What is Cardano (ADA)?

Cardano is a decentralized third-generation proof-of-stake blockchain platform. While it shares characteristics and applications with other blockchain platforms like Ethereum, Cardano distinguishes itself from others through a commitment to peer-reviewed scientific research as building blocks for updates to its platform.

Three organizations are responsible for Cardano’s development: IOHK, Cardano Foundation, and EMURGO. The first two are non-profit foundations and the third is a for-profit entity. The IOHK, which is responsible for building Cardano, works with a team of academics spread out across the world to produce research and review platform updates before implementation to ensure that they are scalable.

KEY TAKEAWAYS

Cardano is a blockchain and smart contracts platform with a cryptocurrency called "ada."
Cardano has released products for identity management and product traceability.
Cardano uses Ouroboros—a proof-of-stake algorithm—to create blocks and validate transactions occurring on its blockchain.

Understanding Cardano

Charles Hoskinson, the co-founder of Ethereum, began the development of Cardano in 2015 and launched the platform in 2017.3 Cardano has positioned itself as an alternative to Ethereum. Both platforms are used for similar applications, such as smart contracts, and have goals of building a connected and decentralized system. Cardano considers itself as an updated version of Ethereum and has anointed itself a third-generation platform over Ethereum’s second-generation credentials. The blockchain platform also has a goal of providing banking services to the world’s unbanked.

Cardano’s main applications are in identity management and traceability. The former application can be used to streamline and simplify processes that require the collection of data from multiple sources. The latter application can be used to track and audit a product’s manufacturing processes from provenance to finished goods and, potentially, eliminate the market for counterfeit goods.

"Ada" is Cardano's digital currency and is named after Ada Lovelace, a 19th-century countess and English mathematician who is recognized as the first computer programmer.

Examples of Cardano

The organizations behind Cardano have released three products: Atala PRISM, Atala SCAN, and Atala Trace. The first product is marketed as an identity management tool that can be used to provide access to services. For example, it can be used to verify credentials to open a bank account or eligibility for government aid. The other two products are being used to trace a product’s journey through a supply chain.

Cardano is also developing a smart contract platform that will serve as a stable and secure platform for the development of enterprise-level decentralized apps. In the near future, the team at Cardano plans to use a democratic on-chain governance system called Project Catalyst to manage the development and execution of projects. They will also revamp their treasury management system to fund future costs using Project Catalyst.

Cardano Requirements

The heart of any blockchain platform is the algorithm it uses to create blocks and validate transactions. Cardano uses Ouroboros, an algorithm that uses proof-of-stake (PoS) protocol to mine blocks. The protocol is designed to reduce energy expenditure during the block production process to a minimum. It does this by eliminating the need for hash power, or massive computing resources, that are central to the functioning of the proof-of-work (PoW) algorithm used by Bitcoin.

In Cardano’s PoS system, staking determines a node’s capability to create blocks. A node’s stake is equal to the amount of ada, Cardano’s cryptocurrency, held by it over the long term.

How Ouroboros Works

On a broad level, Ouroboros works as follows. It divides physical time into epochs that are made up of slots, which are fixed periods of time. Slots are similar to working shifts at a factory. Currently, an epoch lasts five days, and a slot lasts one second, but these numbers are configurable and can be changed after an update proposal. Epochs work in a circular fashion: when one ends, another starts.

Each slot has a slot leader chosen by a “lottery” system. In this system, the higher the stake, the better the chances of winning the lottery. Slot leaders are responsible for the following tasks:

Validating transactions
Creating transaction blocks
Adding newly-created blocks to the Cardano blockchain

Ouroboros requires a small number of ada holders to be online and maintain good network connectivity. To further cut down on energy consumption, the algorithm contains the concept of stake pools. Ada holders can organize themselves into stake pools and elect a few to represent the pool during protocol execution, making it easy to participate and ensuring block creation even if some of them are offline.

Mining Considerations

A stake pool is a reliable server node that is committed to run the protocol 24/7, on behalf of the contributing ada holders. Stake pools hold the combined stake of various stakeholders in a single entity and are responsible for processing transactions and producing new blocks.

In a Proof-of-Work (PoW) system, the economic incentives for miners to participate in the network and create blocks are rewards of the cryptocurrency and transaction fees. Ouroboros collects rewards from an epoch and distributes them among stake pools and stakeholders. Each is rewarded based on the proportion of their stake contributed during the epoch, meaning a higher stake will receive more rewards.