Launched in 2017, Cardano is billed as a third-generation blockchain, following Bitcoin and Ethereum, which were the first- and second-generation blockchains. Cardano aims to compete directly with Ethereum and other decentralized application platforms, saying that it is a more scalable, secure and efficient alternative.
Decentralized applications, or dapps, are similar to applications on a smartphone. The main difference is dapps run autonomously without a third party operating in the background. They achieve that autonomy by using smart contracts, which are computer programs designed specifically to perform a function when certain predetermined conditions are met.
For example, you could create a collateralized borrowing dapp that loaned money to anyone if they deposited a certain amount of collateral in a wallet beforehand. The smart contract, in this instance, would be programmed to send a transaction (the loan) to the borrower immediately after the collateral wallet received the right amount of funds. The smart contract could also be programmed to liquidate the collateral (keep the locked-up funds) if the borrower failed to make repayments on time.
Cardano also touts itself as being the only extensively peer-reviewed blockchain platform in the industry, and it routinely publishes academic research papers on its website.
Cardano’s native cryptocurrency, ADA, was launched in 2017 following a public sale of 25.9 billion ADA tokens, which began in September 2015. A further 5.2 billion tokens were issued and shared among the three separate entities that market and develop the Cardano protocol. They are Input Output Global (IOG), Emurgo and the Cardano Foundation. IOG was issued 2.46 billion tokens, Emurgo 2.06 billion and the foundation 648 million.
When the token became publicly tradable, ADA’s price was $0.02. Within 96 days, prices skyrocketed to their previous all-time high of $1.31 in tune with the rest of the crypto market during the 2017 crypto bull run.
Like the prices of most crypto assets in 2018, ADA’s price fell sharply that year. By November 2018, it had fallen back to $0.02.
It took more than two years before ADA returned to above $1.31. Spurred by a new bull market cycle in early 2021, ADA continued to climb, and it hit $2.46 in mid-May 2021. A brief correction occurred between May and July before prices shot up even further. This time, ADA reached a new all-time high of $3.10 in early September 2021.
How does Cardano work?
Cardano’s native blockchain is divided into two separate layers to fulfill different tasks and improve overall efficiency. They are:
• Cardano Settlement Layer (CSL): Used to facilitate peer-to-peer transactions of ADA-native tokens
• Cardano Computational Layer (CCL): Used to execute smart contracts
The Cardano blockchain operates using a proof-of-stake (PoS) consensus mechanism for discovering new blocks and adding transaction data to the blockchain, called “Ouroboros.” This PoS system involves ADA holders locking up, or “staking,” their coins in pools operated by other participants or becoming operators of stake pools themselves.
In order to create new blocks, Ouroboros uses a time-period system called “epochs,” where each epoch lasts five days. Inside each epoch, there are 21,600 smaller units of time called slots, or one slot every 20 seconds. Stake pools are randomly assigned to each slot as a “slot leader” and tasked with creating a new block for that slot.
While anyone can run their own staking pool, it does require a level of technical expertise to do so successfully. Rewards for adding new blocks to the chain are distributed among the stake-pool operator and stakers after every epoch finishes (five days). The rewards are in proportion to how many coins are staked in the pool by each person.
The more coins collectively held in a stake pool, the greater the chance it will get randomly selected to become a slot leader and add the next block in the chain. Think of staked coins like lottery tickets. While having more tickets increases your chances of winning, it doesn’t guarantee that you will win. To prevent giant pools from dominating the system, each staking pool is governed by a “saturation parameter,” which essentially offers stake pools lower rewards once they reach a certain capacity. That gives ADA stakers an incentive to relocate their coins to smaller pools.
This Ouroboros consensus system is completely different from Bitcoin’s proof-of-work (PoW) system, which requires users to compete using specialized computer equipment to discover the next block and has no built-in feature that discourages monopolistic mining operations, other than the fact that bitcoin’s value depends on its being controlled by no one.
The Cardano blockchain platform is still in development and plans to launch over the course of the following five separate stages:
• Byron: The “foundational phase” that saw the launch of the project’s ADA cryptocurrency and its native wallets, Yoroi and Daedalus.
• Shelley: The decentralization phase that introduced delegated staking and encouraged the growth of distributed stake pool operators.
• Goguen: This stage introduced the launch of Cardano smart contracts and custom fungible and non-fungible tokens.
• Basho: The “scalability phase” that will see the launch of sidechains running parallel to Cardano’s main blockchain.
• Voltaire: The “governance phase” where a new voting and treasury system will be implemented to make Cardano a fully self-supported community project.
Once it is fully live, Cardano will allow external developers to create their own custom tokens similar to ERC-20 tokens on Ethereum, as well as dapps using smart contracts written in an entirely new, high-level “Plutus” programming language based on Haskell, another high-level programming language.
Financial professionals with no experience in programming will be able to create their own smart contracts for business using “Marlowe,” a programming language known as a domain-specific language (DSL) that was created by Cardano to make it easier to create smart contracts.
To improve scalability, Cardano will introduce sidechains. These are separate blockchains that run parallel to the main blockchain (master chain) and can be used to fulfill certain tasks such as processing microtransactions, storing wallet data and deploying dapps. The idea is that sidechains reduce the amount of work that needs to be done on the master chain and help to prevent congestion, which should allow for faster transactions.
Decentralized governance is another part of the planned development and will eventually turn Cardano into a wholly community-driven project. That refers to a system where ADA holders stake their coins in order to vote on new proposals to develop or advance the project. This is a weighted system, whereby the more coins you stake, the greater your voting powers.
Key events and management
Three separate entities oversee the development of Cardano as it moves toward becoming a completely decentralized project.
• IOG (Input Output Global): Formerly known as IOHK (Input Output Hong Kong), IOG is responsible for the technological development of the Cardano platform. Charles Hoskinson, who was one of Ethereum co-founders, stands as the company’s CEO and co-founder.
• Cardano Foundation: Tasked with marketing, forming partnerships and expanding the global presence of the platform.
• Emurgo: Helps fund developers, enterprises and startups looking to contribute to the Cardano ecosystem.
In September 2021, the Cardano protocol launched its Alonzo hard fork upgrade – a type of non-backward compatible protocol change that requires all participants to upgrade to the latest version. What was special about Alonzo is that it introduced smart contract functionality on the Cardano blockchain for the first time, opening the doors to Cardano-native dapps and other features.