Cardano was developed as the twin blockchain of Ethereum and had the main purpose of making distributed ledger technology possible. The blockchain is also used as a medium of exchange. With the help of Cardano, implementing cross-chain compatibility and smart contracts has become a lot easier.
Since there are lots of different blockchains available in the cryptocurrency market, it might not be easy for a novice investor to choose the right blockchain to start with.
Although Cardano is a relatively new blockchain, it has gathered lots of attention and has become widely popular in the crypto world. In this guide, we will see how Cardano works and what makes it so unique and popular.
Introduction to Cardano (ADA)
As we’ve mentioned earlier, Cardano was created as an alternative to the Ethereum blockchain. It is one of the first blockchain platforms to be peer-reviewed and uses a scientific method to work.
The key purpose behind the creation of the Cardano blockchain was to enhance the ability of the Ethereum blockchain to process more transactions rapidly and with low fees. Moreover, since the latest technology, like smart contracts and distributed ledger, are used in the creation of Cardano, the data of its users is perfectly safe.
Cardano allows its users to seamlessly create new smart contracts, send and receive money, and use the blockchain to create decentralized applications on top of it. ADA is the native token of the Cardano blockchain. This token is used to transfer value between different users on the blockchain.
While it performs the same purpose as every other cryptocurrency token, it differs in its functionalities. The token can also be staked on the blockchain to help the users ensure maximum security of the blockchain and to earn some passive income as well. Staked tokens are used to verify transactions on the blockchain.
Users who are active on the blockchain and participate in different activities also get ADA tokens as a reward for their contribution to the community. The same token can also be used by developers to create decentralized platforms and create smart contracts.
Cardano vs. BTC vs. ETH
Although Cardano has the same features as Bitcoin and Ethereum, the latest technology used in its creation enables a few extra functions which are not available in the above-mentioned coins.
For example, being peer-reviewed and scientifically based is one of the best features of the Cardano blockchain, which is not yet found in any other blockchain. Whenever a new change is to be introduced to the blockchain, academics have to review the change before accepting or rejecting it.
Moreover, it is worth noting that Cardano was developed when Ethereum was still in its early stages. The shortcomings of Ethereum are now being covered with the help of Ethereum 2.0, as the blockchain is transitioning towards approval of the staking system.
Cardano contains a total of two layers, and because of this feature, it is highly scalable and safe for its users. Cardano is used by the first layer to settle all the transactions on the blockchain. This layer is termed the settlement layer. There is only a minimal transaction piece involved in transaction processing.
Below the settlement layer lies the computation layer. This layer contains the specific protocols used by the Cardano blockchain to create smart contracts. Smart contracts can be used by developers to create decentralized applications and to implement changes in those applications later on.
PoS Consensus Mechanism
Cryptocurrencies like Bitcoin and Ethereum are still based on the proof of work consensus mechanism. This consensus mechanism requires a lot of computational power and electricity to keep verifying the transactions. On the other hand, Cardano uses the latest proof of stake consensus mechanism. It is a very energy-efficient process and requires less computational power.
Moreover, the transaction fees are really low in this process. Due to the widespread acceptance and popularity of the proof of stake consensus mechanism, Ethereum is also shifting to PoS by introducing the Ethereum 2.0 project.
Due to the power-hungry proof-of-work mechanism, complex cryptocurrencies like Bitcoin and Ethereum are also able to process a limited number of transactions per second. Cardano solved this issue by releasing the Ouroboros protocol.
The protocol is based on proof of stake and can thus be used to verify and process a large sum of transactions per second, and that too with low fees.
Advanced algorithms are used to choose validators, and layers are separated to ensure extra security. Moreover, token holders are allowed to vote for changes on the platform. The consensus mechanism is also scalable to an unlimited extent.
In a proof-of-stake consensus mechanism, the nodes have to stake their cryptocurrency tokens on the blockchain to help validate transactions. However, the Ouroboros protocol introduced by Cardano uses a slightly different process.
The Cardano blockchain uses epochs that last for 20 seconds. Each period is called a slot. The validator is selected by people having steak in the network and is responsible for adding one block to the blockchain.
Once a validator gets assigned as the epoch leader, they have to complete half of the block creation within one slot or 20 seconds. Stakes in the network are used to validate new blocks and add them to the blockchain.
The whole network is designed in a unique way to process unlimited transactions at any given time. After an epoch has been mined, relevant rewards are distributed to the participants.
To mine a block of Cardano, you need to have at least a 2% stake in the Cardano blockchain.
However, higher stakes mean higher chances of getting accepted as a validator node. The MPC technology ensures the fair and randomized election of slot leaders. So, the unique proof of stake mechanism of Cardano is perfectly safe and secure.
Use Cases of Cardano
The centralized structures of other cryptocurrencies have resulted in governance issues, low transparency, manual and inefficient work, high fees, data loss, and fraud. However, Cardano, with the help of its latest technology, provides the solution to all of these problems in one package.
There are lots of different use cases for Cardano because of its open-source nature. Users can easily create smart contracts on the blockchain. Cardano can be used to solve problems in many industries. For example, it can be used in finance, retail, government, and other sectors to introduce blockchain-based smart solutions.
Cardano can implement specific smart contracts to keep the educational credentials of a person safe on the blockchain. With the help of this technology, academic certifications can be easily verified by institutions without any manual work. Atala PRISM protocol can be used in the education sector.
To provide banking solutions to the unbanked people, Alata PRISM technology can be used to create digital IDs for those people. This way, developing nations can also be connected to international markets through a seamless and transparent method. The Cardano team is already working with multiple countries to create blockchain-based governance solutions for them.
To facilitate the healthcare industry, Cardano has developed the Atala SCAN feature. The future can be used to easily get more details on the origin of pharmaceutical products. This way, counterfeit pharmaceutical products can be eliminated from the market, and the safety of patients and pharmaceutical companies around the globe can be ensured.
The Atala SCAN system can be used in the retail industry as well. Just like pharmaceutical products, retail products can be verified and authenticated with the help of this system. Any user can easily get an idea about the supply chain and authenticity of a retail product before buying it. This makes eliminating counterfeit products from the market possible.
Governments around the globe can use the Atala PRISM system to release new credentials and verify the previously existing credentials of their citizens. This eliminates the dependence of credential issuing on third parties and issuing authorities.
The Atala Trace system has been launched to help the agriculture sector. This system can be used to easily trace and certify agricultural products.
Moreover, just like any other cryptocurrency, You can easily buy and sell ADA tokens on the blockchain to transfer value. These tokens can also be kept in your wallet to help you take part in the voting process.
With the help of voting rights, you will be able to vote for or against different features being introduced on the ADA blockchain. If you have no use for your ADA tokens, you can stake them on the blockchain to help verify transactions, and earn more ADA tokens as a result.
Wallets Supporting Cardano
Here are some of the major wallets supporting Cardano.
Because of the smart contracts feature of the blockchain, users need to sign up with a digital wallet that can interact with the blockchain in real-time. Nami is one of the best digital wallets you can use in this regard. With the help of this wallet, you can easily interact with the decentralized applications supported by the Cardano blockchain.
Daedalus is the native digital wallet of the Cardano blockchain. You should choose this native digital wallet over any other cryptocurrency exchange or wallet. This is the same wallet you can use to stake your ADA tokens on the blockchain to earn rewards in return. To start staking, all you have to do is to join a staking pool, and you’ll start benefiting from the rewards right away.
If you do not want to go through the complex features of the native Cardano wallet, you can choose Yoroi as your default Cardano storage wallet. This wallet is very simple and comes as an extension for all the major browsers. It isn’t much different from Daedalus and is developed by the same IOHK, the company behind Cardano and Daedalus.
Yoroi wallet comes with simple features like account creation, making ADA transactions, and staking your ADA tokens.
Benefits of Cardano
Just like any other cryptocurrency, Cardano has its own set of benefits which its users can benefit from.
As we have mentioned earlier, cryptocurrencies like Bitcoin and Ethereum are still working on the proof of work mechanism. This mechanism causes a lot of electricity to be wasted because of its power-hungry algorithm.
However, the proof of stake mechanism used by Cardano is one of the best in the industry and is the most eco-friendly option as well. According to a calculation, Cardano is over 1.6 million times more energy efficient as compared to bitcoin.
To introduce new features to their platform, the Cardano team gets the research done by academics. The valuable research done by the academics is then used to create new cryptocurrency solutions which are then implemented in the blockchain after being reviewed by the experts.
This feature ensures that Cardano is peer-reviewed, and can easily keep developing according to the latest technological requirements arising shortly.
Fast Payments and Low Fees
Currently, the ADA blockchain is capable of processing and completing around 250 transactions per second. This number is already great, but the ADA team is working closely with experts to increase this number even further as the network scales in the long run. In the case of bitcoin and Ethereum, they can only process 4. 6 transactions, and around 15 transactions per second respectively.
In addition to being incredibly fast, the Cardano transaction system is also cheap. For example, you are charged under $1 for every transaction. This is great when compared to the heavy fees of Ethereum, which can go above $10 per transaction.
This is why Cardano is currently more scalable as compared to Ethereum, and the Ethereum team is working on Ethereum 2.0 to introduce sharding, increase their transactions per second, and lower their fees.
Drawbacks of Cardano
Here are some of the biggest drawbacks of Cardano.
An Under-Development Blockchain
One of the biggest drawbacks of using Cardano is that its blockchain is still under construction. Although the progress is steady, the key features are still being developed and enhanced after careful reviews by the experts.
To compete with Cardano, Ethereum is now developing Ethereum 2.0, which will introduce sharding to the Ethereum blockchain, and will increase its transaction speed and enhance its features to help it compete against ADA.
There is also the issue of double spending with Cardano. The issue arises when slot leaders accidentally verify the same transaction two times. This way, you can easily double-spend on one transaction, and it is one of the biggest drawbacks of using Cardano.
Developers’ Lack Of Interest
When compared to other cryptocurrencies, Cardano is a bit slower when it comes to attracting developers’ interest. Cryptocurrencies with smaller market caps are being adopted by developers way faster as compared to ADA.
One of the main reasons for the lack of interest by developers is because of the complex programming language used in the development of Cardano. This is why the number of decentralized applications created on top of Cardano is still very low.
Cardano as an Investment
When it comes to using Cardano or ADA as an investment tool, it entirely depends on the current and future value of the cryptocurrency. You should also consider various other factors when choosing Cardano as an investment tool. Once you understand the key principles which drive the value of Cardano, you will be able to make a more educated investment decision.
Moreover, there is a hard cap on the total number of Cardano coins that can be created. This keeps the inflation under check and gradually increases the user base to increase the value of ADA in the long run.
Due to the multiple-layered structure used by the Cardano blockchain, it is much more secure and scalable as compared to other cryptocurrencies. This is why Cardano is considered one of the best investment tools you can use to store value in the long run.
Another reason why Cardano is very valuable is because of the creation of smart contracts and decentralized applications on top of the Cardano blockchain. Moreover, since Cardano is peer-reviewed, the new features can be analyzed and tested before they are implemented on the blockchain.
To sum up the discussion, we can say that Cardano surely has a huge potential for growth and scalability in the cryptocurrency market. This makes the cryptocurrency and the ADA blockchain a hot investment tool for crypto investors and traders around the globe.
You can add ADA to your cryptocurrency portfolio to benefit from its increasing value and utility in the long run. So, Cardano is a good investment choice. However, you should do the due diligence before making any financial decisions.