Introduction to Cardano (ADA) Part 1

Three generations of cryptocurrencies. Introduction to Cardano ADA. Part 1. First Generation of Cryptocurrencies.

 

In January of 2018, market capitalization of cryptocurrency Cardano (trading symbol: ADA) has surpassed USD$15 billion. The cryptocurrency has consistently been in the top 10 cryptocurrencies in the world by market capitalization. Cardano is a project by a Hong Kong company Input Output Hong Kong (IOHK). Charles Hoskinson, the former chief executive officer of Ethereum, has co-founded the IOHK project together with Jeremy Wood.

 

IOHK Co-founders. Three generations of cryptocurrencies

Hoskinson graduated from the Metropolitan State University of Denver, where he studied Analytic Number Theory. Prior to co-founding IOHK, he co-founded two start-ups in the cryptocurrency space. The first one was Invictus Innovations and the second one was Ethereum. Hoskinson was the founding chairman of the education committee of the Bitcoin Foundation. In 2013, he created Cryptocurrency Research Group.

Jeremy Wood is a graduate of Indiana University. After the graduation, he moved to Japan. He has been living in Asia since 2008. Before co-founding IOHK, he was a member of Ethereum together with Hoskinson. Wood and Hoskinson call Cardano a “third generation cryptocurrency.”

 

First generation of cryptocurrencies: Bitcoin

Bitcoin is a first-generation cryptocurrency. Satoshi Nakamoto has launched Bitcoin in 2009. It is a pioneer digital currency that has proven that digital currencies can be a way for people and organizations to engage in financial transactions without using a third party. Bitcoin has also shown that blockchain is a viable technology that offers a number of benefits compared to existing automation and transaction functionality.

The main principles behind Bitcoin are decentralization, transparency, and limited coin supply.

 

Decentralization of Bitcoin

Bitcoin network is decentralized, which means that anybody can become a user or miner of Bitcoin. The network doesn’t have a chief executive officer, a main office or brick-and-mortar locations. It exists because people and organizations choose to be a part of it. This approach has both pros and cons. The biggest advantage of bitcoin is the there is no third party that can decide to print more money or re-distribute the money by introducing new taxes or schemes, which is what many world governments have been doing in the past. For example, during the world financial crisis of 2008, the government of the United States decided to bail out certain banks and businesses, including Citigroup, Bank of America, Goldman Sachs, US Bankcorp, Suntrust, Capital One, American Express and many others. You can see the full list of companies, including the data about the bailouts and the companies repaying the money to the government at https://projects.propublica.org/bailout/list Iceland, Great Britain and many other countries have also either nationalized certain companies or bailed them out.

A bailout means that a government gives money to a company that has made a lot of mistakes. The government obtains money from tax collections. While the government can borrow money by issuing bonds and using other ways to borrow, it will eventually need to pay the borrowers and the only way to do so is by collecting taxes. Therefore, a bailout means transferring the responsibility for the mistakes of a few onto the shoulders of all taxpayers. A scenario like this is not possible with Bitcoin because the Bitcoin network does not have a central authority that could decide to “print more money” or “redistribute the money.”

 

Complete transparency of the Bitcoin network

Some people think that the Bitcoin network offers a lot of privacy. This is simply not true. All the transactions that occur on the Bitcoin network become a part of the Bitcoin blockchain. Anyone at any time could visit the Bitcoin blockchain explorer and search for transactions.

It is true that the Bitcoin network does not attach a name of a person or an organization to the transactions. The network only uses addresses and not names. Bitcoin addresses work similarly to emails because you can use an address to both send and receive funds. Every bitcoin wallet can have an unlimited number of addresses, but in many instances people and organizations use the same address over and over again. For example, if a non-profit sends an email asking for donations and indicates one bitcoin address in all the emails, you can then track all the donations to the address using the Bitcoin blockchain explorer. This also means that if you know that someone is about to participate in a transaction and you know the size of the transaction, you can look for this transaction on the Bitcoin blockchain. While it is possible to break a transaction into many parts (this is something that some privacy-focused cryptocurrencies, such as Monero, do), Bitcoin users mostly don’t do it and the network is very transparent.