Cardano is probably one of the most interesting projects to enter the cryptocurrency scene. Much like Ethereum, the Cardano blockchain is on a smart contract platform. However, Cardano provides scalability and security by having a layered architecture. Cardano has a unique approach to cryptocurrency. It is built on scientific philosophy, paired with peer-reviewed academic research. In this guide, I will go into detail about what Cardano is, and some of the interesting innovations it brings to light.

The Origin Of Cardano

While it’s true Ethereum is an admirable smart contract platform, many people deem it as a 2nd Gen cryptocurrency. Charles Hoskinson, Co-Founder of Ethereum and CEO of Cardano is one of these people. According to Hoskinson, Ethereum is a second generation blockchain, and it needs evolution. The thing that makes Cardano a truly remarkable feat, is the amount of care and consideration that goes to its upkeep. Three organizations work full time to develop and maintain the Cardano blockchain and network. These are The Cardano Foundation, Emurgo, and IOHK.

The Cardano Foundation is a not-for-profit regulated entity that is the custodial organization of Cardano. Their main function is to “standardize, protect, and promote the Cardano Protocol technology”.

In 2015, Hoskinson and Jeremy Wood (Founders of The Cardano Foundation) came across IOHK (Input Output Hong Kong). The IOHK team strive to be a “Research and development company. Committed to using the peer-to-peer innovations of blockchain technology to build accessible financial services for all.” IOHK will be working for Cardano, contracted to design, build and maintain the Cardano network until 2020. Emurgo, is a Japanese company that “develops, supports, and incubates commercial ventures who want to revolutionize their industries using blockchain technology.” A large chunk of IOHK’s funding came from a 5-year contract with Emurgo.

All three of these organizations synergize in order to make sure that the Cardano blockchain and platform develops at a steady and consistent pace. I’m sure you’re wondering why all this is necessary for a single cryptocurrency. But Cardano states it is a 3rd generation blockchain. Let’s take a look into why they believe this.

The 3 Generations of Blockchain Tech

Generation 1: Money Transfer and Bitcoin

The Bitcoin cryptocurrency was created due to everybody asking the same question.
“Will it ever be possible to create a form of currency that can be transferred between 2 people without any 3rd party?”

A person by the pseudonym Satoshi Nakamoto decided to answer this by creating Bitcoin. Just like that, we finally had access to a decentralized monetary system able to transfer money between 2 people without a middleman. But there was a problem, which transcended to all first generation blockchains. They only allowed for monetary transactions. You were unable to set conditions in order to process the transaction.

In other words, James can send John 10 BTC, but James can’t impose any conditions for the transaction. For example, there was no way for James to tell John he will only get the money if he completes a certain task. The only way to do this with 1st gen blockchains would be to implement highly complicated scripting. As a result, something had to be done in order to make this process more seamless.

Generation 2: Smart Contracts and Ethereum

The solution to this problem was smart contracts. Smart contracts allow you to exchange money, shares, property or anything that holds value in a conflict-free and transparent way. All without the need for a middleman or any third party involvement. Vitalik Buterin, Founder of Ethereum is easily the leader of this generation. Ethereum showed the world how blockchain technology can evolve from a simple payment system to something with far more value and meaning.

With more interesting use cases of blockchain technology being applied each day, more people were growing to accept it. But… There was a problem, also transcending all second gen blockchains. The governance system for these blockchains wasn’t thought out properly. As a result, Ethereum forked, and Ethereum Classic was made. According to Charles Hoskinson (yes, the co-founder of this very same Ethereum platform), this is a classic example of bad governance.

Because of this, the third generation of blockchain technology was created. The Cardano blockchain.

Generation 3: The Cardano Blockchain

Hoskinson decided that blockchain technology still needed to grow. He took all the positive innovations from the first 2 blockchain generations, then added a few innovations of his own. This resulted in the creation of the Cardano blockchain. Cardano attempts to pioneer 3 main elements:

  • Scalability
  • Interoperability
  • Sustainability

The Cardano blockchain is on a highly unique platform as it’s built on scientific philosophy and peer-reviewed academic research. All engineering that goes into the Cardano blockchain and the project as a whole has the ultimatum of being “High Assurance Code”. This is done due to the belief that Cardano has a high-quality code, and it plans to remain that way. According to Hoskinson, good coding will prevent future cases like the ETH-ETC (Ethereum to Ethereum Classic) fork from happening with ADA. With all the time and effort going into this project, it begs the question; what is Cardano’s philosophy?

Cardano’s Philosophy

The Cardano foundation and the team behind it adhere to a set of philosophies and principles. They didn’t launch with a white paper or a proper roadmap. Instead, Cardano focused on following “a collection of design principles, engineering best practices, and avenues for exploration.”  These principles are sourced directly from the Cardano website:

  • Separation of accounting and computation into different layers.
  • Implementation of core components in highly modular functional code
  • Small groups of academics and developers competing with peer-reviewed research
  • Heavy use of interdisciplinary teams including early use of InfoSec experts
  • Fast iteration between white papers, implementation and new research required to correct issues discovered during a review
  • Building in the ability to upgrade post-deployed systems without destroying the network
  • Development of a decentralized funding mechanism for future work
  • A long-term view on improving the design of cryptocurrencies so they can work on mobile devices with a reasonable and secure user experience
  • Bringing stakeholders closer to the operations and maintenance of their cryptocurrency
  • Acknowledging the need to account for multiple assets in the same ledger
  • Abstracting transactions to include optional metadata in order to better conform to the needs of legacy systems
  • Learning from the nearly 1,000 altcoins by embracing features that make sense
  • Adopt a standards-driven process inspired by the Internet Engineering Task Force using a dedicated foundation to lock down the final protocol design
  • Explore the social elements of commerce
  • Find a healthy middle ground for regulators to interact with commerce without compromising some core principles inherited from Bitcoin.

There are three main elements that Cardano wants to solve, let’s take a deeper look at them.

Element 1: Scalability

When talking about cryptocurrency, the word ‘scalability’ usually refers to the number of transactions processed per second or throughput. However, Hoskinson believes this is only one part of the whole problem. Full scalability has 3 main obstacles to tackle. To get to a level of full scalability, you’d have to take care of these three separate elements:

  • TPS (Transactions per second)
  • Network compatibility
  • Data Scaling

Transactions Per Second

Both Bitcoin and Ethereum always struggled with their network speed. Bitcoin can handle 7 transactions per second, and Ethereum can handle 15-20 transactions. For a financial system aiming to pioneer how money works, this is unacceptable. the Cardano blockchain aims to solve this problem with their consensus mechanism Ouroboros. Ouroboros is a proof of stake consensus algorithm which was peer-reviewed and approved during a conference at Crypto 2017. We have more information about the Ouroboros consensus mechanism and proof of stake mining on our blog.

Network

Network scalability is simple. Its based on bandwidth. All transactions carry data. When the volume of transactions increases, the network will require more bandwidth. It’s straightforward. If a system aims to be able to scale up millions of users, it will need hundreds of terabytes in resources, possibly even more in order to sustain itself.

In a homogenous network topology, every node on the network works to relay each and every message. Skype is an example of this. With skype most of the value comes from a single class of users who are all trying to make a phone call. But in a decentralized network, this is impractical on a large scale. All nodes on the network may not possess the resources required to relay the information effectively.

In an attempt to solve this issue, Cardano is looking at RINA (Recursive Inter-Network Architecture), a new technology developed by John Day. RINA is a type of structuring for networks that use policies and ingenious engineering principles.

RINA’s main goal is to create a heterogeneous network that provides:

  • Transparency
  • Scalability
  • Privacy

It does this by operating in a way where you can guess how the network will organize in a formal capacity. Thus, Cardano hopes that RINA will operate seamlessly with TCP/IP protocols by 2019. According to Wikipedia,

RINA inherently supports mobility, multi-homing and Quality of Service without the need for extra mechanisms, provides a secure and programmable environment, motivates for a more competitive marketplace, and allows for a seamless adoption

Data Scaling

Data scaling is the final problem Cardano plans to solve. Blockchains store all data for eternity. All data relevant or not stays on the blockchain indefinitely. As a result, when the system grows and more people start to use it, the influx of data will cause the blockchain to get bulkier. It is important to note that a blockchain operates because of its nodes. All nodes are users who keep a copy of the entire blockchain on their computer system. See the problem?

If a blockchain was handling millions of people’s everyday transactions, it will get vastly bigger. For the average user with an average computer, this is unreasonable and may even be impossible. Cardano plans to combat this by implementing a philosophy. “Not everyone needs to have all the data”

Some techniques being implemented for the Cardano blockchain regarding this are:

  • Subscriptions
  • Pruning
  • Compression

If Cardano applies all three of these techniques synergistically, we could potentially see a substantial drop in the amount of data a user will need to keep on their computer system. In addition to this, there is the concept of partitioning. In short, this means that instead of needing to download the whole Cardano blockchain, a user can download a chunk of it instead, greatly reducing the need for data. For this reason, Cardano is attempting to implement sidechains. This is done in an attempt to compress the amount of data users need to use without compromising security or other assurances that their transaction was successful. The University of Edinburgh is doing research on this.

Element 2: Interoperability

Now we know how Cardano plans to tackle scalability, let’s take a look at their second pillar; Interoperability. To summarise what this means, as Charles Hoskinson describes it, “there won’t be one token to rule them all. When looking at the current ecosystem of the crypto world, you will find many different crypto coins like BTC, ETH, and LTC etc. In the traditional finance world, we have systems like traditional banks, using SWIFT and ACH etc. The main problem with this is the fact that it’s extremely hard for these separate entities to communicate with one another. It would be very hard for Ethereum to know what was going on with Bitcoin and vice versa.

This problem becomes even more difficult when traditional banks using fiat currency try to communicate with cryptocurrency. This is why cryptocurrency exchanges such iCE3X are so important. They serve as a portal between cryptocurrencies and banks. This is why cryptocurrency exchanges are so important. They provide a portal between crypto users and banks. Be that as it may, there will always be problems. Some cryptocurrency exchanges are centralized, and they can be vulnerable to hacks if they are not configured correctly and secure. Also, cryptocurrency exchanges can go blackout for extended periods of time due to system upgrades.

Third generation cryptocurrencies must provide an ecosystem in which individual blockchains can communicate with one another, as well as with external traditional financial systems. Let’s take a look at how the Cardano platform plans to do this.

Side Chains and Inter-Chain Communication

Cardano has a dream. Cardano dreams of an internet of blockchains. Just imagine an ecosystem in which Bitcoin could flow into Ripple and Ethereum, which could then flow into Litecoin without the need for third-party involvement (a centralized exchange). This is the dream Cardano has, and they’re working towards making it a reality. With this intention, Cardano wants to implement sidechains.

A sidechain is a concept that has been lingering in the crypto community for some time now. The idea is simple. You have a separate parallel blockchain that operates alongside the main Cardano blockchain. The side chain links to the main chain via a two-way peg. Currently, Cardano is supporting sidechains implement the research of Miller, Zindroz (KMZ) and Kiayias. This involves “non-interactive proofs of proofs of work”

Charles Hoskinson states the idea of sidechains came to light because of two things:

  • Creating a compressed version of a blockchain
  • Creating interoperability between separate blockchains.

Traditional Finance World: Bridging the Gap

Currently, the teams behind Cardano attempting to increase Cardano’s interoperability with the traditional finance world. To do this, they must focus on three main obstacles that hinder compatibility between the cryptocurrency world and the traditional finance world. These are:

  • Attribution
  • Compliance
  • Metadata

Metadata: The Story Behind Each Transaction

If Danie were to spend 100 Rand, the metadata would look something similar to this:

  • What did Danie spend this money on
  • Who did Danie give this money to
  • Where did Danie send this money from

While this may not be too important in the cryptocurrency world, in the traditional finance world, it’s extremely important. As a matter of fact, this is the reason many entities struggle after their ICO period. Many of them simply do not have enough metadata to provide to the banks. Metadata serves many different purposes in traditional finance, some of these are;

  • Resource identification and discovery
  • Effective electronic data organization
  • Showing how data exchanges between various systems, improving interoperability
  • Resource protection, helping identify data’s behaviour and characteristics in order for it to be replicated if necessary.

However, there is a problem. Metadata is extremely personal information. Since the data would stay on the blockchain, making it permanent and transparent — extremely private information would be permanently kept on the public ledger that is the Cardano blockchain. As a result, they are working on selectively attaching data to the Cardano blockchain.

Attribution: Who Was In Each Transaction

Similar to metadata, attribution holds information about the transaction. The main difference is the only data that is kept in this regard refers to who sent and received the transaction. If this information was to stay on the Cardano blockchain, it would compromise the privacy of the individuals that transact on the network. As a result, Cardano is attempting to empower their users to give out attribution data as and when it is required.

Compliance: Know Your Customer

Compliance has many different factors. Some of these include AML (Anti Money Laundering), ATF (Anti Terrorist Financing) and KYC (Know Your Customer). Compliance is the factor that determines whether or not a transaction is legitimate. For example, if Danie pays Johan R500, compliance makes sure the transaction is not being used for any nefarious purposes. While cryptocurrency hasn’t done much in this regard, it’s extremely important in the traditional finance world. The legitimacy and history of each transaction is important information that must be known.

Currently, Cardano is researching into metadata and attribution as well as compliance. When all of these factors are applied to the Cardano blockchain, users that need to interact with traditional banks will have a streamlined experience.

Element 3: Sustainability

Finally, we have the third pillar,  sustainability. Charles Hoskinson says that this is hands down the most difficult problem to solve. The essence of this factor lies in a single question. How does Cardano plan to pay for its future growth and development? Often, when developments and upgrades need to be done to the system and grants are required, a few things could happen:

  • ICOs
  • Patronage

But both of these outcomes have issues of their own. For example, Patronage opens you up to the possibility of centralization. If a big company wants to give a huge amount of money in a grant to a blockchain-based company, they are able to direct the way some developments turn out on the system. This means that people with the largest stakes in a company have some say in what the developers should do with the money they were given as a grant.

ICOs give companies a sudden large influx of money without a sustainable model, adding another completely useless token to the ecosystem. As a result, something far different and more sustainable needs to be implemented. To counteract this, Cardano took some inspiration from Dash and decided to work towards making a treasury.

How Does the Treasury Work?

Each time a new block is added to the blockchain, a portion of that block reward goes to the treasury. Meaning, if someone intends to develop something new, bringing changes to the ecosystem, they must submit a ballot to the treasury in order to ask for a grant. Then, Cardano stakeholders will vote and decide if the ballot should be granted or not. As a result, this system has two major advantages:

  • The treasury is constantly being added to as more new blocks are discovered and added to the blockchain
  • It’s directly proportional to the size of the network. Meaning, the bigger the network, the more resources that are available. The voting system also becomes vastly more decentralized

While that sounds highly promising, with anything there are obstacles in the way stopping this from being utilized:

  • A fair voting system must be in place
  • There should be an incentive to vote and participate in the system
  • Everyone’s vote should hold a value in order to avoid the “Tragedy of Commons” situation
  • It should be easy and straightforward to submit a ballot
  • This entire system must be as decentralized as possible

Cardano is working on a system that they could possibly use, combining liquid democracy with an incentivized treasury model.

So What is Liquid Democracy?

liquidity image

Liquid democracy is essentially a system that can fluidly transition between direct democracy and representative democracy. To elaborate, this process allows it’s users to vote on their preferred policies directly and allows them to delegate their voting responsibilities to another delegate, allowing that person to vote on their behalf. The property in which a delegate is able to appoint their own delegate is named transitivity. If an individual who has delegated their vote doesn’t agree with the vote their delegate chose, they can simply take the vote back and vote on the policy they would rather choose themselves.

So what are the advantages?

Every opinion each individual has is important, and it plays a part when the final policy is being created. In order to become a trusted delegate, all you have to do is simply win someone’s trust. There’s no need to spend millions of rand on election campaigns. Because of this, the barrier of entry in becoming a delegate is pretty low. With the option to oscillate seamlessly between a direct democracy or a delegated democracy, minority groups are able to be more fairly represented. In addition to this, the model is scalable. Anyone who doesn’t have the time to vote for the policies they want can simply delegate their voting responsibilities to someone they trust.

The Cardano Roadmap

Cardano is going to release in 5 different stages, these are:

  • Byron: Enabling users to buy, sell, and transfer ADA tokens. The Cardano main net also released.
  • Shelley: Ensuring that the technology is in place in order for Cardano to become a fully decentralized platform
  • Goguen: The integration of Smart Contracts
  • Basho: Performance improvements and optimization
  • Voltaire: IOHK is going to add the treasury system and governance

Cardano is a platform with huge potential for the cryptocurrency space. It is not only built on a solid philosophy but on a strong scientific basis as well. These 2 facts on their own give Cardano a significant advantage over its competitors. Plus, with Charles Hoskinson and the IOHK team leading the way for the development of the Cardano platform only adds more credibility to it. While speculating and imagining Cardano turning into this dream platform we all think it’ll be, we will have to wait until 2019 before we see if they can deliver on their lofty promises.

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This article is intended to educate and should in no way be seen as investment advice or an enticement to use the ice3x.com platform. Bitcoin is highly volatile with big profit opportunities but you should also remember that you could lose part or all of your investment whenever you take part in any high risk investment. Bitcoin trading is not a regulated industry in South Africa, which in itself carries additional risks. IF YOU ARE NOT AN ASTUTE BITCOIN TRADER, SEEK INDEPENDENT FINANCIAL ADVICE BEFORE MAKING ANY INVESTMENTS.