What is Cardano (ADA) and How It Works?

What is Cardano (ADA) and How It Works_

Since the introduction of Bitcoin in 2009, new cryptocurrencies spring up like mushrooms thanks to the innovative technology called the blockchain. Take a look at Coin Market. You’ll see tons of new digital coins and tokens. While some of these upstarts might not have the bright future of Bitcoin, they get a lot of attention from interested parties.

As you might know, Ethereum is not just a digital currency, but also a platform, which allows users to build decentralized apps and draft smart contracts. Those who follow the news might have heard something about a new addition to the crypto world called Cardano, which shares some similarities with the Ethereum platform.

However, you probably don’t know anything about it or whether it’s worth investing. So, what is Cardano and how it works? We are going to explore these questions in this article, so stay tuned.

What’s Cardano?

Just like Ethereum, Cardano is a cryptocurrency platform, which once fully developed will allow you to run decentralized apps, create smart contracts, and side chains, to name a few. It was launched on September 29, 2017, quite recently. However, its revolutionary ideas caught the attention of the public and put it right into the spotlight.

Cardano promises to be a new “generation” of cryptocurrency, which would improve upon the concepts of Bitcoin and Ethereum. It wants to be the middleman between the need for regulations and the privacy/decentralization, which made the blockchain popular.

As you know, the lack of intermediaries and the privacy of the blockchain are traits, which centralized financial organizations like banks frown upon and label as dangerous. They see cryptocurrencies as a threat to the financial stability and as a way for people to commit crimes such as money laundering.

Banks are not the only worried about the lack of supervision in the crypto community. Currently, governments also have a keen interest in cryptocurrencies, and they hint at the need for more regulations.

As you can imagine, a project like Cardano, which aims to please both its customers and the authorities, can quickly turn into a goldmine.

Structure and coin

cardano structure

Credit: https://steemit.com/cryptocurrency/@cryptolite

Cardano consists of two layers:

  • ​CSL layer – the balance ledger, which uses proof-of-work to validate transactions
  • ​CCL - a layer detached from the CSL, which gives information on why transactions occur and on which smart contracts and DAPPs will run

Cardano’s native cryptocurrency is called ADA. Currently, Coin Market Cap rates it 7th with a market cap of over 7 billion dollars and a price of $0, 280612. An impressive number for a newly introduced coin, we have to admit. Similar to other digital currencies, the supply is limited to guarantee stability.

At the moment, over 26 billion are in circulation. You can buy ADA from exchange platforms like:

What’s more, you can apply for a Cardano debit card, which will allow you to spend your ADA wherever you want by converting it to a currency of your choice.

Cardano Development and ICO

The first thing that catches the eye about Cardano is its creation. Usually, cryptocurrencies write their white paper (think about it as a guide, whose aim is to explain everything about the new coin for the initial offering) and then implement into the code and create the currency.

Cardano has a new approach to the matter. It uses peer-reviewed papers to build the platform. Is there a difference between white papers and peer-reviewed ones? Yes, there is. While white papers aim to promote the product, in our case – Cardano and ADA, peer-reviewed studies are focused more on adding knowledge.

Let’s say that you have important research you wish to publish. You first sent it to other specialists and experts in the same field for review. These people might agree with the concepts/ideas presented in the paper and offer ways to improve them. Then you can publish your work. If they don’t acknowledge or accept it, it’s clear that your work needs improvement.

Cardano did exactly that. It sent the papers to be reviewed and accepted by the scientific community before launching the project. You can see the merits of such approach especially when it’s done by a team of scientists, who have studied the blockchain meticulously.

After it was clear that they had developed a well-thought scientific philosophy, the team started executing the project. The initial coin offering (ICO) was in four stages from September 2015 to January 2017 with Know Your Customers requirements. Most of Cardano’s buyers were from Japan (95%), followed by Koreans and Chinese.

During the ICO, over 26 billion of ADA were sold from the max supply (over 46 billion ADA). At the conclusion of the offering, over $63 million was raised.

Founder of Cardano and Cardano team

Cardano is developed by a global team of engineers, scientists, and researchers. We can distinguish three main participants:

  • ​The Cardano Foundation, which aims to help the Cardano community grow and evolve.
  • ​Emurgo, which supports, develops and encourage ventures like Cardano. Its purpose will be to implement the blockchain into existing companies and build DAPPs.
  • ​IOHK, which is responsible for the building and maintaining of the Cardano platform.
Cardano project

You’ll probably hear a lot about Charles Hoskinson, the founder of Cardano. He was first engaged in another highly profitable cryptocurrency project. Can you guess which one? Yes, that’s right. He was one of the original co-founders of Ethereum.

Charles Hoskinson

Charles Hoskinso​n

However, after a row with another founder over the future of the platform, he left in 2014. What could make someone leave such a successful project, you would ask. Well, Hoskinson wanted “formal governing structure” rather than a non-profit organization.

In 2015, he and Jeremy Wood formed a new project, called IOHK. IOHK’s main principle is called Cascading disruption – the notion that the most important systems – financial, government, and social –are unstable and minor “disruptions” can have devastating effects. IOHK’s goal is to identify these disturbances and develop technology to overcome them.

As stated by IOKH website, its uses peer-to-peer innovations as a way to provide 3 billion people with financial services. They also build blockchain and cryptocurrencies for governments, corporations, and institutions.

You can watch this video if you’re interested in hearing more about Charles Hoskinson’s views and ideas.

What makes Cardano different from other cryptocurrencies?

As we said, Cardano claims to be a new generation of cryptocurrency. To do that, it has to solve three problems:

  • ​Scalability
  • ​Interoperability
  • ​Sustainability

We’ll take a detailed look at all three to explain what Cardano has in mind.

#1. Scalability

I’m sure that some of you are wondering what scalability is. So, let’s define the term first. A network usually starts small. But it should be able to enlarge to handle more work in the future. That’s scalability – the ability of a system or a network to expand to accommodate growth. Here we distinguish three main points:

  • ​Transactions per second
  • ​Bandwidth
  • ​Data storage

#1.1. Transactions per second (tps)

If a cryptocurrency plans to function as a reliable payment system, it should be able to process many transactions per seconds. If it can’t grow to accommodate the increasing amount of work, people sooner or later will give it up for something more functional and scalable.

As you might know, Bitcoin transactions take time. In other words, you have to wait around 10-15 minutes for your payment to be validated. What’s more, Bitcoin can process around seven transactions per second. In comparison:

  • ​Ethereum – 20 tps
  • ​Litecoin – 56 tps
  • ​PayPal – 193 tps
  • Visa – 24,000 tps

The results show that cryptocurrencies have a serious disadvantage to traditional systems. One of the exceptions would be Ripple, which according to recent reports could process over 50, 000 tps. So, it makes sense that Cardano is looking into ways to increase scalability.

There is one more thing that makes Bitcoin inefficient and costly. I’m talking about electricity. You need a lot of power to solve the complicated cryptographic equations and validate transactions.

In fact, scientists estimate that a single bitcoin transaction requires 215 kilowatt-hours. In other words, enough electricity to power your house for a week. Taking this into account, we can see that in the long run Bitcoin is not environmentally friendly.

You need so much electricity because Bitcoin uses proof-of-work algorithm. Miners complete with each other to solve the equations and whoever manages to do it first, get the reward. Mining in Bitcoin serves two purposes:

  1. Verify that transactions are legit and no one is double-spending
  2. Create new coins, which miners receive as a reward

To resolve these issues, Cardano employs a different algorithm - proof-of-stake instead of proof-of-work. It’s called Ouroboros.

Ouroborous divides time into epochs. Then each epoch gets divided into slots, and each slot has a slot leader. The tasks of the slot leaders are:

  • ​Listen for transactions announced by the nodes.
  • ​Bundle the transactions into a block.
  • ​Sign in with a secret key and publish it.

​So, instead of everyone trying to solve the mathematical problems, the elected “slot leaders,” are those who would mine the new blocks. They are chosen randomly based on their stake (how much ADA they have). In simple words - those who have more stakes have a higher chance to be picked up as slot leaders.

But who elects these “slot leaders”? That would be the “electors” – stakeholder who have enough stakes. The Cardano website gives 2% as an example. The electors make their choice during the current epoch, e.g., next epoch slot leaders are known and can’t be changed.

What we can conclude from this explanation is that everybody can become a slot leader (even with 1 ADA, you can still be slot leader), but not everybody can be an elector.

During their slot, the slot leader can produce only one block, so the number of slots equals the number of slot leaders. It’s not necessary to fill all the slots, but at least 51% of the blocks must be generated. In case a slot leader doesn’t appear or doesn’t do his job, he loses the opportunity to add a new block, until he is elected again.

Why Bitcoin hasn’t thought to use proof-of-stake, you would ask? Usually, these algorithms have numerous flaws, but Ouroboros is secure, peer-reviewed, and accepted by the crypto community. What’s more, it allows developers to run multiple epoch in parallel, which makes it much more scalable than other cryptocurrencies.

#1.2. Bandwidth

One of the main principles of the blockchain is that all participants receive information about new transactions. If there aren’t too many transactions per second, the nodes will manage to download it. But if the number of transaction grows, the nodes will need a lot of bandwidth to continue, and it will turn into a problem in the future.

Cardano has a solution for these issues, called RINA - Recursive InterNetwork Architecture. RINA is a way to restructure the network into subnetworks. Saying it like that probably means nothing to you. So, let me explain it simply.

Now nodes communicate with each other. But if we use RINA, a node will become part of a subnetwork, grouped with other nodes. Each node will be able to share information with the other nodes in the group and with nodes from other subnetworks, making Cardano more scalable. However, RINA is still under development and will be launched in 2019.

#1.3. Data storage

Every cryptocurrency has a blockchain, which contains data about all complete transactions. Do you see the problem here? In time, you’ll need a lot of storage space because the blockchain will keep growing and growing. To resolve this issues, Cardano is thinking about introducing several techniques:

  • ​Pruning – removing transactions that you don’t need to verify anymore
  • ​Compression – compressing the data to reduce the original size
  • ​Partitioning – a user might not have the whole blockchain, but a piece of it

However, the implementation of these techniques is not the main priority, because there is still ample cheap storage space.

#2. Interoperability

Do you know what interoperability is? Interoperability is the extent to which systems can exchange information and interpret it. Right now you can’t directly turn your Bitcoins into Ether, Ripple, or Litecoin. You can to go to an exchange platform, an intermediary in this case, and use it to make the desired exchange.

Cardano wants to remedy this situation and turn into an “Internet of blockchains.” It means that Cardano will be able to connect and communicate with other blockchains so that you won’t need a middleman to do your business.

The other problem Cardano wants to tackle is earning the trust of banks and governments. As we already said, banks are not fans of digital currencies because they don’t contain much information about who makes a transaction and for what purpose. Governments also have their worries that criminals can use cryptocurrencies for nefarious deeds or for avoiding tax payments.

Cardano wants to introduce smart contracts, which would allow a person to insert metadata into the transaction and share it with the blockchain. This tactic might make banks and governments less suspicious of the activity on the blockchain.

#3. Sustainability

The last important aspect we have to talk about is sustainability. For digital currencies, sustainability equals enough money to do research, build the blockchain, maintain the network, and implement new features. That’s why, initially, companies raise money through ICOs. However, these funds don’t last forever and will eventually run out. What happens then?

Well, the company might hold another ICO to gather more money for investments, however, it’s debatable how successful such tactic would be. So, Cardano plans to implement a “Treasury.” When someone makes a transaction on the network, a small portion will go into the Treasury.

Think about the Treasury as a wallet, but a special one. No one controls it, and it’s governed by a smart contract, which would allow developers to receive some money to improve the network. However, before you can get the funds, you have to submit a proposal to the community and explain what you want to achieve and how much would it cost.

Next, people vote for the proposal they like the most. The most popular ones get the cash. It’s a neat way to raise money and make developments, don’t you think? Of course, as long as there are mechanisms in place preventing a group of people from seizing control.

How to store ADA?

Dedalus wallet

As all who deal with cryptocurrencies, you know that you need a wallet to store your digital coins. ADA is no different. Currently, you can do so by downloading “Dedalus.” It’s a highly – secured wallet developed by Cardano and your only choice for storing ADA.

What’s also interesting is that developers plan on including more cryptocurrencies and turning Dedalus into a universal wallet, a platform, and an app store. We are looking forward to that!

The conclusion is that Cardano is a promising project, which would be priceless if it manages to achieve its goals successfully. It certainly looks like a good investment. However, it’s still too young, and we can only wait and see what direction it will take in the following months.

What do you think about Cardano? Did you understand what Cardano is and how it works? Share your opinion in the comments.

(Last Updated On: May 25, 2022)
About the author

    Whale Sumo

    Hwang is a self-proclaimed nerd who loves helping people understand complex concepts. He has a passion for crypto and online privacy and enjoys teaching others about the benefits of both. Hwang is an advocate for individual freedom and believes that knowledge is power. When he's not busy sharing his knowledge with the world, Hwang can be found running full marathons or playing video games.