What is Cardano?
Cardano is the world's first peer-reviewed blockchain. The nonprofit foundation responsible for Cardano assembled a network of academics and scientists from various universities, including the University of Edinburgh and Tokyo Institute of Technology, to review its protocols before they are released. It is a third-generation cryptocurrency and smart contract platform that claims to improve upon the scaling problems of bitcoin, a first-generation coin, and ethereum, which belongs to the second- generation.
How Does Cardano Work?
Cardano’s platform consists of two layers. The Cardano Settlement Layer (CSL) is used to settle transactions that use ADA, Cardano’s cryptocurrency.
The Control Layer, which is under development, will be used for smart contracts. The hierarchical structure of Cardano ensures that it can be used as a medium of exchange and as well as to generate smart contracts. In addition, the platform has aspirations to be interoperable with the mainstream finance ecosystem.
The heart of Cardano’s platform is Ouroboros, an algorithm that uses Proof of Stake protocol to mine coins. The protocol is customized to reduce energy use and time for making new coins.
In a typical Proof of Stake algorithm, nodes with the maximum stake (or the highest number of coins) create transaction blocks in a blockchain. But the Ouroboros algorithm implements the algorithm differently.
On a broad level, it works as follows. Ouroboros divides physical time into epochs that are made up of slots, which are fixed periods of time. Slots are similar to working shifts at a factory. In Cardano, the time range encompassed by slots varies and can be modified within the algorithm. Epochs work in a circular fashion: when one ends, another one comes online.
Each epoch has a slot leader, who is elected by stakeholders or nodes that have already generated coins. Slot leaders are responsible for creating and confirming transaction blocks to be added to the Cardano blockchain. If they fail to create a transaction block in an epoch, then the next slot leader gets another shot at it during the next epoch. At least 50 percent or more blocks must be produced within a given epoch.
Transactions in blocks produced by slot leaders are approved by input endorsers. They are the second set of stakeholders responsible for running the protocol. There can be one to many multiple endorsers within a given epoch and their election is based on stakes.
To ensure unbiased results, the election system is configured for two inputs. The first one is a multiparty computation system. A set of stakeholders within the network perform a computation, which is the digital equivalent of a “coin toss,” and share their results with each other. The second input is the distribution of wealth or stake. Nodes with greater stake (or more coins) have increased probability of being elected slot leaders.
Ouroboros also differs from other algorithms in the type and form of incentives offered to stakeholders. The Proof of Work algorithm offers rewards in the form of coins and transaction fees to miners. But the Ouroboros algorithm’s design provides incentives for availability and transaction verification over investment in massive computer power to mine coins. Economic rewards are also split between three stakeholders: input endorsers, multiparty computation stakeholders, and slot leaders.