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Tuesday, October 4, 2022

Cardano – Explained

Right now there are countless of cryptocurrencies that you can buy. But recently, we’ve seen something called Cardano getting a lot of traction. But why is Cardano so popular all of a sudden? What makes it so special compared to other cryptos? Well, let’s find out.

Cardano is a new cryptocurrency platform that was launched in September 2017 after more than 2 years of development. It’s rather different than other cryptocurrency projects because it is built around peer-reviewed papers.

So instead of writing a whitepaper and implementing it straight to code, the Cardano team actually makes sure that experts from around the world read their papers, improve them and agree with the outcome. This is a very different way of working! Cardano claims to be the third generation of cryptocurrencies.

The first generation was Bitcoin and is essentially digital gold. Its used to transfer and store virtual money but is plagued with scalability issues. The second generation was started with Ethereum and brought us smart contracts. It improved scalability somewhat but not enough to become a global currency.

The third generation, however, wants to take the previous two generations and improve upon them. Right now Cardano and IOTA are both considered to be third-generation blockchains. Cardano wants to solve three big pain points of the current generation: scalability, interoperability and sustainability.

Let’s go over each one. Well, start with scalability which itself consists out of three problems that have to be solved: transactions per second, network bandwidth and storage.

Transactions per second are the most obvious one: in order for a cryptocurrency to become a global payment system, you need to be able to handle a lot of transactions per second. Cardano’s Ouroboros system solves this by adopting proof-of-stake instead of proof-of-work. You probably know that Bitcoin uses the proof-of-work algorithm and lets everyone mine new blocks.

This process is slow and not only wastes a lot of computing power, it also wastes huge amounts of electricity. Cardano is much more efficient. It doesn’t let everyone mine new blocks. Instead, the network elects a few nodes to mine the next blocks. These are called the slot leaders.

To make this all work, Cardano divides the time into epochs. An epoch is split into slots, a short period of time in which exactly 1 block can be created. The network then elects a slot leader for each slot and this is the only person that can mine a block for that particular slot. Slot leaders listen for new transactions, verify them and then puts them inside a block.

If a slot leader doesn’t complete his task in time or doesn’t show up, he loses the right to produce a block and has to wait until he is reelected by the network. This technique makes Cardano highly scalable because they increase the number of slots per epoch and they could run multiple epochs in parallel.

The next scalability problem is network bandwidth. Blockchains are stored in a P2P network. Each node in this network receives a copy of all new transactions. But imagine what happens if there are thousands of transactions per second.

The node would need a lot of bandwidth to continuously download them all, not very scalable! Instead, Cardano wants to split up the network into subnetworks by using a technique called RINA (Recursive InterNetwork Architecture).

Each node will be a part of a specific subnetwork and can communicate with other networks if needed. Much like the TCP/IP protocol for the internet. The final aspect of scalability is data storage.

Blockchains store all transactions that have ever happened. But how do we handle this ever-growing set of data? The Cardano team is thinking about implementing techniques like pruning, compression and partitioning. However, they don’t consider this a top priority at the moment because storage space right now is still fairly cheap. They tackle this problem later in 2018 or beginning in 2019.

Big problem number two is interoperability. This again consists of two problems. First of all: there are many cryptocurrencies out there, but they don’t work together. And secondly: banks and governments shy away from cryptocurrencies. So the Cardano team assumes that in the future we won’t have 1 coin to rule them all.

Instead, multiple different cryptocurrencies will exist side by side, each with its own protocol and rules. Right now they don’t talk to each other. You cant for example transform you Bitcoin into Ether without an intermediate. The Cardano project aims to be the Internet of blockchains or in other words: a blockchain that can understand what happens in other blockchains.

This would mean seamlessly moving assets across multiple chains. Then there is also a problem with governments and banks. They shy away from cryptocurrencies because they don’t adhere to regular banking laws.

It’s hard for them to trust a transaction in the crypto world because they don’t have any metadata about that transaction. They like to know who made the transaction and for what reason. However, this is also very sensitive information. So the Cardano projects want to allow people to attach metadata to a transaction if they want to.

This would make the crypto world play nicer with the traditional banking world. But again, it would be up to the user to decide if he wants that or not. The final problem that the team intends to solve is sustainability. Right now there are a lot of people who want to build a company around cryptocurrencies. To raise money for their company, they launch an ICO or Initial Coin Offering.

After an ICO the team ends up with a lot of capital that they can then use to fully start their company. But what happens if – after a couple of years – this money runs out? How will they make sure that the development of their technology continues? Should they create a new coin and hold another ICO just to get some cash? This is still an unanswered question, but its clear that raising money just once isn’t very sustainable and doesn’t promote continuous improvement.

Cardano intends to solve this problem by creating a treasury. The idea is that the treasury will receive a small percentage of every transaction that happens on the network. The treasury itself is a special wallet that isnt controlled by anyone. Instead, its sort of smart contract that can release a part of the funds to developers who wish to improve the Cardano protocol.

To do this, developers have to submit a proposal to the community saying what they want to change and how much money they need for it. The community can then vote on the ideas that they think is the most important.

After a certain amount of time, the treasury takes the most popular proposals and gives them enough money so they can develop their improvements. Over time, the treasury model will keep Cardano sustainable by providing a continuous stream of money that can be used to continue to do research and to improve the system. So far we talked about all the things that the Cardano project wants to achieve.

And as you can see its quite ambitious and maybe a bit risky. They’re trying to tackle many challenging problems. Take the treasury model for instance: it depends on a fair voting system to prevent people from seizing control. The Cardano project is very young and has a long way to go. But their way of working is very different from other cryptocurrencies.

So Cardano might be the project that finally solves some long-standing and fundamental issues. Time will tell! So that concludes this video. I hope you learned a lot and if you did, make sure to subscribe to my channel and like this video. Thank you very much for watching and Ill see you in the next one!.

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