Cardano is a decentralized, open-source blockchain network that launched in September 2017. Like Ethereum, Cardano supports smart contract functionality (self executing computer programs) but plans to take them to the next level by ensuring higher speeds and broader interoperability. The hope is it will make them more functional and accessible than Ethereum smart contracts so that anyone – not just developers – can create their own decentralized applications.
Despite the project still being in development, Cardano is frequently touted as an “Ethereum killer” because it seeks to improve upon the second-largest cryptocurrency’s current infrastructure. These improvements include significantly cheaper fees, better scalability and higher transaction throughput and speed than what is currently offered by Ethereum’s 1.0 blockchain.
— CoinDesk (@CoinDesk) May 6, 2021
Cardano was founded by former Ethereum co-founder Charles Hoskinson and former Ethereum executive assistant Jeremy Wood and is supervised by three separate entities: the Cardano Foundation, IOG (formerly known as IOHK) and Emurgo.
What is Ethereum?
Ethereum is a public, decentralized blockchain network that is also open-source and first introduced smart-contract functionality to the crypto world. It enables peer-to-peer transactions with its own in-house cryptocurrency, ether, and supports the creation of fungible tokens, non-fungible tokens (NFTs), semi-fungible tokens and decentralized applications.
Ethereum was launched in 2015 by eight co-founders, including Vitalik Buterin, who continues to be the main representative of Ethereum to this day, Charles Hoskinson, Gavin Wood, Anthony Di Iorio, Amir Chetrit, Jeffrey Wilcke, Mihai Alisie and Joseph Lubin.
Three Lessons Cardano learned from Ethereum
There are three main areas where Cardano has taken lessons from Ethereum’s second-generation infrastructure and improved on it.
- Architecture: Cardano’s blockchain network is divided into two layers: the Cardano Settlement Layer (CSL) and the Cardano Computation Layer (CCL). The former is used for ADA transfers, while CCL supports the smart contract functionality that enables developers to create programs (decentralized applications, or dapps). It’s like having two separate rooms for different activities – this makes operations on both layers more efficient. A major advantage is that you could upgrade one of the rooms while leaving the other one untouched or perform two separate upgrades with independent attributes. By contrast, Ethereum handles both ETH transactions and smart contracts on the same layer, which often leads to congestion and high fees.
- Consensus Mechanism: The key element that sets Cardano apart is its unique proof-of-stake (PoS) consensus algorithm – the mechanism that determines how new transactions are agreed upon and added to the blockchain. Known as Ouroboros, Cardano’s PoS system is more scalable and energy-efficient than Bitcoin’s proof-of-work (PoW) and claims to be the first provably secure system of its kind. In PoS networks, users don’t have to mine tokens; instead, they participate in the block-validation process by staking the native token. This involves locking up tokens (depositing them into a smart contract) in order to stand a chance of being selected to add new blocks to the blockchain. Staking systems are weighted, meaning the more coins you lock up, the higher your chance of being selected to add new transaction data to the next block. Similar to the PoW mechanism, stakers who are chosen to add new blocks are rewarded with newly minted coins for doing so. Ethereum has been using a PoW protocol – a slow and energy-consuming consensus mechanism – since its launch but it’s gradually moving to a PoS algorithm as part of the Ethereum 2.0 upgrade, a major ongoing upgrade to the Ethereum blockchain to make it more scalable, energy efficient and cost-effective.
- Approach: Unlike other blockchains, Cardano implements a scientific peer-reviewed process prior to the release of any new product, service or update. This provides a greater degree of confidence and assurance than is offered by a vast majority of other cryptocurrency projects. First, academic papers are written detailing new proposals and their underlying technologies. These papers are made available for independent review by computer scientists and other interested academic parties. Comments can be left publicly or sent privately when viewing each document. To date, over 128 papers have been published by Cardano. Ouroboros is one example of a feature that went through this rigorous process of a formal review that still continues to this day.
Five key problems Cardano aims to solve
Ethereum has enjoyed a lot of success over recent years, but as it’s grown its infrastructure has led to volatile transaction fees, congestion on the network and expensive node operating costs. Cardano, on the other hand, had the benefit of arriving later to market and its protocol was designed to address the main issues of Ethereum:
- Scalability: This is one of the larger issues with PoW blockchains, including Bitcoin and Ethereum. Even though the initial version of Ethereum addresses some of the scalability issues of Bitcoin, it is still not capable of handling millions of new users. With the launch of Ethereum 2.0, the network could eventually handle up to 100,000 transactions per second (tps). But Cardano is working to reach millions of tps thanks to Hydra, a second-layer solution built on top of Ouroboros – you can think of it as an extension meant to improve the network, like adding an external memory or card reader to your laptop. Second-layer solutions are additional protocols built on top of a blockchain that perform certain tasks to reduce the workload for the main chain.
- Interoperability: Another problem Cardano wants to solve is the lack of proper interoperability among blockchains. Most blockchain networks are independent and cannot communicate with each other because they use different architectures and coding languages. Ethereum achieves interoperability within its own ecosystem of tokens created to adhere to a specific standard, usually ERC-20. Cardano plans to build true interoperability so any user could move bitcoin to Ethereum without intermediaries and friction. This can theoretically be achieved through sidechains, which are parallel chains attached to the main chain, be it Bitcoin, Litecoin or Ethereum itself.
- Sustainability: Every blockchain needs ongoing improvements, but who can fund developers willing to work on new upgrades if the network is fully decentralized? Cardano aims to solve this issue with a treasury. Whenever a block is mined, part of the ADA rewards will eventually go to the separate wallet, and when someone wants to propose changes to the network, they can submit a ballot and ask for grants. Eventually, ADA holders (stakeholders) vote and decide if the proposal should be granted or not. Conversely, the Ethereum Foundation, which has a major influence on how Ethereum works and where the network is heading to, is a centralized organization.
- Governance: Cardano intends to host a stakeholder voting system in the form of a decentralized autonomous organization (DAO) once the final stage of its development, named “Voltaire,” is fully deployed. With Voltaire, the Cardano community will make meaningful decisions related to technical improvements, software updates and funding decisions. All ADA holders will be able to vote or delegate others to represent them as part of a liquid democratic system.
- Philosophy: Last but not least, Cardano has a unique philosophy. It’s not just another blockchain. Cardano aims to become a global cryptocurrency ecosystem that would reach the unbanked people, support decentralized financial services, and make the world work better for all. For example, IOG has partnered with several governments of African countries to promote the blockchain for various use cases.
Cardano still has a lot to prove
It’s worth pointing out that at this stage only 62 dapps have been built on Cardano’s blockchain compared to more than 2,997 built on Ethereum. Not to mention, Ethereum’s market capitalization stands at $442 billion versus Cardano’s $45 billion market capitalization.
There is also 9 million ether currently locked away in DeFi protocols (worth $33,811,920,000 at press time) while it’s unknown exactly how many ADA tokens have been deposited in DeFi protocol smart contracts.
The road ahead is long for Cardano but thanks to its advanced technologies, rigorous approach and gift of hindsight, it appears to be in a strong position to challenge Ethereum’s dominance and address some of the most common blockchain problems earlier generation blockchains face, namely scalability, sustainability, interoperability and governance.