What is Cardano? Why is Cardano's ADA a good tactical buy?
Updated: Apr 10, 2021
Ethereum is currently the undisputed leader among platforms supporting dApps. Projects like Polkadot, Cosmos, and EOS are attempting to challenge its position and have earned the title of “Eth Killers”. Today we talk in detail about another very credible Eth Killer- Cardano. If successful, it would be the most scalable dApp development platform in the market.
It was started by Charles Hoskinson who was also a co-founder of Ethereum and apparently had a falling out with the Ethereum team over its non-profit status. The native token of Cardano is called ADA.
Investment thesis for Cardano
Cardano does not support smart contracts yet. This means that it is not competing with Ethereum yet. It will begin competing with Ethereum with the launch of Goguen (Stage 3 of Cardano roll-out) which is scheduled for Feb’2021. ADA (Cardano’s native token) already saw a price spike in the run-up to Shelley (Stage 2 of Cardano roll-out) in July’2020. One can expect another price jump with Goguen.
The sustainability of price movement will depend on the ability of the Cardano team to attract developers to the platform, as the price is likely to follow adoption and use cases. From the looks of it, Cardano is likely to go after developers on Ethereum very aggressively.
Cardano has a 5 stage roll-out plan
Stage 1 - Byron: launched in 2017 saw basic functionality
Stage 2 - Shelly: saw the rollout of Ouroborus Proof of Stake (OPoS) consensus mechanism and staking functionality in July’2020. Staking increases the number of validators making the protocol more secure.
Stage 3 - Goguen: With the launch of Goguen, Cardano will be able to support smart contracts and developers will be able to build dApps on the Cardano platform as they can in Ethereum. Goguen is scheduled to come online by February'2021. Given the delays in Shelley, no one is expecting a timely roll-out.
Stage 4 - Basho: will introduce side chains which will increase scalability.
Stage 5 - Voltaire: will bring governance to the network. ADA holders will be able to vote on uses for treasury funds.
A 3G blockchain that solves the problems in 1G and 2G blockchains
Cardano calls itself the 3rd generation blockchain. Bitcoin with its Digital Gold status is 1st generation. Ethereum with its support of Smart Contracts is 2nd generation. Cardano solves problems of 1st and 2nd gen blockchains:
Problem 1- Scalability - The number of transactions that can be processed per second is capped at 7 in the case of Bitcoin and 15 in the case of Ethereum. This is because of their consensus mechanism designs. You can read about it here.
=> Cardano’s solution - Cardano uses a unique consensus mechanism called Ouroboros Proof of Stake (OPoS). In OPoS, time is divided into Epochs. Each Epoch is further divided into Slots. Each Slot has a Slot Leader. A staking pool becomes a Slot Leader if an ADA coin staked by it is selected by the Cardano Consensus algorithm. The Slot Leader listens for transactions and mines the next block. In return for its services, it is paid block rewards in ADA. In case the Slot Leader doesn’t show up or doesn’t complete the task for any reason then it loses the chance to create a block and earn rewards.
How does this help with scaling? An Epoch can technically be divided into an infinite number of slots. This would theoretically mean that an infinite number of transactions can be processed in any unit of time. Charles Hoskinson has stated that if OPoS works as intended, Cardano can scale to 1,000 transactions per second.
Problem 2 - Centralization of mining/staking pools- The economics of mining/staking has led to the creation of large mining/staking pools. There is a risk of concentration of power with these pools giving them undue influence on the network.
=> Cardano’s solution - In a basic PoS protocol, the greater the coins in the pool, the greater the chances of getting selected. Cardano starts with the same structure but has a built-in protection against centralization. This protection is the Saturation Point of 64 million ADA. As the pool approaches the Saturation Point, there will be decreasing marginal returns from staking. This would incentivize ADA holders to seek out smaller staking pools and thus reduce the concentration of power with a few large staking pools. As per Charles Hoskinson, Cardano will be 50-100x more decentralized than other large blockchain networks.
Problem 3- Inadequate processes for dealing with disagreements - Bitcoin and Ethereum do not have a formal process to debate disagreements. This has left the community disgruntled and divided at the time of controversial issues like the block size wars at Bitcoin or the DAO Debacle at Ethereum.
=> Cardano’s solution - Cardano has an interesting mechanism to promote discussion. It will maintain a treasury funded by inflation and transaction fees. Developers requiring funding can put up their proposals which will be voted on by the community. The proposals with the maximum votes will get funding. This mechanism provides a platform to air views on the philosophy, goals, and future development of the platform before polarisation leads to splits or forks.
Problem 4 - Network bandwidth-heavy- Every Bitcoin and Ethereum node must maintain a copy of the full history of the blockchain. With the passage of time, as more blocks are mined and more transactions processed, the amount of data keeps going up requiring higher network bandwidth and storage space.
=> Cardano’s solution - Cardano solves this problem by splitting the network into sub-networks using RINA (Recursive Inter-Network Architecture). Each node is part of a sub-network. It needs to store information only of that sub-network but can call on data from other networks when needed.
Problem 5 - Regulator suspicion - Government’s look at cryptocurrencies with suspicion and don’t appreciate being denied the power to see who is paying who and for what. It robs them of the power to tax, to choke money supply to criminals, to implement monetary and fiscal policies, etc. The fact that Bitcoin makes pseudonymous transactions possible has not made identity verification unimportant, it has simply shifted the job of identity verification to centralized authorities like exchanges. This goes against the basic raison d'etre of blockchain which is to avoid centralization.
=> Cardano’s solution - Cardano plans to give people the ability to attach metadata (that the government may rightly or wrongly ask for) if they want to.
Some exciting features of Goguen
A. ERC20 Converter- When it is rolled out, Goguen will launch an ERC20 converter which allows developers to migrate assets from Ethereum to Cardano. A demo of the converter showcased 3 migration options:
i. Airdrop newly minted tokens to the wallet of choice.
ii. Lock tokens in a Smart Contract on Ethereum and mint an equal number of tokens on the Cardano blockchain. This is similar to how tokenized bitcoin work on Ethereum.
iii. Burn ERC20 tokens using an Ethereum smart contract and mint an equal number of tokens on Cardano.
B. Multi-currency Ledger- Goguen will have a multi-currency ledger making it possible to transfer multiple different tokens in one transaction.
C. No cookie-cutter tokens - Unlike ERC20 tokens which have to follow a standard format, Cardano tokens will have greater autonomy in terms of what features they want to build.
Slow and Steady wins the race?
Entrepreneurs today are told not to let “perfect be the enemy of the good”. It is considered better to launch a minimum viable product and then iterate for improvements. This is what usually happens with crypto projects as well. Not with Cardano though. Cardano took its time to launch after a long-drawn, methodical research and development process, writing several academic papers and evaluating the best practices in other projects.
Cardano is an ambitious project of Charles Hoskinson which if successful could seriously challenge Ethereum. While I'm not sure it will ever replace Ethereum, I do believe ADA token should be strong in the run-up to Goguen. Post Goguen, I'd keep an eye out for how many developers they're able to attract to their platform.