Cardano (ADA) is a blockchain platform built to support decentralized finance apps, cryptocurrencies, NFTs, games, and smart contracts (eventually). Currently, Cardano does not support smart contracts, but an upgrade expected sometime in 2021 will implement them.
There are several big blockchain platforms in the cryptocurrency space, such as Ethereum, Polkadot, and Solana. What makes Cardano different? Cardano's claim to fame is the implementation of Haskell, a widely-used programming language that enables Cardano code to be peer-reviewed and developed using scientific standards.
Apart from Cardano's capabilities as a blockchain platform, it's primarily the home of ADA, one of the top cryptocurrency tokens by market capitalization. ADA hype has carried it to the fifth largest crypto asset with a total market value of $54 billion.
This guide to Cardano gives you easy to understand explanations of what Cardano is, how it works, and everything to know about the ADA token. Let's jump in!
Cardano is a decentralized blockchain platform founded by Charles Hoskinson that prioritizes rigorous peer-reviewed code to maximize network security. Currently, Cardano is mainly used as the blockchain supporting ADA, the network's native cryptocurrency.
Eventually, Cardano will support smart contracts, at which point it will contend with leading blockchains supporting smart contract capabilities like Ethereum, Polkadot, and Solana.
Hoskinson describes Cardano as the first blockchain to achieve scalability, security, and decentralization. Most blockchains excel in two of these as trade-offs make it challenging to attain all three qualities sufficiently.
Several different foundations develop the Cardano blockchain. IOHK directs technical development, Emurgo handles marketing + outreach, and Cardano Foundation oversees the protocol as a whole.
Despite lacking smart contract support, Cardano uses a novel dual-layer architectural design:
Designing a general-purpose with two layers rather than one is a unique approach Cardano developers believe lends itself to better interoperability and scaling prowess. So, to really understand how Cardano works, it's crucial to get a firm grasp on its dual-layer build.
The Cardano Settlement Layer (CSL) is Cardano's value ledger where digital asset transactions are settled. As you might have guessed, ADA cryptocurrency lives on the CSL — as will other digital tokens issued on Cardano after smart contract implementation.
Keeping value separate from computation (whereas blockchains like Ethereum blend the two on a single layer) removes the accounting of value from why it moved. Any time an event occurs on a blockchain, understanding why it happened is always a computational question. As such, the CSL enjoys greater flexible scalability owing to its singular focus.
The CSL is also the layer containing Ouroboros, the network's proof of stake consensus algorithm, which we explain below.
To account for the reasons behind transactions on the CSL, the Cardano Computation Layer (CCL) acts as the network's brain. The CCL enables special features within the Cardano blockchain, such as programmable tokens operating by unique rules for private organizations and DAOs.
Every transaction involves a flow of value along with the conditions for that flow. The CCL allows those conditions to be specified — an extremely pertinent feature in a regulated blockchain environment.
In summary, the CSL powers Cardano transactions, but the CCL writes the rules for how they happen.
Cardano is secured via Ouroboros, a delegated proof of stake consensus algorithm loaded with powerful features. Amongst them are:
Unlike Bitcoin's proof of work model, Ouroboros hones in on being as light and modular as possible. Why? Because Cardano envisions a blockchain scaling for billions of people worldwide while remaining fully decentralized. To get there, consensus needs to happen quickly without bearing much load.
The downsides of proof of work consensus are most evident when you look at Ethereum. Slight upticks in usage lead to catastrophic network congestion, high gas fees, and poor user experience. Hence Cardano's laser focus on building a lightweight PoS algorithm to avoid those same pitfalls.
As blockchain tech matures, the ability of different chains to interoperate together has become crucial. Think about the matter this way: legacy companies like Google, Amazon, and Facebook each work to their own standards. Such privacy results in silos of data, information, and protocols that hold the internet back rather than advance it through mutualism.
Blockchains are going in a different direction by recognizing the inherent advantages of working together. After all, every blockchain has its strength — so, if developers can build applications capable of triggering smart contracts across several blockchains, users win.
For instance, Cardano's main design goal is to provide developing countries with an integrated system for decentralized banking, digital identity, and property rights, all within a single app. What if the best appchain for digital identity resides on Solana? It's to Cardano's advantage if it can interoperate with the Solana-based app to integrate its data and provide Cardano users with better services.
Interoperability doesn't mean blockchain to blockchain only. Cardano also envisions its blockchain interoperating with traditional banks, central banks to support central bank digital currencies (CBDC), and other off-chain entities via oracles.
The best blockchains in 2021 are quickly learning to scale their networks or get left behind. Again, Ethereum has taught the industry what happens when adoption runs ahead of the technical chops to support them.
Grading Cardano on its current scalability is difficult because it doesn't support smart contracts yet. Smart contracts bloat blockchain networks with activity, and because all Cardano really does right now is support ADA transactions, it's too early to say.
However, Cardano is trying to get ahead of the curve well before its smart contract debut with Hydra, an interesting approach to layer two scaling solutions. What Hydra does differently is offer developers a way to use their layer one smart contract code on the scalable off-chain layer two channel.
Enabling developers to use the same code on and off-chain saves them time, reduces redundancy, and creates a stronger security paradigm since less can go wrong when reusing previously audited code.
If you're already familiar with how other layer two scaling solutions work (such as Polygon Network), then you already get the gist of how Cardano plans to scale itself. Not familiar with how layer two scaling works? Check out our beginner's guide to layer two scaling solutions.
ADA is the native cryptocurrency token of the Cardano blockchain network. Any conversation about the most valuable cryptocurrencies must include ADA, currently ranked fifth with a $54 billion market cap.
Why is ADA so popular with cryptocurrency investors? Aside from having an instantly recognizable name, the Cardano ecosystem has brilliantly marketed itself around the world. Along with a regularly updated Cardano Roadmap and widely followed founder Charles Hoskinson, Cardano hype has gained steam year on year since 2015.
So, should you buy ADA? Well — it depends. ADA has plenty of use cases aside from investor speculation. Let's run through ADA's two most compelling utilities so you can decide if ADA is a good investment.
First and foremost, ADA is a digital currency enabling the frictionless transfer of value between wallets anywhere in the world. You can send, receive, or save ADA cryptocurrency using the network's Daedelus wallet knowing the Cardano blockchain secures your transactions.
Cardano's proof of stake blockchain architecture lets anyone stake ADA tokens to earn rewards. There's two ways to earn ADA staking rewards — you can either delegate your stake or run a stake pool.
Running a stake pool requires a significant upfront investment in ADA tokens or a substantial amount of ADA delegated to the pool. That's why for most people delegating ADA stake is the way to go.
The current rewards for staking ADA are hovering just under 5% interest per year. ADA staking pool rewards are much higher at 700%+ but that amount is split up amongst delegators and pool operators.
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