Cardano (ADA): What Is It, and How Does It Work?

A flat spaceship flyng through meteors in space.

Cardano (ADA) is a decentralized blockchain that runs a Proof-of-Stake (PoS) consensus mechanism. The name of Cardano’s native currency (ADA) comes from Augusta Ada King, who is often referred to as the first computer programmer. Ada King is primarily known for her work on Charles Babbage’s analytical machine, a precursor to modern computers. The blockchain was named after Geralomo Cardano, an influential mathematician and programmer. 

The Cardano consensus mechanism rewards stakers in the network with ADA, the vehicle by which the network reaches a consensus. Work on Cardano began in 2015, and the project was led by the co-founder of Ethereum, Charles Hoskinson

Cardano is similar to Ethereum in that its development is supervised by a non-profit organization, the Cardano Foundation, which operates out of Zug, Switzerland. 

History of Cardano

The story of Cardano’s birth is a very peculiar one. One could argue that the entire blockchain was built as an Ethereum fork since it was started by two Ethereum colleagues who were dissatisfied with the original project. 

The founder of Cardano, Charles Hoskinson, was one of the original eight founders of Ethereum. However, he got into a huge fight with Vitalik Buterin over the future of the Ethereum blockchain and left soon after. Hoskinson wanted to accept venture capital and build an Ethereum company with a formal governing structure. Buterin wanted to create a nonprofit with a decentralized governance structure instead. 

Buterin won the argument in the end, and Hoskinson had no choice but to leave Ethereum as it no longer aligned with his vision. Outside Ethereum, Hoskinson went on with his plan to build a Proof-of-Stake (PoS) blockchain, which would soon come to be known as Cardano. 

Hoskinson could never have built Cardano without help. After leaving Ethereum, he co-founded IOHK, a blockchain engineering company. He was approached with the idea for Cardano by ex-Ethereum colleague Jeremy Wood and had been impressed by it. The goal of IOHK was simple; build Cardano. 

In the beginning, IOHK stayed afloat by getting contracts to help people build cryptocurrencies. The company charged in Bitcoin, and as the price of Bitcoin soared, so did its profits. Eventually, the IOHK became so liquid that it could now afford to launch its original project, Cardano.

Cardano’s Goal

The goal of Cardano is to become an important alternative to Proof-of-Work (PoW) networks such as Bitcoin. Cardano also claims that it solves the important fundamental problems in crypto. Cardano claims it’s faster, greener, and more flexible than Bitcoin while being safer and even more scalable than Ethereum. 

By the time the Cardano network eventually launched in 2017, it was the largest Proof-of-Stake (PoS) blockchain. According to Hoskinson, the Cardano blockchain was 99.9% more power efficient than Bitcoin

However, Cardano has made limited progress in ridding the crypto economy of PoW. 

Bitcoin, for example, still uses PoW and is not likely to make a switch anytime soon. Aside from that, crypto enthusiasts have shown little indication that they care about the PoW vs. PoS debate. The huge majority still purchase Bitcoin, and many others believe it will outlast its competitors. 

One interesting thing about Cardano is that it doesn’t have a whitepaper. Instead, the project is built based on input from several academic papers. People who want to learn about the blockchain and the tech that powers it can do so via various academic sources. 

Some of these sources include a peer-reviewed research library, the Cardano homepage, a developer portal for the tech community, and a partner description page that outlines the decentralized nature of the Cardano tech database.

How Does Cardano Work?

The Cardano blockchain architecture is multilayered. This means that they are two layers to the chain. The first is the Cardano Settlement Layer (CSL), and the second is the Cardano Computational Layer (CCL).

The CSL is the base layer and is the chain that records transactions that involve ADA alone. The CCL layer, on the other hand, records smart contract-based transactions. 

The network reaches a consensus through a special PoS protocol called Ouroboros. This mechanism allows stakers to earn ADA and send their tokens securely and quickly while retaining the highest level of security possible.

The Ouroboros protocol is vital to Cardano for a few reasons. The first is that the mechanism provides true security in choosing validators for the blockchain. 

For a PoS chain to be secure, the validator chosen by the network must be truly random. The Ouroboros mechanism explicitly guarantees that this is the case for every validator. 

The randomness of Ouroboros also ensures that all token holders staking their ADA have a fair chance of being chosen as validators. This provides extra protection for the network against 51% of attacks.

Daedalus Wallet

Another thing that stands Cardano out from the rest is the fact that it has its own wallet. Daedalus wallet users get a full Cardano node, which means that every user with a Daedalus wallet provides extra support to the network and has complete control over their transactions. 

Users with the wallet can also stake ADA through the Ouroboros staking system. They can be chosen as validators and earn ADA via staking. The Daedalus wallet can only be downloaded on computers, as it doesn’t have a mobile version yet.  

Cardano vs. the Rest

The core idea behind Cardano is that it’s a better blockchain than all the others. This is an extraordinary claim, considering the market acceptance that chains like Ethereum and Bitcoin have. But the fact that the claim is incredible doesn’t mean it cannot be true. That’s why it’s crucial to compare Cardano to its biggest competitors and see how it performs. 

Cardano vs. Bitcoin

There are three core differences between Cardano and Bitcoin. The first is that Bitcoin was created as a P2P cashless transaction system. However, Cardano, like Ethereum, was developed as an all-inclusive ecosystem that allows developers to complete all manners of transactions on the blockchain. 

The second difference between Cardano and Bitcoin is that Bitcoin uses a PoW model to mine new tokens, while Cardano uses a PoS mechanism. This means that Cardano uses less energy than Bitcoin and is greener. 

The third difference is that Cardano is much faster than the Bitcoin blockchain. While Bitcoin processes around five transactions per second, Cardano can process around 250

However, Bitcoin has proven to be the better investment over the past decade. So despite Cardano’s best arguments, people still trust and prefer Bitcoin. 

Cardano vs. Ethereum

Cardano and Ethereum are very similar. They both use PoS technology and are both very flexible. Cardano claims it is safer than Ethereum because it avoided pitfalls that Ethereum didn’t. 

 Hoskinson, for instance, says that every part of the Cardano code had been published and peer-reviewed before the chain was built. This cannot be said about Ethereum, which was a one-man show. 

While Cardano claims it is safer than Ethereum, there’s yet to be any conclusive evidence proving this is true. The Ethereum blockchain is yet to be hacked, and Cardano hasn’t proven that it’s intrinsically safer than Ethereum. 

The transaction limits of Ethereum mean there’s some validity to the idea that Cardano has better scalability. Cardano uses two layers, a settlement layer and a computational layer. This means the network can easily grow to any size as quickly as it wants, which isn’t true for Ethereum. 

Despite this, Ethereum has built a more extensive market presence than Cardano. This might be because of Cardano’s limited flexibility when compared to Ethereum.

On the Flipside

  • Despite its many advantages, the Cardano network has recently seen a slump in use and popularity. It is presently the ninth-largest cryptocurrency by market cap. This signals poor or reduced market interest in the network.

Why You Should Care

Cardano is a self-styled third-generation blockchain and is one of the most important crypto networks in the world. The Ouroboros mechanism, in particular, is of great scientific importance to the future of crypto. That’s why it’s essential to understand it and know how it works.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Victor Fabusola

Victor Fabusola is a Blockchain & Crypto Content Writer. He excels in crafting long-form educational guides, opinion pieces, and reviews in niches such as DeFi, NFTs, and Web 3.0. Outside of his work at DailyCoin, he loves conscious hip-hop and classical music and engaging in intellectually stimulating conversations with his friends.