What is the Cardano Cryptocurrency? A Simple Explanation

Bitcoin and Ethereum have held their positions as the top two proof-of-work cryptocurrencies for years.

However, the cryptocurrency ecosystem has continued to rapidly expand, putting their positions at risk.

There is a shift in the industry towards application-specific blockchains. In contrast to Bitcoin, which is designed to be a global currency, projects such as SiaCoin instead trade the right to store data.

To address this diversified environment, Cardano has emerged as a project willing to face the next wave of problems.

A few of Cardano’s strengths are:

  • A willingness to interact with other blockchains
  • The support for a variety of blockchain applications
  • Work towards a carefully planned network that can handle any number of users

Cardano logo

A Layman’s Introduction

Cardano claims to be the World’s first third-generation blockchain.

To see what a third-generation blockchain is, and what makes Cardano important, we have to step back through time and see how blockchain technology has been transformed.

Genaration 1: Transactions in the Blockchain

A purely peer-to-peer version of electronic cash would allow online
payments to be sent directly from one party to another without going through a financial institution.

Satoshti Nakamoto, Bitcoin Whitepaper

In 2008, the repercussions of the 2007 global financial crisis were at its worst. Distrust for the traditional financial system was at an all-time high.

It’s likely no coincidence that an anonymous cryptographer, known only by the pseudonym Satoshi Nakamoto, decided to release the Bitcoin whitepaper that year. The research paper proposed a revolutionary solution to the security, trust, fraud and privacy issues surrounding digital payments.

Satoshi’s solution was one of the earliest applications of a blockchain. Prior to Bitcoin, the blockchain data structure saw little use.

Let’s break it down.

A blockchain is a list of blocks, wherein each block contains a number of transactions. There are two concepts that form its basis:

  • Cryptographic hashing is used to make the modification of the chain’s history impossible. This prevents malicious users from changing completed transactions. 
  • Satoshi developed a proof of work, a fair procedure for new blocks to be appended. Proof of work prevents users from adding any transactions they want.

From just this, we can spend, receive and store Bitcoin, just by writing transactions on blocks.

To keep everyone honest, we distribute the blockchain to everyone. As the blockchain contains all the transactions, any Bitcoin user can prove to themselves the account balances of everyone in the network and detect fraudulent spending.

Then, through a web of internet connections, each user can tell the entire network to add new transactions and receive the latest blockchain.

With just that, you have Bitcoin and a decentralized currency. Your trust is no longer with a financial institution, but with a network of people.

Genaration 2: Building a Blockchain Economy with Smart Contracts

Smart contracts, cryptographic “boxes” that contain value and only unlock it if certain conditions are met, can also be built on top of the platform, with vastly more power than that offered by Bitcoin scripting because of the added powers of Turing-completeness, value-awareness, blockchain-awareness and state.

Ethereum Whitepaper

Economies are games of trust. For example, when you deposit money into your bank account, you do it with the expectation that some will be put in reserve, you can withdraw and that the bank will communicate with you.

However, without a contract, there is no guarantee that the bank will act in your interests and satisfy any of the three.

The contracts that can provide the required trust are written by armies of lawyers and the Government gets dragged in to solve disputes.

A solution to these inefficient contracts, first proposed by researcher Nick Szabo, is a smart contract.

The idea is to construct a piece of software that executes independently of both parties, cannot be modified and only considers information from the agreed sources.

Blockchains are the perfect home for these autonomous financial contracts, and Ethereum built them into their platform.

ethereum

Ethereum smart contracts are just computer programs stored on the blockchain. They can be submitted by anyone.

When someone creates a new block, they also execute the contract and include its results. Following this, all the other nodes also execute the contract to validate this output. This way, ‘everyone’ runs the program.

A popular analogy is a vending machine. If you and the vendor agree on the code and mechanisms inside the machine, which deposits a snack when sufficient coins are inserted, the transaction is risk-free.

In our banking case, a smart contract might withdraw funds to an individual’s account on request. Although impractical, this removes the possibility of the bank failing to fulfill their side of the contract. 

Generation 3

Cardano has declared themselves as the symbol of the third generation of blockchains, but there are other projects competing for the title.

EOS, NEO, Zilliqa and an updated Ethereum have also been predicted become to the leaders of the new era in blockchain technology.

Most address three key weak-points of Bitcoin and Ethereum:

  • Scalability: The ability of a cryptocurrency to handle any number of users.
  • Regulation: A currency that is built with global laws, such as anti- money-laundering and know-your-customer regulations, in mind.
  • Project decentralization: A project that is not controlled by a single entity, and always adapts to the latest demands of its users.

Welcome to Cardano.

Cardano is more than just a cryptocurrency, however, it is a technological platform that will be capable of running financial applications currently used every day by individuals, organisations and governments all around the world.

Cardano website

Cardano has a simple vision. Become the leading public blockchain.

To do it, it abides by two key principles:

  • Build a flexible network. The Cardano team’s approach to market domination is simple: build the best software. They are one of the few humble groups of developers constantly exploring, updating and replacing their design choices to improve the network. Most importantly, they’re willing to implement the ideas of others if they prove superior.
  • Adapt to demand. Cardano is ready to change their goals to meet problems as they arise during adoption. They take the projects with the most support and have a flexible vision.

Cardano did not begin with a comprehensive roadmap or even an authoritative white paper. Rather it embraced a collection of design principles, engineering best practices and avenues for exploration.

WhyCardano official website

Next, we’ll lightly touch on some design decisions made so far and how they satisfy the three elements of a third generation blockchain.

Key Details

Consensus Protocol

The consensus algorithm defines how new blocks, which hold transactions, are added to the blockchain.

Cardano uses its own protocol, Ouroboros. Unlike Bitcoin’s proof-of-work, Ouroboros uses proof-of-stake.

Ourboros implements this with a system of slots and slot leaders, but here’s what you need to know:

  • The protocol chooses the creator of the next block by asking users to ‘stake’ their ADA tokens.
  • Ourboros allows for sidechains, tokens that are traded independently of ADA, but rely on the Cardano blockchain.
  • Proof of stake protocols do not require the massive amounts of electricity that proof of work ones do.
  • Cardano’s protocol has a very high potential transaction throughput, allowing it to scale to a global level.
  • Just like Ethereum, it offers smart contacts, signatures and user assets.

Project Governance

Project structure is very important for a blockchain project. In the wider economy, Bitcoin’s many forks and contentious updates would not be acceptable.

Cardano’s approach is to divide the project into three teams, providing a balance of power.

  • Emurgo’s responsibility is to handle partnerships and encourage projects to build on Cardano.
  • IOHK is a Hong Kong based software development company that has been contracted to build the blockchain.
  • The Cardano Foundation is a not-for-profit group that oversees the development of Cardano and encourages its adoption. It also handles legal matters and community management. It is now managed by IOHK due to a dispute with the board.

Interoperability

Interoperability is the final key design goal of Cardano. The idea is to connect every blockchain to each other, allowing users on different platforms to trade tokens, verify transactions and more.

A simple example of this in action is BTC Relay, which allows Ethereum smart contracts to verify Bitcoin transactions. 

Cardano’s approach is to use both extensible smart contracts and wallets and is already working with other projects, such as Aion, to extend their blockchain.

Further Research

There’s plenty more to Cardano that we haven’t covered.

To learn more, take a look at the WhyCardano website, which contains a full technical explanation of Cardano’s current design.

The IOHK YouTube channel also offers long-form explanations of key concepts, starting with this video by IOHK founder Charles Hoskinson.

Here are other related articles you may be interested in:

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