The Sleeping Giant: Cardano’s Path to Victory

Cardano is a decentralized and scalable open source blockchain platform. Cardano was founded in 2017 by Jeremy Wood and Charles Hoskinson, the former co-founder of Ethereum, and is controlled by three different independent organizations: Cardano Foundation (verification), IOG (formerly IOHK, development) and Emurgo (promotion).

Ethereum was set up in 2015. Unlike Bitcoin and other cryptocurrencies of the time, this is the first blockchain platform that supported the functionality of smart contracts and allowed the creation, monetization and use of DApps (decentralized applications). Ethereum has its own programming language - Solidity, its own cryptocurrency - Ether (ETH), which can be used as payment for transactions, and fungible and non-fungible tokens (NFT) for contracts and access to applications on the platform.

Cardano was created to perform similar tasks, such as smart contracts launching and DApps creation; Cardano also has its own smart contract language - Plutus and cryptocurrency - ADA. At the same time, Ethereum is called the second generation blockchain, and Cardano defines its place in the market as the third generation blockchain. The qualitative difference is in the lessons that Cardano has learned from Ethereum, the infrastructure improvements of the blockchain industry, and the issues that the IOG team is consciously working on, such as security and scalability. In particular, the development and use of the Proof-of-Stake (PoS) protocol takes Cardano smart contracts to a new level, providing high throughput and transaction speed and the availability of creating DApps for everyone, and will also solve the problem of compatibility with other blockchains.

A new consensus mechanism 

Any blockchain platform uses an algorithm to create blocks and validate transactions. Cardano has implemented a unique Proof-of-Stake (PoS) consensus algorithm known as Ouroboros, which is more secure, energy efficient, and scalable than the Proof-of-Work (PoW) that Ethereum uses.

Consensus is the mechanism that maintains fairness in the unmanaged, decentralized blockchain world. Network users decide how to spend money, how much and how many times. To eliminate the possibility of spending one and the same digital coin several times, Bitcoin came up with the idea of Proof-of-Work consensus algorithm.

Proof-of-Work is based on complex calculations that miners perform to keep the blockchain running. Each new block is formed in the process of solving a cryptographic problem. The performance of miners and the number of new blocks depends on computing power, which, in turn, depends on electricity. Confirmation of the use of a certain amount of computing power (“work”) within one blockchain is a unique value (hash). Ethereum compensates the cost of a unit of computing power to miners at the expense of a commission from each transaction (usually from the sender's wallet).

The Proof-of-Stake consensus does not require the purchase of expensive equipment and the mining of new blocks; instead of miners, validators - owners of the ADA cryptocurrency - participate in the block verification process. Validators must confirm that the transaction is correct - then it is added to the new blockchain block. Unlike PoW, in PoS validators are rewarded for perticipation, not miners. In addition, validators spend much less energy and time solely on transaction validation, which means that transactions are completed faster and cheaper. This is Cardano's advantage over Ethereum and other PoW networks, whose development is seriously hampered by high levels of power consumption.

Hoping to catch up, reduce energy costs and reduce transaction time, Ethereum 2.0 (also known as Serenity) plans to move from a PoW model to a PoS model in the second quarter of 2022. After implementing this upgrade, Cardano will have one less advantage, and Ethereum will have one more argument for its popularity. However, there is no argument in the Ethereum community about switching to a different consensus mechanism: PoS is often criticized as a system that seeks to centralize and strengthen oligarchic control over the project, because the “rich get richer” by receiving rewards for their financial assets. If the American Commodity Futures Trading Commission (CFTC) recognizes Ethereum as an unregistered security as a result of the switch to PoS, ETH is expected to fall in price.

An exploratory approach

The hallmark of Cardano is a research approach and expert mathematical code verification in the development of any new product, service or update; as a result, users feel more confident in what is being offered to them. The Library section of the IOG website regularly publishes academic articles with an overview and analysis of new technologies (as of June 2022, the library has 141 articles). Articles are available to everyone; Comments with questions, bug reports or lifehacks are encouraged and can be left publicly or sent privately as each document is viewed. The creators of Cardano emphasize the importance of community participation in platform trials and invite everyone to influence the creation or change of blockchain software: “The meaning of collective innovation is that thousands of people are going to build and bring something new, new experience to the world. It will be fun, ”the slogan greets users on the main page of the new IOG website.

More than that, Cardano is scientifically planning to develop updates and study data from research and peer-reviewed experiences on the blockchain. Each item of the Cardano plan is dedicated to solving a specific problem, is included in the development map, and bears the name of a cultural figure of the past:

1. The Byron era - the founding of Cardano and the emergence of the ADA cryptocurrency (2017);
2. The Shelley era - decentralization (2020);
3. The Goguen Era - smart contracts (2021);
4. The Basho Era - scalability (2022)
5. The Voltaire Era - management (in development).

The plan supposes the possibility of adjustment depending on how the market changes and how the currency develops. According to Tim Harrison, VP of Community and Ecosystems at Input Output Global, 2022, which marked the dawn of the Basho era, the network optimization work is scheduled and it will help Cardano scale and become more functional.

Separation of cost and computation

Cardano separated cost accounting from computing and created a two-tier blockchain architecture, borrowing the principle of separation of concerns in data transfer from the TCP / IP network protocol stack. Ethereum processes transactions and smart contracts at the same level, which otherwise involves centralized decision making (this is contrary to the blockchain principle), threatens user privacy, overloads networks, and slows down transactions.

The Cardano Settlement Layer (CSL) is used for ADA transmission and provides network speed. CSL provides support for KMZ sidechains to interact with other blockchains, supports multiple signature types for enhanced security, and supports two sets of scripting languages, Plutus and Marlowe.

At the Cardano Computational Layer (CCL), smart contracts are deployed and DApps are launched. Developers can create compatible applications in Plutus and Solidity languages. In addition, CCL ensures that data storage and operations comply with the laws of different countries.

UTXO improvement

Cardano took into account the experience of not only Ethereum, but also Bitcoin. To manage the balance and exchange transactions and messages, Ethereum uses an Account-based model. Each Ethereum account has a specific state and an Ethereum address; To manage an account, you need to create an Ethereum wallet. In the Account-based model, balances are stored as a global account state, where the account state is mapped to the account address. The global state is updated with every block. This is similar to the database, which in Ethereum is called the Merkle prefix tree.

Cardano, like Bitcoin, uses UTxO - only in the augmented and extended version of EUTxO (Extended Unspent Transaction Output). UTxO is an alternative registration and verification model to accounts. In short, UTxO is the remainder of previous transactions that can be used as input for future ones (if it’s not very clear, here is a video, after which there will be no questions about what UTxO is).

The difference between UTxO and the Account-based model is that the global state of UTxO is a graph of all transactions, spent and unused, and the global state of accounts is only a set of accounts and their balances. The global UTxO state is expanded by adding new UTXOs - old UTXOs cannot be changed (whereas the old account is simply replaced by the new one).

The advantage of the UTXO model is enhanced cybersecurity and fraud prevention due to the difficulties in tracking coin owners, such as the lack of a permanent address and a single account.

In Cardano, UTxO has received new features. In addition to the sender's address and the transfer amount, EUTxOs can contain Datums that are not carried by traditional UTxOs - these are additional data or state that is required for the program to work. The data can be arbitrary and change on different EUTxOs (while the data structure remains unchanged for a particular script). Datum may be needed to validate the transaction, since inside the transaction there is only information from EUTxO. For example, to exchange one token for another within a transaction, you need to request an exchange rate from an external source; the source sends its EUTxO to the transaction, where the Datum contains the exchange rate.

Since its founding, Cardano has set the direction of the entire blockchain industry as a whole. The Cardano roadmap outlines several common ‘pain’ points across all blockchains; learning from the mistakes of Ethereum, the creators initially developed the Cardano protocol to solve the problems of scalability, interoperability and stability.

Scalability. Blockchains that use PoW, including Bitcoin and Ethereum, are slow (Ethereum still processes 15 transactions per second (TPS). This is one of the reasons why blockchain, although it has become a buzzword, has not been widely adopted in practice, - and so it will be until the network starts processing millions of transactions per second.Ethereum 2.0 promises to process up to 100,000 TPS, but has not yet fulfilled the promise.

The performance of the Cardano chain is not high: the blockchain is capable of processing up to a maximum of 257 TPS - in comparison, Bitgert already processes up to 100,000 TPS and launches a new block in 15 seconds. In 2022, Cardano enters the Basho era and plans to reach throughput of millions of TPS with it. One of the solutions will be an update for Plutus, the Vasil hard fork. In April, Cardano founder Charles Hoskinson announced Vasil features such as pipeline processing, new Plutus CIP, UTxO storage on disk, and Hydra (an add-on to Ouroboros - a kind of network extension). In particular, pipelining will speed up the block allocation process by reducing propagation latency. This, in turn, would allow the implementation of reference scripts, which could significantly reduce the size of transactions, increase throughput, and reduce the cost of executing scripts. Cardano has also embraced RINA, a mysterious obscure torrent-like network topology that presents the internet as a layer of interconnected nodes that exchange state information and allow new heterogeneous networks to be added while maintaining privacy and transparency.

Compatibility. Each blockchain system has its own tokens, architecture and language. To carry out a transaction between systems, it is necessary to prove to another blockchain that the information about the ownership of tokens and the execution of smart contracts is correct. Centralized financial systems (state budget, banks, etc.) have their own laws, which conflict with the blockchain philosophy: for example, full control over bank transfer metadata (recipient, sender, income type code, etc.) contradicts the confidentiality of a cryptocurrency transaction. The parties do not trust each other, and the only intermediaries in this complex relationship are crypto exchanges.

Cardano plans to create a sustainable decentralized interoperable data ecosystem where blockchains can “flow” into each other without intermediaries. IOG is exploring the possibility of partially disclosing metadata, which will allow the use of cryptocurrency for payment for goods and services, as well as instant private transfers. In 2021, the team announced that they are working on communication with Ethereum smart contracts; it is achieved with the help of sidechains - additional blockchains that carry out transactions between two parties outside the main blockchain. Cardano uses sidechains by supporting the KMZ protocol, which securely moves assets from CSL to CCL Cardano - or those blockchains that support the current protocol.

System management. Cardano was originally conceived as a self-sufficient system with decentralized control. So, in the next era of Voltaire, a transition from blockchain management by a group of creators from IOHK to community management is planned.

The problem with an open decentralized system is that there is no responsible person who raises money for research, funds developers and makes decisions. Lack of funding and development threatens the system with degradation and oblivion. For this reason, the Ethereum Foundation prefers to influence the development of the network, and Ethereum is, in fact, managed centrally. Cardano intends to solve the problem implementing a treasury system in the form of a decentralized autonomous organization (DAO). Part of the mining reward from each new ADA block goes to a special wallet. Funds from this wallet - a kind of grant - will be allocated to developers who propose innovations and receive the most votes in the referendum process of ADA owners.

Today Cardano has no tangible benefits that can be measured in numbers. Ethereum is by far the most popular choice for smart contracts and DApps: by comparison, there are 73 dapps built on the Cardano blockchain to date (1003 total projects ever built on the Cardano network) and 3315 on Ethereum. Ethereum has a market cap of $212.5 billion at the time of writing, while Cardano has a market cap of $21 billion.

What is the prediction of a great future for Cardano based on? On her forward looking philosophy. Cardano is more than technology; it is a worldview that is based on a scientific approach and practical research, as well as the ideas of decentralization, self-sufficiency and trust that unite the community. If Bitcoin arose as an experiment, and the Ethereum network was the first to expand the practical possibilities of cryptocurrencies to smart contracts, then Cardano was created consciously, taking into account the lessons learned from the experience of Ethereum, and with the goal of solving the global problems of the blockchain and humanity - such as scalability, interaction, management, trust, security. A strong engineering team and a strong focus on compliance make Cardano attractive to the big players like banks and corporations, though perhaps the same reason blockchain is not popular with those who prefer “catch up the money and run.” Cardano has great potential to become a global ecosystem accessible to people all over the world, regardless of the political structure of society or financial situation. For example, IOG is partnering with several African countries to use blockchain to empower local people and help them implement projects in trade, agriculture, and education.

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