Ethereum

What is Cardano? This crypto’s greatest strength and weakness is its potential.

I’ve written about the main coins: Bitcoin, Ethereum, and Litecoin. Now it’s time to write about some of the significant altcoins that look promising in a series called Altwatch.

Cardano is a cryptocurrency that is as ambitious as it is difficult to fully grasp and understand. Its site and white papers are full of jargon and proprietary names that make it difficult to parse. Trying to figure out exactly what they’re trying to achieve and how they’re trying to achieve it is difficult and requires some imagination. I’ve hammered out what I think the important points are below.

What is Cardano?

Cardano was founded by the former CEO of Ethereum, Charles Hoskinson, in 2015 to be the next generation of cryptocurrency. Hoskinson saw inadequacies in other cryptocurrencies, specifically Bitcoin and Ethereum, and decided to develop a coin that succeeded and built upon their formulae while also significantly innovating.

Cardano was founded by the former CEO of Ethereum, Charles Hoskinson, in 2015 to be the next generation of cryptocurrency. Hoskinson saw inadequacies in other cryptocurrencies, specifically Bitcoin and Ethereum, and decided to develop a coin that succeeded and built upon their formulae while also significantly innovating.

  1. It is based on rigorous academic and peer-to-peer research and collaboration.
  2. It appreciates previous cryptocurrencies and builds upon their successes and failures.
  3. It is committed to accommodating for the future.

With these principles in mind, Cardano seeks to position itself for the future by learning from the past. Why perpetuate cryptocurrency paradigms that don’t work? Why follow models that seem rooted in the past? Litecoin did this to an extent by taking what Bitcoin did well and improving upon it. Cardano is attempting to do that with Bitcoin, Ethereum, and others.

Cardano is actually three separate organizations:

  1. The Cardano Foundation: The organization that promotes the Cardano protocol and furthers its ecosystem.
  2. IOHK: The academic part of Cardano that researches blockchain technology and seeks to make available financial services to people that don’t have access.
  3. Emurgo: The commercial aspect of Cardano that seeks to incubate new blockchain companies with Cardano and establish commercial partnerships.

What does Cardano do?

Cardano seeks to integrate the capabilities of a host of other coins. It hopes to be a store of value like Bitcoin, a platform like Ethereum, secure like Monero, and amenable to regulation and legacy infrastructure like Ripple.

Based on scientific/mathematical model

One of the first things that one notices when looking at Cardano is that it is committed to advancing itself through a scientific model and mathematical principles. It does this in a few ways:

  1. It is the first blockchain technology to be written in the Haskell programming language. The syntax with the Haskell language closely resembles mathematical algorithms, making its implementation relatively simple. Additionally, it is noted to eliminate bugs early in the development process during compile time compared to other languages among other benefits.
  2. Development of Cardano is led by academics and engineers. Its capabilities are fleshed out in peer reviewed white papers.
  3. Its consensus protocol has been mathematically provably secure proof-of-stake protocol.

This commitment to scientific methodology removes much of the doubt surrounding many other cryptos which seem to be a set of disjointed ideas that may or may not make sense but which certainly are money grabs. The feeling with Cardano is that it is trying to accomplish something big.

Adaptability: layers, governance, and Daedalus

Cardano is borne from the frustrations that some developers have felt using Ethereum.

Ethereum does a lot of things well. It is a reliable store of value (compared to other cryptocurrencies) and has managed to mitigate the losses experienced by many of the other cryptocurrencies. It is also the gold standard for multi-use coin/platform. Its integration of secure smart contracts has allowed it to become the method de jour for ICOs and has drummed up significant interest both from organizations as well as from governments.

The problem with this dual functionality (storage of value and smart contracts) is that while each serves an important purpose, their integration makes Ethereum infinitely more complicated. Trying to fix the problems of one necessarily means that the other will be changed somehow. This is because Ethereum is monolithic. Its ledger is intrinsically tied from a code perspective to its smart contract functionality. Both of these things are sloshing together in one giant container. While this may have made sense for developmental expediency, it makes upgrading the system more difficult and cumbersome.

To solve this, Cardano silos off its ledger from its smart contracts into two separate layers: the Cardano Settlement Layer (CSL) and the Cardano Computation Layer (CCL).

The CSL is the part of Cardano that keeps tabs on balances and wallets. The CCL is the part of Cardano responsible for computations such as decentralized application and smart contracts. The two layers are able to interact with one another but are independent entities. This allows for discrete programming to be placed within the CCL without affecting the broader CSL.

Per Cardano, this separation of functions will allow it to straddle two broadly competing interests: the privacy of its users and the need for regulation. In this way, Cardano is attempting to be a bit of Bitcoin and a bit of Ripple. The two functions are necessary and interrelated, but maintained separate from each other to satisfy the needs of everyone involved.

Future improvements on the CSL will allow support for sidechains, user issued assets (aka tokens ala Ethereum’s ERC20 protocol), and different types of signatures. All of these will greatly increase potential uses for Cardano.

The second way that Cardano maintains adaptability is by its intended governance structure. As mentioned above, Cardano is built with previous cryptos in mind. Anyone keeping up with cryptocurrencies is aware of the various splits within the Bitcoin community that have led to a number of offshoots. Ethereum itself is actually a hard fork from the original Ethereum blockchain. Both cryptocurrencies have been plagued with divisions within their user base, a serious internal threat to each crypto. Per Cardano Foundation chairman Michael Parsons:

“Cardano therefore will operate a type of constitution, providing a means of agreeing upon change within a stable framework. Token holders can vote on how to change the protocol, capturing stakeholder intent and reducing the potential for fragmentation. Updates to the software will need to be made through soft forks. Governance has been carefully designed, and every ADA holder can take part.”

Not only do these disagreements hurt the existing product and cause fractures within their respective communities, they also prevent improvements from being installed.

Cardano hopes to avoid all of this by implementing a transparent, open, blockchain based method where proposals can be made and voted upon by the Cardano community. To solve the stagnation problem, Cardano will institute a “treasury” made up of some percentage of transaction fees that will be relegated to development of the platform. Users will be able to vote on proposals that they find beneficial or promising and fund them from that treasury.

The third way that adaptability is through Cardano’s exclusive wallet, Daedalus.

Daedalus intends to eventually be a multi-currency wallet that supports smart contracts and atomic swaps between different currencies. Like everything else related to Cardano, Daedalus’s support is presently limited to Cardano but there are plans in the future to on board these other features.

Proof of Stake -> “Ouroboros”

Unlike Bitcoin or Ethereum (for now) which rely on Proof of Work (POW), Cardano is mined via Proof of Stake (POS). As a quick recap: mining is a required component of cryptocurrencies as it is the step that validates transactions and ensures that the person sending currency has the permission to do so. This is a computing and energy intensive process. Thus far, two methods have been used: POW which relies on miners to validate the transactions and be paid via fees and newly minted coins, or POS where stakeholders (people that own the currency) validate transactions via vote which is proportional to their holdings.

Cardano has eschewed the POW method as being too energy intensive (for fun, just Google “Bitcoin Energy Ireland”). Instead, it hopes to use a proprietary POS algorithm called Ouroboros. As mentioned above, Ouroboros is a scientifically developed mathematically proven secure algorithm that attempts to relay the security of the Bitcoin blockchain without the energy expenditure.

Unlike other attempts at POS, Ouroboros relies on delegation and randomness, which confers utility and security [for more detail, please see the Ouroboros academic paper]. Additionally, as more people start to use Cardano, Ouroboros can be iterated upon and improved. Indeed, scalability and updated incentive structures are built into Ouroboros to make it relevant in the future as it is in the rest of Cardano.

Smart contracts/platform

Cardano is also trying to take the mantle as the desired platform for smart contracts and therefore ICOs from Ethereum. As mentioned above, Cardano’s CCL is responsible for smart contracts and computation. After looking at Ethereum’s programming language, Solidity, and realizing that its complexity prevented many from using it, Cardano has decided to develop a proprietary programming language called Simon.

“The principal idea is that financial transactions are generally composed from a collection of foundational elements7. If one assembles a financial periodic table of elements, then one can provide support for an arbitrarily large set of compound transactions that will cover most, if not all, common transaction types without requiring general programmability.”

In other words, most transactions can be broken down into discrete blocks or functions. Rather than relying on super complex code, why not create a language that was made of discrete blocks that could be put together to form complex transactions. Simon attempts to do just this.

For those familiar with biology, DNA is composed of 4 nucleotide building blocks (guanine, adenine, thymine, and cytosine). These 4 building blocks are combined in different orders to create 64 different sequences and 20 different amino acids. These amino acids form the basis for the entire human genome.

Now think about Simon. A fairly limited number of building blocks can yield a huge amount of possible transactions and configurations. No flexibility is lost and indeed, transparency and clarity are gained.

Say that A, B, C in the above are each foundational elements to transactions. Say that A means “provides x service”, B means “provides y payment”, and C means “provides z service”. You can see how just having three elements available makes 27 permutations possible (3³). Adding just a few more elements makes it theoretically possible to achieve almost any type of transaction. Because its pieces are distinct, the criteria for the transaction can be easily audited by observers or regulators. This fits well with the vision of the CCL being regulator, government, and legacy facing.

Risks

Large scope

Cardano is attempting to be an all in one crypto: cheap, secure, a platform for other coins, an exchange for atomic swaps. Awesome. Many coins have struggled trying to achieve just one of these things, however, and the ability of Cardano’s management team to pull all of these things off remains to be seen. While Cardano could be amazing if everything works out, each additional capability makes realizing that potential more difficult.

It’s important to maintain a distinction between what Cardano presently is and what Cardano potentially could be. Right now, it is a premined, distributed, store of value. It is not anything else. POTENTIALLY it could usurp Bitcoin, Lightning Network, Ethereum, Ripple, and Coinbase but only if it successfully integrates its POS protocol (validation presently occurs on secured nodes), multisignature wallets and sidechains, user-issued assets, smart contracts through a robust CCL, and atomic swaps.

That’s a lot.

Take a look at their development road map here. While I appreciate their optimism, I can’t help but feel that the extent of their goals also hampers the possibility that they actually reach those goals. We shall see.

Furthermore, they make note of difficulties experienced by other cryptos and say that they will fix them: but how? I’m speaking specifically about their observations on governance and the frustrations felt by the ETH and Bitcoin communities. Great. Cardano says that they will make them democratic and have the community vote on upgrades. Amazing. Transparency goes a long way but I still don’t understand HOW they will go about achieving this. Problems facing entities such as cryptocurrencies are as complicated as Cardano’s vision paper. I have a hard time believing that a community largely made up of lay people will have an easy time solving problems such as block size and protocol level improvements.

Complicated and difficult to understand

Going along with this, I had extreme difficulty fully understanding many of the concepts put forth on their website and in their literature. It’s cool that they have three foundations running concurrently to further Cardano, but doesn’t that make approaching Cardano as a lay person more confusing? Prospective investors will have difficulty figuring out exactly what Cardano is and where to look.

The Why Cardano site is full of technical language and abstractions that even educated people within the crypto community will have difficulty. As I mentioned earlier, the complexities of creating a cryptocurrency, especially one as ambitious as this, are not lost on me. But this is the forward facing aspect of Cardano. One would think that some effort would be made to make it intelligible.

Slow

Lastly, the combination of the project’s scope and dedication to academic rigor make the actualization of Cardano’s vision something that is still very far off. While Cardano’s future upgrades may have a quick turn around time once all of its features are fully enacted, putting those base features into place will take a long time. Academic research is not known for its rapidity and while Cardano’s feature set may benefit from the assuredness that this type of research provides, it may lose out in terms of timing. Think about how many things are laid out in their road map and how long these will each take to implement.

Conclusion

Cardano has the potential to become huge but faces a number of obstacles. Chief among them is its intention to serve so many functions and the difficulties that it will have achieving its lofty goals. Given the pedigree of its founder and executive team, I have confidence in the project compared to other cryptos. Still, I would appreciate some clarity as to how they will go about solving the problems that they have points out in other cryptos, specifically: governance and preventing user fragmentation, its POS algorithm, integrating smart contracts, and its interaction with regulatory/legacy bodies while maintaining its user side appeal.

If Cardano can pull all of these things off, it would not be unrealistic to see Cardano join the ranks of Bitcoin, Ethereum, and Litecoin in the top echelon of cryptocurrencies at some point in the near future. For now, however, it remains even more speculative than many other cryptos given the scale of what it is trying to accomplish. Still, it is that scale and appreciation for what cryptos are and where they are going that makes Cardano such a special prospect. It’s an intriguing investment with higher upside than most other cryptos aside from Bitcoin and Ethereum dragged down by the scope of what it is trying to accomplish.

Further reading/listening/watching:




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