This article is not financial advice. Ensure to do your research before putting money in this volatile asset.
TL;DR
Cardano is a third generation blockchain which aims to solve the problems of the previous two generations. Cardano will be introducing smart contract support platform similar to Ethereum.
The difference is in the validation mechanism used. Cardano uses Proof-of-Stake which has higher scalability & consumes less energy than Proof-of-Work used by Bitcoin & Ethereum.
What is Cardano?
(Understanding bitcoin & Ethereum may help in understanding Cardano better. Please check the bitcoin article here & Ehtereum here)
Cardano is a decentralized blockchain like Ethereum.
Created by one of the co-founders of Ethereum – Charles Hoskinson. Cardano will be introducing smart contract support platform.
The transactions in Cardano are validated by the Proof-of-Stake mechanism. Cardano is one of the largest Proof-of-Stake protocols today.
This validation mechanism is different to how Bitcoin & Ethereum works. Ethereum is working towards moving from Proof-of-Work to Proof-of-Stake in the near future.
What is Proof-of-Stake?
Since Cardano is a decentralized platform, there is no central authority to validate the transactions.
- In Proof-of-Stake, participants are selected to create blocks based on their stake in the network.
- To validate the transactions, validators need to delegate their ADA coins.
- The process of delegating their coins is staking.
- After the transaction is verified successfully, the validators get additional ADA as a reward.
- The reward they get is proportional to the amount they have staked. So validators who stake higher ADA will get higher ADA in rewards.
This mechanism requires much less energy than the Proof-of-Work mechanism.
We will cover detailed Proof-of-Stake in an upcoming article.
Apart from the Proof-of-Stake validation mechanism, there is another difference.
The difference is the principles on which Cardano is being developed. Updates in the platform are based on Scientific philosophy, peer-reviewed academic research.
This is considered by many to be the strength of Cardano.
The Third Generation Blockchain
According to Charlie Hoskinson, Cardano is a third-generation blockchain. The 1st two generations have problems that Cardano aims to solve.
Generation 1: Bitcoin
Bitcoin is considered a first-generation blockchain. An important innovation that started the Crypto revolution.
But the only thing we can do with bitcoin is transfer value. The validation mechanism Proof of work has been criticized because of high power consumption. There is also a challenge of scalability.
Its limited use cases are also a challenge. One cannot add conditions to those transactions.
Generation 2: Ethereum
Ethereum tried to add a lot of use cases beyond money. With the help of smart contracts, it became possible to create conditional transactions.
But it also has few problems –
- Scalability – Low transactions per second.
- Energy requirement – The consensus mechanism of Proof-of-Work is energy-intensive.
Generation 3: Cardano
Cardano wants to solve the problems faced by the earlier two generations of blockchain.
- Scalability – To be adopted widely, scalability is critical. By adopting a Proof-of-Stake algorithm, Cardano can increase the transactions per second
- Interoperability – Adding the ability of the blockchain to interact with other blockchains. To facilitate the transfer of information across the blockchain. Cardano aims to be the internet of blockchains.
- Sustainability – Raising money may not be a sustainable way for a company to operate. So Cardano wants to create a sustainable source of money to pay for future developments
Who develops Cardano?
There are 3 organizations responsible for Cardano development
- The Cardano foundation – Responsible for supervising the development of the blockchain
- IOHK (Input Output Hong Kong) – Designed the Proof-of-Stake algorithm used in Cardano
- Emurgo – Responsible for encouraging companies to adapt Cardano
What is ADA?
ADA is the native cryptocurrency of the Cardano blockchain. There is a supply cap of 31.95 billion ADA.
Cardano is a decentralized platform, there is no central authority to validate transactions.
You can send ADA anywhere in the world you can send without needing a 3rd party to facilitate the transfer for you. Each transaction is recorded in the Cardano blockchain.
As Cardano has a Proof-of-Stake mechanism, ADA is used by the validators to validate the transactions and earn rewards.
ADA holders can also vote on new changes or developments on the blockchain.
Conclusion
Cardano looks very promising trying to solve the shortcomings of the earlier generation blockchains. It looks very ambitious with a wide range of problems they are trying to solve.
But the majority of the proposed advancements in blockchain are still being developed. We will have to see how the proposed solutions are implemented.