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Cardano

Cardano – also known as the “Japanese Ethereum” – takes many of the pitfalls of Bitcoin and Ethereum and attempts to improve upon both networks

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ADA Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017

For example, Cardano uses proof of stake as its validation method rather than the proof of work systems employed by many cryptocurrencies including Bitcoin. This significantly reduces the amount of processing power required to validate the network. Furthermore, unlike Ethereum, Cardano utilizes a two-layered system (i.e. two sets of processes occurring simultaneously): (i) a settlement layer similar to Bitcoin to record transactions, and (ii) a control layer for executing “smart contracts” similar to Ethereum. By separating the network into multiple layers, Cardano can address problems with each layer independently. This is similar to the communications protocol for the Internet, which uses several layers including an Internet layer for routing data to the appropriate destination, and an application layer for defining the protocols used to exchange the data. The ADA coin is utilized as the “gas” for executing the smart contracts on the Cardano platform, which means users have to pay a certain amount in ADA to run a contract.

Pros: Executes Turing-complete smart contracts; platform for developing dApps; strong development partner in IOHK; multi-layered network that separates the transaction from the terms and conditions of the transfer; proof of stake validation method increases transaction speed and significantly reduces computing power necessary to run the network compared to proof of work used in Bitcoin, Ethereum, and many other decentralized networks

Cons: Unproven and untested – the Plutus programming language for writing smart contracts is still in development; proof of stake can lead to centralization as only a select few may have enough coins to participate in staking

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Unlike Bitcoin, Ethereum, and many other cryptocurrencies, Cardano uses a proof-of-stake (POS) system to validate transactions rather than the more common proof-of-work system. In a POS system, the validator for the next block is selected based on a combination of random selection and account balance. For example, in a POS system if you own 2% of the coins, you can expect to validate about 2% of the blocks, and consequently, receive about 2% of the rewards.  In a POS system, the likelihood of a 51% attack is lower than in a POW system, because it is typically more expensive to own more than 50% of the coins than it is to have more than 50% of the computing power. Conversely, a POS system is vulnerable to the “nothing-at-stake” problem, where an attacker sends a transaction, forks the blockchain from one transaction behind the attacker’s transaction, and then rewrites the transaction to himself to double-spend the currency. Because there is no disincentive for validators to mine both chains in a POS system, they will continue to mine on both validating the attacker’s transactions. However, this problem is more theoretical in nature, and is not perceived as an imminent threat.

Leadership/Community Participation

The Cardano Foundation partnered with Input Output Hong Kong (IOHK) – a technology company founded by Charles Hoskinson and Jeremy Wood who were previously involved in Ethereum. IOHK also employs Professor Aggelos Kiayias, a cryptographer from the University of Edinburgh, along with a team of researchers and scientists that have contributed to the protocol. With these great minds at the forefront of cryptography and distributed ledgers working together, Cardano has the potential to improve upon the existing platforms. Cardano is also the first academically peer-reviewed distributed ledger.

Transaction Volume and Market Capitalization

Cardano has the 7th largest market cap (~5.7B) and a daily transaction volume of over $200 million despite requiring substantial development before any token holder can participate in staking and smart contracts can be deployed on the network.

Industry Participation

A few companies have indicated an interest in the Cardano platform once the virtual machine and Plutus programming language are available for use. This includes Traxia a token for financing small and medium sized businesses, which plans to migrate to the Cardano platform at the end of 2018. However, as Cardano is still in its very early stages, the majority of companies seem to prefer Ethereum at this time.

Security

In terms of security, Cardano has many of the same advantages and disadvantages as Ethereum. In some instances, staking can lead to increased centralization as only a small number of users will have enough tokens to win a block reward. An attack directed at one of those accounts could severely disrupt the network.

Usability

ADA is a utility token used as fuel for operating the Cardano platform. This means that each time a developer creates a smart contract or issues a token on the platform, a designated amount of ADA is transferred. ADA may also be used as a store of value and/or for daily transactions, but its primary intended use appears to be as fuel for executing smart contracts.

Technical Features

To perform proof-of-stake, Cardano uses an algorithm named Ouroboros which has been extensively peer-reviewed. As mentioned above, the Cardano protocol is separated into two layers: a settlement layer and a control layer. The settlement layer is used to record transactions, while the control layer executes smart contracts through a virtual machine called IELE and a programming language named Plutus, both still under development. By separating smart contracts and transactions into two layers, the development team can address problems such as scaling with each layer independently. By contrast, Ethereum records all of this information in the same layer, creating large storage requirements and in some instances, slowing down the network. Finally, Cardano intends to enact an on-chain governance system, where token holders vote on updates to the protocol, and if a majority vote in favor of the update then it is enacted. In other systems like Bitcoin and Ethereum, updates to the network are made through a fork where the chain splits into two. Miners effectively vote for the update by continuing to validate transactions from the old chain or moving over to the new chain. However, this voting occurs after the fork, so the developers can add an update which does not end up being enacted if the miners continue to devote computing resources to the original chain. In Cardano’s on-chain governance system, updates are voted on before they are added into the protocol.

Growth/Legal Risks

Cardano has plenty of potential for growth as development proceeds further.  Eventually, Cardano may compete with Ethereum as developers and companies try out the Cardano platform for generating smart contracts. Moreover, the supply of the ADA coin is capped at 45 billion which it should reach in a little over 20 years.While the supply is several orders of magnitude larger than Bitcoin’s, Litecoin’s, or Ethereum’s, the ADA coin may see a spike in growth as it reaches the maximum amount.

Estimated Time of Arrival

Although ADA is readily available on many exchanges, a significant amount of development is still necessary before this coin becomes viable. Currently, the proof of stake system requires users to have at least a 1% of the total supply of ADA (or about $130 million) to participate in staking. Additionally, both the virtual machine (IELE) and programming language (Plutus) for writing smart contracts remain under development.

ETA: 2020

Conclusion

While the concepts behind Cardano are very intriguing and address many issues with other cryptocurrencies, there is still a lot of work to do to build the platform.  The ADA coin has tremendous potential, but it is yet to be seen how developers will adapt to the Plutus language, or how the IELE virtual machine and the Cardano network will handle a large volume of contracts/transactions.

Acknowledgment:

Analysis brought to you by the hugely talented cryptocurrency enthusiast Cameron Pick. Find out more at https://cryptonalysis.net and be sure to follow the cryptoanalysis Twitter account: https://twitter.com/Cryptonalysis1

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