What is Cardano and How Does It Work? [ADA 2021 Guide]

Cardano is a blockchain project, which has a native cryptocurrency, named ADA. While ADA and Cardano are used interchangeably, they are not the same thing. Cardano is a platform where smart contracts and decentralized applications will eventually be built, while ADA is the native cryptocurrency of the Cardano network.

What makes Cardano different from other blockchain projects is its dedication to peer review and cross-collaboration between vetted institutions along with its proof-of-stake consensus mechanism. Cardano relies on peer-reviewed research to guide the vision for the blockchain, ensuring high quality throughout the development cycle. Its proof-of-stake mechanism also allows the platform to offer fast transaction times, low transaction fees, and the ability to scale in the future. 

InvestorRoyale Summary: What is Cardano (ADA)?
• Cardano is an open-source software powered by validators who stake ADA to earn rewards from the platform.
• ADA is the native cryptocurrency of the Cardano network.
• Cardano aims to solve scalability, interoperability, and sustainability issues suffered by other blockchains.
• Cardano relies on peer-reviewed research to guide development. 
• Cardano does not currently have smart contracts or decentralized applications (“dapps”) available on the platform, but they are in development.
• Cardano was funded via an ICO and was created by Charles Hoskinson.

The Cardano blockchain is an open-source project, which means many people help develop and advance the platform. Before being fully decentralized, Cardano was managed by IOHK. Charles Hoskinson founded Cardano and is the CEO of IOHK. He is well known within the crypto community, having co-founded Ethereum. 

Below, we lay out a comprehensive overview of Cardano (ADA), including how its proof-of-stake works, the use cases for Cardano, and the upcoming roadmap for the blockchain.  

Cardano Founder and Origins

Charles Hoskinson, an American mathematician, founded Cardano in 2015. Before founding Cardano, Charles served as one of the co-founders of Ethereum. He is currently the CEO of Input Output (IOHK), an engineering firm that develops cryptocurrency and blockchain technology for Cardano. 

Other key partners for Cardano include Emurgo and the Cardano Foundation:

  • Emurgo seeks out and develops business use cases for Cardano, helping to drive commercial adoption. 
  • The Cardano Foundation is an independent non-profit that serves as the legal custodian of the protocol and the owner of the blockchain’s brand. The primary purpose of the foundation is to supervise the advancement of the Cardano blockchain. 

Cardano is an open-source project, meaning that many people across the globe contribute to its ongoing development. According to the Cardano project’s site, the platform is built by scientists, engineers, and thought leaders. Since Cardano aims to be a decentralized network, it is developed in accordance with the guidelines set by its users rather than a single authority.     

Why Cardano Was Created

In 2017, Charles Hoskinson, the founder of Cardano, released an essay outlining the inspiration behind Cardano’s creation. The report is comprehensive, and we recommend people interested in the technology read it to get the complete picture of the rationale behind the creation of Cardano.

In summary, Cardano aims to alter how cryptocurrencies are created and supported. When Cardano was launched, it set forth its founding principles in design and engineering best practices along with establishing what components of crypto to explore further. A few examples of the aforementioned founding principles from the report are listed below:

  • Implementation of core components in highly modular functional code
  • Small groups of academics and developers competing with peer-reviewed research
  • Learning from the nearly 1,000 altcoins by embracing features that make sense
  • Explore the social elements of commerce
  • Find a healthy middle-ground for regulators to interact with commerce without compromising some core principles inherited from Bitcoin   

Charles Hoskinson explains that there are three generations of cryptocurrencies. In his view, each generation aims to introduce a solution to a problem:

1st Generation: Bitcoin (BTC)

Problem: Is it possible to create a decentralized scarce currency without a third-party intermediary to facilitate transactions? 

Solution: Bitcoin, a cryptocurrency, was created to allow people to send and receive digital currency in a peer-to-peer fashion without third-party intermediaries.

Shortfall(s): In its current state, Bitcoin isn’t programmable. Say you wanted to send someone 0.01 BTC provided they properly filed your taxes. Bitcoin’s protocol has no way of ensuring terms and conditions pertaining to the transaction are met. Therefore, there is no way for the Bitcoin protocol to facilitate transactions requiring specific actions, also known as smart contracts.  

2nd Generation: Ethereum (ETH)

Problem: Is it possible for a programmable digital currency to facilitate complex transactions?

Solution: Ether, the native crypto on the Ethereum network, is a programmable digital currency, which utilizes smart contracts to facilitate complex transactions.

Shortfall(s): Ethereum in its current state has scalability, interoperability, and sustainability issues. These issues have resulted in high transaction fees (see Ethereum gas explained), hard forks in the protocol, and the need for a considerable amount of electrical power to fuel the network. 

ProTip: Eth 2.0 Addresses Certain Issues
Ethereum 2.0, a planned improvement to the Ethereum network, aims to move Ethereum away from a proof-of-work consensus mechanism to a proof-of-stake method, similar to the Ouroboros proof-of-stake consensus method utilized by Cardano. Without getting into the technical details, in theory, if successful, it should alleviate scalability and sustainability concerns to a certain degree.  

3rd Generation: Cardano (ADA)

Problem: Can a programmable digital currency be effectively scaled on a sustainable basis across a large variety of use cases?

Solution: ADA, the native crypto of the Cardano network, aims to solve the aforementioned issues by ensuring that the solutions integrated into the blockchain protocol are peer-reviewed, thereby confirmed by experts as the best way to move forward. 

Below, we outline Cardano’s solutions to the aforementioned problems faced by second-generation cryptocurrencies:

  • Scalability: To solve scalability issues, Cardano is implementing data compression and is working towards introducing side chains, which are secondary blockchains attached to the primary Cardano blockchain allowing the primary chain to work more efficiently.
  • Interoperability: Cardano is being developed to ensure it functions across use cases, including financial and commercial applications. In the future, Cardano will support multiple token types and multiple smart contract computer languages.
  • Sustainability: Since Cardano uses a proof-of-stake consensus mechanism, it must ensure enough people support the network. The blockchain is hoping to accomplish this by delegating the inner workings of its treasury system to ADA holders, thereby allowing network participants to model the network in their best interest. 

Cardano ICO 

The Cardano ICO took place from January 2015 to January 2017. According to ICOmarks.com, There were 25.9 billion ADA coins available for sale at the time, which represents roughly 58% of the total supply (Cardano’s total supply is 45 billion ADA). 

The Cardano ICO raised over 62 million dollars, and investors were able to purchase 1 ADA coin for $0.0024. The ICO accepted payment in the form of Bitcoin.

Key Term: Initial Coin Offering (ICO)
An ICO is a method through which newly launched cryptocurrencies raise capital through crowdfunding. ICOs offer investors the opportunity to exchange cash, Bitcoin, Ether, or any other stated form of acceptable payment in exchange for the newly launched crypto. 

The name “Initial Coin Offering” is derived from an “Initial Public Offering” or “IPO,” which is when companies sell shares of their stock to the general public in exchange for cash. Unlike an IPO, where investors receive shares of stock in exchange for cash, an ICO offers investors cryptocurrency in exchange for payment.

Why the Name Cardano Blockchain?

The blockchain was named after Gerolamo Cardano, widely regarded as one of the most prominent mathematicians during the renaissance era. Gerolamo created the Cardan Grille, which is a method utilizing a grid to write secret messages. The Cardan Grille is a cutout placed over a piece of writing that, when properly applied, blocks out irrelevant content and reveals the secret message. 

Where Does the Name ADA Come From?

The native cryptocurrency of the Cardano blockchain, ADA, is a homage to Ada Lovelace, who is considered by many to be the first computer programmer. Ada was the first to publish an algorithm to be executed by a machine. She worked closely with Charles Babbage, credited with creating the Analytical Engine, one of the first general-purpose computers. 

How Does Cardano Proof-of-Stake Work? (Ouroboros Cardano)

Before explaining how Cardano’s proof-of-stake consensus mechanism works, it’s important to understand that since most crypto blockchains aren’t controlled by a single entity, they require participants to come to a consensus on what transactions have occurred in the past. There are multiple ways to achieve this consensus, for example, the Bitcoin blockchain utilizes a proof-of-work system, while Cardano’s blockchain utilizes something called a proof-of-stake protocol. 

Unlike proof-of-work, which relies on miners competing to solve computational puzzles in order to add new blocks to the chain and being rewarded for doing so, Cardano’s proof-of-stake protocol, called Ouroboros, delegates the creation of new blocks to stake pools. Stake pools are then assigned as slot leaders and are rewarded for adding blocks to the Cardano network. The more ADA that is staked by a stake pool, the higher the chance it will be selected to validate transactions. 

A diagram explaining Cardano's proof of stake
Key Term: Staking Pools
Staking pools pool crypto stakes together between blockchain participants to increase the likelihood of earning rewards through staking. Staking is the act of freezing a certain amount of crypto and, in exchange earning the possibility to validate transactions on a blockchain. 

While crypto is staked it cannot be traded. By becoming a validator, people who stake stand to earn rewards, which can be thought of as a return in exchange for freezing their assets. In exchange for rewards, people who stake must sacrifice liquidity, effectively locking their crypto up until the staking period ends. 

The Ouroboros protocol splits time into “epochs,” which are currently five days in length. Each of these epochs is divided into “slots,” wherein each slot lasts one second (there are 432,000 slots since there are 432,000 seconds in 5 days).

One node, or staking pool, is nominated to process transactions, referred to as being a “slot leader,” approximately every 20 seconds. Slot leaders can process transactions associated with their epoch or a portion of their epoch. Slot leaders are selected randomly, but the greater the stake in a pool, the greater the chance of being chosen as a slot leader.

There are technical reasons behind epochs’ timing and the number of slots within each epoch. Most users will only be concerned with knowing that their staking rewards will depend on which slot’s transactions their stake helped support. The more slots supported, the higher the potential rewards. 

Cardano Ouroboros Explained

The main advantage of a proof-of-stake consensus mechanism over proof-of-work, is that it requires less computational power to function. That is mainly because in a proof-of-work system, miners are incentivized to compete to be the first to solve computational puzzles. 

Under a proof-of-stake consensus mechanism, validators are selected to power transactions rather than compete for them. By selecting staking pools to add blocks to the network, the blockchain preserves the energy associated with the miners that would have lost the competition to add blocks to the network under a proof-of-work consensus mechanism. 

Cardano Use Cases

The Cardano coin (ADA) can be used for two primary purposes, with a third currently in development:

Cardano (ADA) can be used as a currency. Like Bitcoin, Ether, and many other cryptocurrencies, ADA can be used as a digital currency. ADA offers near-instantaneous transaction times and relatively low fees.

Fees for sending ADA are straightforward and can be calculated using the following formula:  A + (B * Transaction Size in Bytes), where:

  • A is a fixed number currently set to 0.155381 ADA
  • B is another fixed number currently set at 0.000043946 ADA

Therefore, the minimum transaction fee possible is 0.155381, and the cost scales up with an additional 0.0000043946 associated with every Byte on a specific transaction. All fees in an Epoch are collected and distributed to the slot leaders.

Cardano (ADA) can be staked to earn rewards. ADA holders can run their node on the Cardano network and join a staking pool to earn rewards. The easiest way for most users to stake their ADA holdings will be to create either a Daedalus or a Yoroi wallet. Both of these wallets allow you to delegate a part or all of your stake to a staking pool of your choosing. 

Both wallets were developed by IOHK, or in partnership with EMURGO, making them trusted within the Cardano community. Both the Daedalus and the Yoroi wallets offer users the ability to stake their ADA to a selected pool.

In the future, Cardano (ADA) will be used for smart contracts and decentralized applications (dapps). The Cardano blockchain will soon be updated to incorporate smart contracts, which are effectively a way to facilitate the transfer of cryptocurrency with embedded logic. Smart contracts implement logic functions into the blockchain and are what make decentralized applications (Dapps) like NFTs and Decentralized Finance possible. 

ADA will also be usable within dapps created on the Cardano platform. Dapps could conceivably be made for any purpose, but we can look to the existing Dapp ecosystem available on other blockchains to get a rough idea of the possibilities. Popular categories of dapps include NFTs, DeFi, gaming, and gambling.

While Cardano is still developing smart contract and Dapp functionality, it is one of the most transparent platforms for users. Users interested in the latest updates can visit Cardano’s status update page for the most up-to-date information regarding changes and upgrades to the platform.      

Cardano Roadmap

Cardano is being developed following a 5-stage roadmap. Each stage in the roadmap is named after an influential historical figure. We cover each of the 5-stages below and what they mean for the Cardano platform.   

Byron Era: Foundation

Status: Completed

The Byron Era, named after Lord Byron or Ada Lovelace’s father, laid the foundation for Cardano by allowing users to trade ADA coins. The Byron era introduced two Cardano wallets: the Daedalus wallet, an official desktop option for ADA, and the Yoroi wallet, an easier-to-use wallet for quick transactions.

Shelley Era: Decentralization

Status: In progress, but transitioning to Goguen.

The Shelley Era, named after Mary Shelley, who wrote the famous “Frankenstein” novel, aims to move nodes away from centralized organizations, which were needed to create and establish Cardano, towards a decentralized future. The Shelley era also introduced the concept of staking pools to incentivize network participation and community-run network nodes. 

Goguen Era: Smart Contracts

Status: Transition to Goguen is underway.

The Goguen Era, named after Joseph Goguen, an influential computer programmer, aims to integrate smart contracts within the Cardano blockchain. Furthermore, the Goguen era will allow for dapps to be developed on Cardano, marking a significant step forward for the platform. Additionally, Cardano will add a multi-currency ledger, allowing the creation of fungible and non-fungible tokens.

Basho Era: Scaling

Status: Hasn’t Started

The Baso Era, named after Matsuo Basho, a famous Japanese poet, will focus on improving the performance of Cardano by improving scalability and interoperability. The Basho era will introduce sidechains, which function alongside the main blockchain and will increase how much activity the network can support. 

Voltaire Era: Governance

Status: Hasn’t Started

The Voltaire Era, named after the famous French writer and philosopher, Voltaire, will introduce a voting and treasury system, whereby network users will be able to vote via staked ADA. Presumably, the more ADA that is staked, the more voting rights will be allotted to participants. The treasury system will be created by taking a fraction of transaction fees and will fund the voting process development.   

Cardano FAQs

We answer some of the most common questions surrounding Cardano, below.