Of course, Bitcoin and Ethereum are the two most famous cryptocurrencies in the world. For a long time, these were also the only two cryptocurrencies that many people knew about. Not long ago, a new project was added, which everyone has heard about these days. We are, of course, talking about the second largest cryptocurrency in the world, called Cardano.
Cardano is a blockchain developed by scientists. They did years of research before actually developing the blockchain. Cardano hopes to address the issues that plague many other blockchains, such as Ethereum . In this article we explain how they do that technically.
- 1 What is Cardano (ADA)?
- 2 Why and how was Cardano developed?
- 3 Separation of payment and features from dApps
- 4 Secure Proof of Stake (DPoS)
- 5 How does Cardano (ADA) work?
- 6 What is the ADA token?
- 7 How do I buy ADA?
- 8 How can I save ADA?
- 9 The price of ADA
- 10 Conclusion
What is Cardano (ADA)?
Before we dive deeper into how Cardano works, let’s first explain what Cardano actually is, and what it is made for.
Cardano is a blockchain and cryptocurrency launched in 2015, calling itself “the first blockchain project developed using a scientific approach.” This cryptocurrency was created by both engineers and scientists. The launch follows two years of research and development. The project started with an ICO of $62 million.
Cardano is developed by three different parts:
- Cardano Foundation : deals with the management of the Cardano project, as well as legal issues such as regulation.
- Input Output Hong Kong (IOHK) : the company behind the Cardano project. Their mission is to study new tools and paradigms for cryptography and cryptocurrency architecture research. The co-founder, Charles Hoskinson, also participated in the founding of Ethereum before joining the Ethereum Classic teams. He is also the former CEO of Invictus Innovations (the organization behind Bitshares) and has also collaborated with Daniel Larimer, the co-founder of EOS .
- Emurgo : This is a partner that will promote the adoption of the Cardano blockchain in two ways: by investing in startups that create dApps on Cardano. By developing partnerships with companies that want to use the blockchain to revolutionize their business
Like Ethereum or NEO , the project enables the use of decentralized applications and smart contracts. Cardano therefore wants to improve Ethereum with this, and it solves the scalability problems that the network is experiencing.
Cardano is already operational at the moment, while the developers are still busy developing Cardano. A lot of time is needed to properly develop the blockchain.
The illustration below shows how data flows within a node. Circles represent protocol threads and internal threads that are responsible for running the client and server processes within the respective mini protocols.
Why and how was Cardano developed?
Cardano is an open source, decentralized blockchain and platform for executing smart contracts. These functions make it possible to create, deploy and maintain dApps. But Cardano aims to provide more advanced functionality than any previously developed protocol.
It is the first blockchain platform to emerge from a research-driven approach. The development team consists of a large global collective of engineers, researchers and scientists.
Cardano justifies its existence for several reasons. It all started with the first generation of cryptocurrencies such as Bitcoin . Two people can exchange value without the need for a trusted third party. The problem is that the exchange of value comes from a contract. For example: “I will give you $1000 in exchange for your computer”. Bitcoin was not suitable for this and quite a heavy overlay was built on top of Bitcoin to meet this need.
In 2014, Vitalik Buterin, Charles Hoskinson and others came together to propose Ethereum. This cryptocurrency makes it possible to add a programming language to the blockchain (Solidity). This allows an exchange to be activated automatically when conditions are met. These are the second generations of cryptocurrencies.
However, Cardano sees limits to Ethereum, which may not be very scalable. Scalability means that a blockchain is able to handle the increasing load on its network (e.g. more transactions per second while maintaining its performance). There are differing views on how to try to implement scalability solutions. This has resulted in hard and soft forks, such as Bitcoin and Bitcoin Cash .
The second generations of cryptocurrencies also face 3 types of problems:
- Scalability : How to support the transaction per second load as the network grows. But also the corresponding number of MB per second. Blockchains are getting bigger and bigger and millions of data have to be stored in machines. Cardano suggests that users don’t have access to all the data to verify everything, but only to what is needed to verify their own transactions, for example.
- Interoperability : How do we get a common standard so that blockchains can communicate/interact with each other?
- Sustainability : how do we finance evolutions, developments? How do we define a vision?
The aim of the Cardano project is to address these three issues with the aim of improving the previous generations of coins. Cardano is based on 2 principles to solve the 3 problems mentioned above:
- Separation of payment and features from dApps
- Secure Proof of Stake (DPoS)
Separation of payment and features from dApps
To avoid having to connect funds and decentralized applications, Cardano separates payment and dApps into two separate layers, unlike Ethereum.
The idea is that a smart contract that, for example, distributes payroll to a company’s employees every month, will never be able to know how much each of those employees is getting paid.
Cardano will use a new research-developed proof-of-work protocol: sidechains KMZ. This allows the payment layer and the development layer to communicate while limiting their scope. In fact, these sidechains could be used to communicate with any other blockchain and provide proofs that allow value to be exchanged with these other blockchains.
These sidechains increase security by controlling how smart contracts can interact with the payment layer and enable interoperability with other blockchains. In the illustration below you can see what the architecture between the blockchain and sidechains looks like.
Secure Proof of Stake (DPoS)
Cardano uses Ouroboros (which we’ll talk about later). This technology is seen as unique. The algorithm is based on Proof of Stake, although the team behind Cardano has made several adjustments to make the algorithm even more secure.
Currently, there is a lot of criticism of Proof of Work (PoW):
- Huge energy consumption
- High transaction costs
- Network congestion
Proof of Stake makes it possible to reduce this energy consumption. But there are risks that the Proof of Stake is less secure than the Proof of Work. One of the reasons is that it would be easier for an attacker to double-spend attack on Proof of Stake.
How does Cardano (ADA) work?
Now that you know more about Cardano, let’s dive deeper into how the blockchain works. We will tell you more about how the blockchain is built, how the network works and how the smart contracts can run on the blockchain.
The image below shows what the architecture of the Cardano network looks like.
The platform is made up of different layers, in order to provide the system with flexibility. This makes it easier to maintain the blockchain and allows for easy updates ( soft fork ). Cardano separates the blockchain into two different layers.
The transaction layer (Cardano Settlement Layer)
The Cardano Settlement Layer is the part that focuses on the blockchain (transactions) and the transfer of value between the different actors. The value register (unit of account) is powered by the ADA token and is divisible into 6 decimal places (0.000001 = 1 Lovelace)
A layer for applications (Cardano Computation Layer)
Cardano Computation Layer will bring a programming language to the blockchain. It will interact with the Cardano Settlement Layer to execute a payment or smart contract.
The calculations and storage of the operations that will be performed on the CSL will take place on private networks (private servers). Each network can have its own libraries and technologies. The Cardano network is only used to convey information and messages.
The CSL (payment) is used by the CCL as a means of communication. If an application is developed according to this principle, all necessary calculations will not be performed on the miners’ machines, but on a private network. Cardano is also working on customizing an Ethereum virtual machine for their network.
The image below shows the operation between the Cardano Settlement Layer and Computation Layer.
Ourboros is the Proof of Stake (PoS) based consensus algorithm that determines how different nodes in the network reach a consensus. The algorithm would be the first of its kind to be secure. It would be mathematically verifiable as it is being reviewed by scientists. This algorithm was developed by a team of researchers from 5 universities led by Prof. Aggelos Kiayias (Edinbrugh University).
Cardano has a solution to increase the number of transactions per second. In Cardano, time is divided into “Eras” and “Slots”. One Era lasts for 1200 minutes (20 hours), and contains 600 slots. This means that one lock lasts 120 seconds. Each slot also has its own leader, called the slot leader.
The leader of the lock is the only node that can produce a block during the lock. Slot leaders basically do the same thing as Bitcoin miners.
If a slot is offline at the time of its slot, it misses its chance to produce a block and must wait to be selected another time. So the slots can be empty during an era. At least 51% of the blocks must be created.
Slot leaders are chosen from the participants who enter by staking. Thus, these participants need a certain amount of ADA that they can stake before they can be chosen as the leader of a slot.
During an era, the voters vote for the slot leaders of the next era (600 slot leaders) so that at the end of each era, the slot leaders (those who will compose the blocks) of the next era are already known and cannot be changed.
It is also important to note that a high stake person can be chosen as the final leader multiple times during the next era. The number of times a person is selected is proportional to his stake (the number of ADA token he wagers).
In the illustration below you can see what the structure and distribution of the slot leaders can look like.
The main problem with Proof of Stake is that the people chosen must be chosen randomly, but in proportion to their stake. If not, the same person could be selected several times in a row and spend twice (make the same transaction several times). Cardano proposes a special solution to guarantee randomness.
Voters will use their private key to indicate their intent to become slot leader for a specified era. This intent is seen as a commitment from the person that they will be there and available when their lock arrives. The intent is a random secret message chosen by each voter. It can be anything.
This process takes place in two stages:
- The candidates first send an encrypted intent (message) to all nodes with a secret key.
- They all reveal their secret keys at the same time.
This way all participants can see the voting intention and its content. All intents are actually used to generate a completely random sead. This sead is used in an algorithm that randomly selects a Lovelace (the equivalent of a satoshi in Cardano) from all those brought into play. This happens as often as there are slots in an era, or 600 times. The more Lovelaces a person has in the game, the more likely he is to be chosen.
If more than 51% of the slots in a time slot do not generate blocks, the time slot is invalid.
Leading slots can participate in multiple Cardano blocks at once. The idea is to have multiple eras start and end at the same time. This would allow the blockchains to grow simultaneously. But also to manage transactions in parallel (crossing blockchain) because the eras would still be synchronized.
RINA Recursive Internetwork Architecture
The solution for moving large data packets without having to synchronize the entire network is called RINA, which stands for Recursive Internetwork Architecture. This slows down the network as the blockchain gets heavier.
This allows for a heterogeneous network, which still adheres to the principles necessary to ensure security. In 2019, RINA was introduced within the blockchain testnet, and has now also been deployed within the operational blockchain.
For programming transactions, Cardano seeks a middle ground between Bitcoin, whose language is extremely difficult and inflexible, and Ethereum (Solidity), with which a lot can be done.
Cardano has developed his own language called Simon. It provides all the necessary tools to write financial transactions. A second language, Plutus (based on Haskell), is used to communicate with external financial entities.
The use of these programming languages makes the blockchain more secure, because the possibilities are limited. This is not the case for Ethereum, as there have already been several hacks in the smart contracts here. This is mainly due to some vulnerabilities in Solidity.
This programming language allows features to be added by a soft fork without having to update the entire Cardano code ( hard fork ). For dApps, Cardano will be able to support Solidity directly. Some changes will be made once they finish customizing the Ethereum Virtual Machine (EVM).
Can’t you program through Plutus yet? No worries. You can sign up for a program to learn Plutus. You can register for this program on the Cardano website.
Plutus Core is used to connect the smart contract to the blockchain. Plutus is a fairly complex programming language that cannot be directly understood by a blockchain. Therefore, this language is converted into a language that is much easier to understand.
This ensures that developers can still write complex applications, while not at the expense of the speed of the blockchain. A blockchain needs a lot of resources to execute a smart contract. The easier this is to implement, the faster the blockchain can do its job.
Of course, there are also other ways to save power. For example, there are many ecosystems that make use of sidechains, on which specific tasks are performed. As a result, a large part of the computing power that is required is distributed over different blockchains. This also happens at Avalanche, for example.
Moving Ethereum apps to Cardano
Cardano wants to be an alternative to Ethereum. A downside for Cardano is the fact that most dApps are already written for EVMs at this point. You would think developers would have to write a new application for Cardano if they also want to take advantage of this blockchain. Fortunately that is not the case.
It is possible to move applications from Ethereum to Cardano very quickly and easily. This allows developers to choose to stop using Ethereum and instead move on to Cardano. Another possibility is for developers to develop their own application from an existing Ethereum application.
After all, applications on a blockchain are open source, which means that anyone can use these applications, as well as reuse them.
Marlowe is a tool that allows anyone to quickly and easily develop a dApp. It’s a kind of block builder, which means you can build an application by simply moving blocks around. This application is built on top of Plutus and Haskell, which means that you do not need any knowledge of these programming languages to create applications.
The big advantage of this is that there will be many more applications on Cardano. After all, anyone can create an application. That is something that is not possible with Ethereum: you will have to immerse yourself in Solidity to be able to make applications for Ethereum.
In the image below you can see what the interface of Marlowe looks like, with which you can develop applications yourself.
What is the ADA token?
ADA is the token of the Cardano platform. It is used for various purposes. So users can use it as stake. When they want to participate in the Proof of Stake network, they can use ADA as a kind of deposit. Then validators are chosen based on the stake they have wagered.
By staking ADA, you can earn more ADA. The network pays out rewards to the validators, who ensure that new blocks are added to the ADA blockchain. Another way to get ADA is to buy it from a crypto exchange .
An illustration below shows how the interaction with tokens between the different systems looks like.
How do I buy ADA?
You can buy ADA on various crypto exchanges. We recommend that you do this at Binance or Bitvavo , given the high liquidity of these platforms. You are then sure that you can buy or sell ADA at all times. That’s something you can’t be sure of with small exchanges.
Of course, it is also possible to buy ADA from decentralized exchanges (DEXs) such as Uniswap , Sushiswap , and Pancakeswap . However, keep in mind that it is a lot more difficult to buy ADA from these platforms. It is much simpler to purchase it via, for example, Binance or Bitvavo. You will then have your tokens in your possession within a few clicks.
How can I save ADA?
The ADA coins can be stored in almost any wallet, as Cardano is one of the most famous crypto projects in the world. Think of the wallet that is linked to the crypto exchange, but also external wallets such as MetaMask. You can also store your crypto coins in other wallets, such as the Ledger wallet.
If you have a lot of ADA in your possession, it is wise to store it in a hardware wallet . A cold wallet is much safer than a wallet that is continuously connected to the internet, such as a MetaMask wallet or the wallet of a crypto exchange.
The price of ADA
In the past, the price of the ADA token has already gone up and down considerably. In the past, good returns could be achieved with this project. However, this does not guarantee success in the future. The price can also fall further than the value is currently standing.
Of course you want to buy ADA tokens for the best price. That is why we recommend that you keep an eye on the price of ADA tokens. You can do that on several websites, including CoinMarketcap’s:
Cardano aims to be a cryptocurrency where all steps, protocols and concepts are reviewed and critiqued by researchers and developers, to ensure the soundness of the project. This process is similar to what is being done in scientific research today. The team participates in conferences and writes papers.
The project can therefore be considered serious. Many crypto traders expect the value of ADA to rise in the future. We don’t know whether that will actually happen. However, we can recommend that you do your own research into Cardano to find out if it could be a wise investment for you.
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com