What is Cardano?

This article is a compilation of works by Messari, IOG, and the Cardano Foundation - links to the originals are provided in the reference section at the bottom of the article. This post is supporting material for slides at the end of the page.

Table of Content

Introduction

  • Cardano is one of the largest smart contract networks, with billions in market cap and millions of holders.
  • Following the Alonzo hard fork, smart contract development has increased and produced a variety of new DeFi protocols.
  • The eUTXO accounting model enables native token transfers, scalability, and decentralization.
  • Sidechains and Layer-2s such as Hydra aim to scale the network even further.
  • Cardano has stayed true to its methodical, deliberate, and sometimes slow approach to development, prioritizing sustainability over speed.

Cardano was conceived to solve security, scalability, and sustainability problems. The project is an early adopter of one of today’s most popular architecture choices: Proof-of-Stake. Cardano developed Ouroboros Classic as its first PoS consensus mechanism. Combined with an unspent transaction output (UTXO) model for a planned smart contract network, Cardano considers itself a “third generation” blockchain — with Bitcoin being the first generation and Ethereum being the second generation.

Cardano takes a calculated approach to development, putting functionalities through rigorous academic peer review before production. While Cardano’s initial roadmap is still in progress, its “completed” roadmap items continue to be improved. Cardano’s PoS mechanism, Ouroboros, has already been through several different versions with several more iterations planned.

Background

Cardano is an open-source, smart-contract-enabled blockchain originating from peer-reviewed academic research. Development on Cardano began in 2015 by founders Charles Hoskinson and Jeremy Wood, as well as the team at Input Output Hong Kong (IOHK), now Input Output Global (IOG). Hoskinson and Wood previously worked on Ethereum before starting Cardano. Cardano and the ADA token launched in September 2017 after a multi-stage ICO.

Progress on the project has been deliberate and heavily tested along the way. All functionalities and protocols are peer-reviewed before being implemented, which in some cases delays the path to production. For example, smart contracts were not enabled until the Alonzo hard fork in September of 2021 - a full four years after the network launched.

The max supply of ADA (the Cardano Currency) is 45 billion. About 31.2 billion ADA were minted during the Genesis Block Distribution with the remaining 13.8 billion ADA to be minted as block rewards. About 35 billion ADA (78%) is currently in supply.

Entities Supporting Cardano

Cardano is designed by a global team of experts who are leaders in disciplines ranging from distributed systems to programming languages and game theory and is jointly developed by IOHK and partners. IOHK develops the technology, the Cardano Foundation is responsible for supervising the development and promoting Cardano, while Emurgo drives commercial adoption.

The three entities are formally supporting Cardano and advancing its development, with many more working on Dapps and Integration.

Input Output Global (IOG) - IOG is a technology company pre-eminent in engineering and research in blockchain structures. Best known for the Cardano blockchain platform. IOG’s vision is to provide economic identity to the billions of people who don’t have it. So that the poorest people in the world use the same systems as the richest. Head Office in Colorado, United States

EMURGO - Emurgo is the official commercial arm and a founding entity of the Cardano blockchain. Emurgo developer the first web wallet for Cardano (Yoroi) and actively support promising projects building on Cardano with Funding

Cardano Foundation - The Cardano Foundation is the independent, Swiss-based and non-profit organization responsible for stewarding the advancement of the public, permissionless blockchain Cardano. Their mission is to anchor the Cardano blockchain as a baselayer for current and future financial and social systems, thus empowering the architects of the future. We aim to de-risk decentralization for regulators and organizations, while also giving the Cardano community the necessary tools and support to leverage the Cardano protocol to solve world problems.

Cardano Roadmap

The Cardano roadmap summarizes Cardano development, which has been organized into five eras: Byron, Shelley, Goguen, Basho, and Voltaire. Each era is centered around a set of functionalities that will be delivered across multiple code releases.

While the eras of Cardano will be delivered sequentially, the work for each era happens in parallel, with research, prototyping, and development often in progress all at once across the different development streams.

Byron - Foundation [done]

The story began in 2015, with a vision of addressing the three strategic challenges facing all blockchain networks: scalability, interoperability, and sustainability. Two years, thousands of GitHub commits, and hundreds of hours of study later, the first version of Cardano shipped in September 2017, and the Byron era began.

The first incarnation of Cardano allowed users to buy and sell the ada cryptocurrency – so named for revolutionary programmer Ada Lovelace – on a federated network running the groundbreaking Ouroboros consensus protocol. The heart of the Cardano network, Ouroboros is the first proof-of-stake protocol created on the basis of academic research, with a mathematically-proven level of security.

The Byron era also saw the delivery of the Daedalus wallet, IOG official desktop wallet for ada, as well as Yoroi, a light wallet from  Emurgo designed for quick transactions and day-to-day use.

Shelley - Decentralization

Shelley era of Cardano began around 2020 and was a period of growth and development for the network. Unlike the Byron era, which began at a single point in time when the mainnet was launched, the transition to Shelley was designed to achieve a smooth, low-risk transition without service interruptions.

Shelley saw the introduction of a delegation and incentives scheme, a reward system to drive stake pools and community adoption. As a proof-of-stake network, users stake their ada to participate in the network.

Goguen - Smart Contracts

Goguen added Smart contracts functionality to Cardano. The Goguen era represents a step change in the abilities of Cardano, opening the way to developing enterprise-level, mission-critical, decentralized smart contract applications. Plutus and Marlowe smart contract languages were delivered.

Basho - Scaling

The Basho era of Cardano is an era of optimization, improving the scalability and interoperability of the network. Whereas previous development eras focused on decentralization and new functionality, Basho is about improving the underlying performance of the Cardano network to better support growth and adoption for applications with high transaction volume.

One of the core developments of Basho will be the introduction of sidechains: new blockchains, interoperable with the main Cardano chain, with immense potential to extend the capabilities of the network. Sidechains can be used as a sharding mechanism by off-loading work from the main chain onto a sidechain to increase the capacity of the network. They can also be used to introduce experimental features without affecting the security of the main blockchain.

Basho will also see the introduction of parallel accounting styles. While the main Cardano blockchain will continue to use a UTXO model, the ability to support and switch between UTXO and account-based models will be added using sidechains. The result will be greater interoperability for Cardano, as well as the ability to support new kinds of use cases on the network.

Overall, the Basho era will see Cardano become one of the most high-performance, resilient, and flexible blockchain platforms in the industry. This will provide a network infrastructure with the capability to scale in a sustainable, secure way, as well as the ability to add new functionality without compromising the reliability at the core of the network

Voltaire - Governance

The Voltaire era of Cardano will provide the final pieces required for the Cardano network to become a self-sustaining system. With the introduction of a voting and treasury system, network participants will be able to use their stake and voting rights to influence the future development of the network.

For the Cardano network to become truly decentralized, it will require not only the distributed infrastructure introduced during the Shelley era but also the capacity to be maintained and improved over time in a decentralized way. To that end, the Voltaire era will add the ability for network participants to present Cardano improvement proposals that can be voted on by stakeholders, leveraging the already existing staking and delegation process.

To fund the future development of the network, Voltaire will also see the addition of a treasury system, whereby a fraction of all transaction fees will be pooled to provide funds for development activities undertaken following the voting process.

When both a voting and treasury system are in place, Cardano will be truly decentralized and no longer under IOG's management. Instead, Cardano’s future will be in the hands of the community, who will have everything they need to grow and evolve Cardano from the secure, decentralized basis established by IOG.

Consensus Mechanism

Ouroboros is Cardano’s Proof-of-Stake (PoS) consensus mechanism. In this system, users can delegate their ADA to a stake pool operator and earn rewards while still retaining ownership of their tokens. Cardano was one of the first cryptocurrencies to adopt the PoS consensus mechanism, specifically using a variant called Delegated-Proof-of-Stake (DPoS).

Ouroboros divides time into epochs of five days and further divides each epoch into 21,600 slots of an average of 20 seconds each. Each node uses a verifiable random function (VRF) to generate a random number. If the VRF number is under a certain threshold, that node gets to be the slot leader and proposes a block. If multiple nodes achieve this, they all produce blocks and the next selected slot leader builds upon the lowest VRF number of the bunch. The threshold depends on the amount of ADA, favoring larger staking pools.

There have been many versions of Ouroboros since it was first developed for the network, and it is still being iterated. Ouroboros Classic was the first version that went live at launch in 2017. Ouroboros Genesis came in 2018 and solved the bootstrap problem analytically.

Ouroboros Praos is the current consensus mechanism in place. In Praos, stake pool operators / validators are aware of which slots they lead ahead of time, but other validators are not. Additionally, no users know in advance how many slot leaders each slot will have. This adds a layer of security as it prevents DDOS attacks on slot leaders. In previous versions of Ouroboros, slot leaders were known publicly ahead of time, and only a single slot leader corresponded to a single slot.

Since its launch over five years ago, Cardano has never skipped a block or had to reboot. There have also been no network shutdowns during upgrades. Other networks, such as Polkadot and Mina, have chosen to adopt Ouroboros and adapt it to their needs.

Accounting Models

In the UTXO model, assets are stored on the ledger as a directed acyclic graph (DAG) between addresses. In a transaction, those unspent outputs are consumed to create new outputs.

By contrast, the account-based model adds and subtracts transactions from addresses stored in a database of network states. Ethereum, Solana, all EVM-based chains, and many other smart contract networks use an account-based model.

Classic UTXO

Cardano, like Bitcoin and unlike Ethereum, uses a UTXO model. Transactions can include one or more UTXOs as inputs and one or more UTXOs as outputs — all of arbitrary sizes — to meet the needs of the transfer.

Extended UTXO

Cardano uses a novel version of UTXO called the extended UTXO (eUTXO). eUTXOs include a datum and a script, allowing for arbitrary logic and metadata to be attached to each individual transaction.

eUTXO includes two features over the classic UTXO:

  • Scripts: Arbitrary logic that references the eUTXO itself and its data to determine if it can be used as an input for a new transaction.
  • Datums: Metadata or a smart contract in Plutus. It gives instructions to the transaction builder on what to do with the eUTXO.

eUTXO in Practice

Compared to the account-based model, the eUTXO model:

  • Has cheaper transaction verification — no fees are needed for the memory cost of tracking the accumulated chain state.
  • Has lower node requirements in terms of data storage — a state tree of all account balances does not need to be kept as it does with an account-based model (same reasoning as above).
  • Is deterministic — transaction outputs rely on outputs from previous transactions, forcing a level of atomicity. The cost and validity of transactions can be predicted prior to execution. Fees can also be predicted as there is no arbitrary ordering based on a gas variable.
  • Is scalable — transactions can be processed in parallel.
  • Is less familiar for developers — the majority of Web3 developers are accustomed to account-based transactions.
  • Has concurrency risks — dapp developers must find ways to batch transactions to allow simultaneous UTXO interactions within the same block.

Dapps on Cardano must account for the eUTXO model and structure themselves to avoid concurrency problems. Given that each UTXO can only be spent once, protocols cannot make a user’s UTXO available to multiple users at the same time. Developers must approach Cardano DeFi differently than they do on Ethereum, Solana, or other account-based protocols and create their unique solutions to concurrency issues.

Native Assets

On blockchains with account-based transaction models (e.g., EVM chains), the blockchain’s sole native token (e.g., Ether on Ethereum) has different functionalities from all other tokens (fungible and non-fungible).

With Cardano’s multi-asset support, this isn’t the case. All fungible tokens (FTs) and non-fungible tokens (NFTs) are native tokens and share almost all the functionality that ADA has. The main differences are that gas fees are still always paid in ADA and that only native tokens can be created and destroyed.

Tokens on Cardano don't need to be deployed via smart contracts. As such, they are not vulnerable to exploits to the same degree as ERC-20s or ERC-721s and do not require a smart contract execution to be transferred. Because they are not created with heterogeneous smart contracts, dapp developers can integrate all Cardano native tokens in the same way. Additionally, the eUTXO model allows for multiple tokens of different types to be transferred together in a single transaction.

Minting policies are written into a script attached to the token address. These policies handle authorization for transactions to use the mint field and create more of an asset.

Cardano Improvement Proposal 25 (CIP25) declared the metadatum label for Cardano NFTs to be the same as Ethereum’s ERC-721.

Staking

ADA holders delegate their ADA tokens to a stake pool operator (validator) to receive a share of block rewards while still retaining ownership of the ADA. They can use or withdraw their ADA at any time.

Transaction fees are pooled over the course of an epoch and evenly distributed to all pools that produced blocks for each slot in the given epoch; this distribution remains equitable with varying numbers of slot leaders per slot. Rather than relying on the operator for distribution, the blockchain guarantees that every delegator receives rewards.

Stake becomes active after two epochs, and the distribution of rewards begins after the third. Any changes to operator pool parameters take two epochs to take effect, protecting delegators from sudden changes.

A fixed 20% of transaction fees goes into the treasury rather than being fully distributed to stakers. This treasury share can be adjusted through the governance process and is used to support sustainable development.

Haskell and Plutus

Cardano was built with Haskell, a statically typed functional programming language.

Plutus, created by IOG, is the scripting language used by Cardano. It is a simple functional language similar to Haskell, and a large subset of Haskell can be used to write Plutus scripts. As a contract author, you don’t write any Plutus. All Plutus programs are generated by a Haskell compiler plugin.

These scripts will be executed by nodes during transaction validation ‘live’ on the chain. They will either lock UTXOs in the form of validator scripts or as minting policies, which control the minting and burning of native assets.

Redeemer data is a simple data type that can be defined easily in Haskell, which is another reason why Haskell is a good option for writing Plutus scripts. In practice, a smart contract developer will write validator scripts in Haskell, which will then be automatically compiled into Plutus.

Appropriate Haskell libraries simplify writing such validation logic by providing core data types for the inspection of transactions during validation, and by offering many helper functions and higher-level abstractions, allowing contract authors to concentrate on the business logic and not have to worry about too many low-level details.

The Vasil hard fork in September 2022 added new features with Plutus V2.

Multichain

Cardano aims to have multiple ways to scale, mainly through Layer-2s and sidechains. Overlay networks such as Mithril and Mamba are supported by a subset of Cardano stake pools and can solve specialized needs such as EVM compatibility.

IOG released the Cardano EVM Sidechain in alpha in June 2022, which allows Solidity developers to easily port applications into the Cardano ecosystem.

Hydra is a class of L2s based on isomorphic state channels and optimistic settlement. Ouroboros Hydra is a new version of Cardano’s consensus mechanism being designed by IOG. It will help enable faster transaction speeds, increased throughput, and lower transaction costs for Hydra protocols. Hydra was announced years before smart contracts were enabled, and it is now quickly approaching V1.0

Cardano is moving towards collaboration and interoperability in many directions. One such example is Midnight.

Midnight

Midnight will be a data protection-based blockchain that safeguards sensitive commercial and personal data, protecting fundamental freedoms of association, commerce, and expression for developers, companies, and individuals.

Midnight will enable developers to quickly build and deploy data protection-first DApps using many programming languages, starting with Typescript, whilst companies will be able to share mission-critical information without the fear of leaks or censorship. Individuals will be able to safely share their sensitive information when operating in a connected world.

Its differentiating factor from other blockchains will be the privacy aspect of smart contracts. Dapps will be written that benefit from the security of the Cardano blockchain, yet all the smart contracts and transactions will be private. To date, this privacy was only achievable with the use of private blockchains that lack guarantees about their long-term success  

Milkomeda

Milkomeda sidechain is an Ethereum Virtual Machine, EVM, based sidechain called M1. This sidechain has opened up the Cardano ecosystem to developers of the most popular smart contracting language, Solidity.

Digital Identity

Atala PRISM is a self-sovereign identity (SSI) platform on the Cardano blockchain providing digital infrastructure for banking, healthcare, education, and more. Atala PRISM is developed by IOG

The other alternative is IAMX, developed by an independent company and has received good traction with the community  

References

Messari - Cardano Slow and Steady

Messari - Cardano

Cardano Roadmap

Plutus: what you need to know

Midnight - data protection chain

Slides

License

This work is distributed under a Creative Commons Attribution 4.0 International (CC BY 4.0) The license allows you to copy and redistribute the material in any medium or format, as well as remix, transform, and build upon the material for any purpose, including commercial, as long as you give appropriate credit * to the creator.

*appropriate credit means you must include the names of the creators (Dmitry Shibaev and the company Dynamic Strategies) and provide a link back to this content or our main page https://dynamicstrategies.io