouroboros is a delegated proof-of-stake.

Network

Cardano foresees its massive popularity and has a plan to address the bandwidth limitations of the existing TCP/IP protocol. Cardano plans to introduce a novel network architecture called RINA, which stands for Recursive InterNetwork Architecture. RINA is still new and yet to be successfully implemented.

Data storage

The growing size of blockchains is another widely discussed issue in the space. Cardano, however, does not seem to be in a particular kind of a hurry because storage costs, as Charles Hoskinson says, still are relatively cheap and the team would rather focus on more pressing matters.

In the future Cardano plans to implement a number of techniques that will lower resource requirements for nodes to host the Cardano blockchain on their drives such as pruning, partitioning, compression and sidechains. By implementing these techniques Cardano hopes to have individual nodes only store a certain portion of the blockchain with which they will still be able to verify and confirm transactions.

Interoperability

Cardano predicts that there will not likely be a single coin to rule them all. Rather there will be a variety of different cryptocurrencies each fulfilling particular needs. And all these cryptocurrencies will need some kind of hub for value to be transferred between them. Currently, this function is performed by exchanges. But those are not a very reliable or secure way of moving funds around. In this regard, Cardano seeks to be the internet of blockchains by enabling interoperability of different blockchains. Cardano wants to provide a secure infrastructure for cross-chain transfers by way of sidechains, compressed versions of other blockchains that are understandable and interactable by the Cardano blockchain.

Cardano also seeks to serve as a bridge between legacy banking methods and cryptocurrencies by adding a complex of features that would allow banks interact with blockchains. Cardano users will be able:

  • to attach metadata to their transactions,
  • prove their identities by way of public-key cryptography,
  • and to comply with any KYC, AML requirements.

Sustainability

Sustainability, in Charles’ view, is the most important issue in cryptocurrencies. The 2017 ICO craze made us realize that the space was in need for a reliable way of raising capital. Here Cardano borrows from Dash, an anonymous cryptocurrency that was first to introduce the concept of treasury.

The Cardano treasury is essentially a bank account which receives a little portion of each block reward. No one owns this account but it can be used to fund the implementation of various improvement proposals. This includes a voting process by which Cardano users can select projects that in their view most deserves the funding. However, there is still a lot of research needs to be done in order to make sure that Cardano employs a fair and honest democratic system of self-funding.

Conclusion

Cardano is still in the early stages of its development and most of what was described above is subject to intensive research and improvement. Currently, the Cardano mainnet is in the Byron stage which mostly focuses on the settlement layer but Cardano testnets already support smart contracts.

Links

Website

Roadmap

Philosophy

Academic papers

Why Cardano?

Block explorer

Youtube

Community

Cardano Community twitter

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Charles Hoskinson explains Cardano

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