PYMNTS Blockchain Series: What is Cardano?

Throughout this series of articles, we’re looking at the top blockchains in crypto to help you make sense of the alphabet soup of so-called “altcoins” that exists beyond that of Bitcoin’s BTC and Ethereum’s ETH.

We will look at what they are, how they work, what they do, and their pros and cons.

You’ll come out of this series not only with a better sense of what cryptocurrency is all about, but you’ll also understand why the way a token works — the way its blockchain processes transactions — is key to its success or failure as a digital asset.

See also: PYMNTS Blockchain Series: What is Solana?

So, what is Cardano?

The Cardano blockchain is several things, among them one of the big-three Ethereum Killers that are seeking to steal the No. 2 blockchain’s crown as the top smart contract platform in the decentralized finance ecosystem.

For another, it is the brainchild of Charles Hoskinson, one of the original developers who worked on Ethereum with its creator, Vitalik Buterin. By his estimation, Cardano is Blockchain 3.0, the successor to Blockchain 1.0 — Bitcoin’s transfer of value function — and Blockchain 2.0, Ethereum’s smart contract functionality.

For a third, it is something unique, a peer-reviewed blockchain, meaning all code updates and blockchain upgrades are scrutinized in a fair amount of detail before being allowed to go live. That makes it easier to catch security issues and other flaws before they go live. The project calls itself the world’s first provably secure blockchain.

It is also the leader of the Ethereum Killers by market capitalization, $48.8 billion at this writing, making it the No. 5 blockchain.

That’s been helped by the announcement that an eagerly awaited DeFi project, the SundaeSwap decentralized exchange, or DEX, is launching on Jan. 20 — with promises to distribute a whole lot of its native SUNDAE tokens to early users. Then there’s Pavio, a Decentraland-style metaverse project minting 100,000 land parcels as NFTs, coming soon.

Fun fact: Cardano’s token, Ada, is named for Ada Lovelace, a 19th-century mathematician widely considered the first computer programmer. Who happened to be Lord Byron’s daughter.

Cardano’s development is divided into five parts, or “eras.” Named for poets, they begin with Byron (of course), the foundational work. Next, come Shelly (decentralization), Goguen (smart contracts), Basho (scaling) and Voltaire (governance). Far more organized than most blockchain projects, work on Cardano began in 2015 and is currently in Goguen.

Two-part scalability

More to the point, like Solana and Polkadot, Cardano positions itself as a better, faster, more scalable and more environmentally friendly platform, unburdened by Ethereum’s slow blocktime — 15 to 25 transactions per seconds, a snail’s pace compared to Visa’s 1,700 TPS.

Cardano works by dividing the blockchain into two parts. There is a Cardano Settlement Layer that processes and records all transfers of value in its native token, Ada, and a Cardano Computational Layer, on which the actual smart contracts and decentralized applications, or DApps, run separately. That will allow Cardano to handle about 250 TPS. Which Hoskinson and the projects developers knew wouldn’t provide enough scalability.

So, they began working on a Layer 2 solution called Hydra simultaneously. It should allow Cardano to reach a theoretical one million transactions per second. Ethereum’s coming shift to Ethereum 2.0 is supposed to give it 100,000 TPS.

Typically, a Layer 2 project like the Lightning Network for Bitcoin seeks to speed up an existing blockchain doing exactly what Cardano’s Settlement and Computational layers do — separating the transactions from the functions. In Hydra’s case, it will add an unlimited number of Computational Layers to the blockchain.

Staking green

Like the Ethereum Killers and most of the recent blockchain projects, Cardano runs on a proof-of-stake, or PoS, consensus mechanism, which uses almost no power. It is the main replacement technology for Bitcoin and Ethereum’s power-hungry proof-of-work, or PoW, mechanism.

See also: PYMNTS DeFi Series: What is Staking?

Both are used to secure the blockchain and add blocks of new transaction data to it, with the validators (PoS) and miners (PoW) earning new tokens as a reward for their work. PoW’s power requirements are equal to whole countries.

While Hoskinson’s company, IOHK, is heavily involved in Cardano’s development, it doesn’t control it. The decision to make software updates, technical upgrades and fund projects to support Cardano is controlled in DeFi manner by a vote of token holders.

In this case, Ada tokens are not only a currency used for payments but also a governance token giving a vote on the blockchain’s future. That doesn’t change the fact that all proposed changes are peer reviewed before going live.