What is Cardano: The Third Generation Cryptocurrency

Let's take a look at Cardano and find out why this cryptocurrency is worth considering for your crypto portfolio.
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There are over 7000 cryptocurrencies in existence, each having its own specifications and purpose. The one exceptional currency that lately got into the spotlight is the Cardano.

What makes it so special compared to other coins and why is Cardano called the third generation cryptocurrency? Read this article to find out.

Third-generation crypto

Cardano is often related to as the third generation cryptocurrency.

The first generation was Bitcoin, which is essentially digital gold due to its predetermined scarcity. Bitcoin is the first and the largest cryptocurrency, but the technology has a bit been outdated. It is a reliable network to transfer and store your money, but it inevitably faces scalability issues. The blocks of the network are limited in size and frequency. Therefore it is impossible to proceed millions of transactions at a high speed.

The second generation started with the introduction of smart contracts by Ethereum. It improved scalability but not enough to become a global currency. This was well-illustrated after the launch of the famous Ethereum-based game Crypto Kitties.

The game gained popularity very fast — at the peak, it was responsible for around 25% of the whole Ethereum traffic. This inevitably resulted in the disruption of the network. Just like waiting for a taxi at bar time on Saturday, these moments of heavy traffic can slow speeds and drive up transaction fees dramatically.

The third generation of cryptocurrencies wants to improve upon the mistakes of the previous networks and sees the main challenge in solving the scalability issues of blockchain. Right now there are two networks that are considered to be third-generation blockchains — Cardano and IOTA.

Who created Cardano?

Cardano network was under development for 3 years before launching in 2017. It was created by technologist Jeremy Wood and Ethereum co-founder Charles Hoskinson.

From the very beginning, the founders of Cardano emphasized a unique research-driven approach. They build the development around the concept of peer-reviewed papers.

So instead of writing a whitepaper and implementing it straight to code, the Cardano team actually makes sure that experts from around the world review the papers, suggest their improvements, and agree with the outcome.

Cardano’s approach is democratic as it encourages decentralized governance. There are 3 main organizations that manage the network:

What makes Cardano so special

The Ouroboros

Scalability is the key feature for any blockchain that wants to be truly adopted on a global scale. In order for a cryptocurrency to become an international payment network, the blockchain has to be able to handle a lot of transactions at the same time.

Cardano’s Ouroboros system solves this by adopting a proof-of-stake algorithm instead of proof-of-work.

For example, Bitcoin uses proof-of-work which means everyone can mine new blocks. This process is slow and wastes a lot of computing power and electricity.

Cardano is much more efficient because the privilege to mine new blocks is not granted to everyone. Instead, the network elects a few miners to mint the next blocks. These are called the slot leaders. To make this all work, Cardano divides the time into epochs. An epoch branches into slots — short periods of time in which exactly 1 block can be created.

The network then picks a miner for each epoch and this is the only person that can create this part of a block. Slot leaders then verify the transactions and record them inside a block. If a slot leader doesn’t complete his task, he loses the right to produce a block and has to wait for the reelection by the network.

This technique makes Cardano highly scalable because of the increased amount of slots per epoch that can run in parallel.

Interoperability

With so many cryptocurrencies on the market, it is very unlikely that in the future a single cryptocurrency will dominate the whole industry.

Instead, multiple different cryptos will exist side by side, each with its own protocol and rules. Right now every blockchain network is independent — you can’t transform your Bitcoin into Ether without an intermediate.

The Cardano project aims to be the “Internet of blockchains” or in other words, a blockchain that can communicate with other networks. This ability to seamlessly move assets across multiple chains may define the new era of cryptocurrency development.

Another interoperability issue lies in the field of government regulations. Governments and banks generally tend to stay away from crypto because they are not the subject of regular banking laws. The absence of metadata about the transaction results in the lack of trust from the current fiat financial system.

Due to the strict policies, banks have to comply with the KYC and other identification procedures. They are obligated by law to know who made the transaction and for what reason.

The Cardano project wants to solve that by allowing people to attach metadata to a transaction to play nicer with the traditional banking world. However, it would be up to the user to decide if he wants to attach more information or not.

In addition, Cardano’s code is written in Haskell — a programming language that is known for being reliable and stable, therefore it is often used in the banking and military sector. This is another core feature of Cardano’s interoperability with the current financial system.

Sustainability

The 2017 ICO boom is now history, but there are still thousands of new projects entering the crypto market every year. To raise money for their start-up, the company launch an ICO (Initial Coin Offering). After an ICO the team ends up with a lot of cash to fully start their company.

But what happens if, after a couple of years, this money runs out? How will they ensure improvements in development? Should the company launch another crowdfunding campaign just to get some cash?

This is still an unanswered question, but it’s clear that raising money just once isn’t very sustainable and doesn’t always promote continuous improvement. Cardano intends to solve this problem by creating a treasury fund that will receive a small percentage of every transaction that happens on the network.

Technically, the treasury is a special wallet that isn’t controlled by anyone. Instead, it’s a sort of smart contract that can release a part of the funds to developers who wish to improve the Cardano protocol. The developers submit a proposal to the community stating what exactly they aim to change and how much money they need for it.

The community can then vote on the ideas that they think are the most important to give them money to develop the new feature of the network. This treasury model will keep Cardano sustainable by providing a continuous stream of money to fund the research and development of the most needed systems.

Conclusion

Cardano network appears to be quite ambitious and maybe a bit risky, as it tries to tackle many challenging problems of the crypto industry.

The project is still very young and has a long way to go. But their science-driven approach and democratic way of working are very unique to the cryptocurrency market. Will Cardano be the network that finally solves some long-standing and fundamental challenges of the industry? Only time will tell.

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