Three generations of cryptocurrencies. Cardano as a third-generation cryptocurrency.
As a third-generation cryptocurrency, Cardano plans to tackle all the issues that prevent first- and second-generation cryptocurrencies from growing, including scalability, interoperability and sustainability.
Scalability on the Cardano network
The issue of scalability of blockchain networks is not just about how many transactions per second the networks can process. Most popular blockchain networks, including Bitcoin and Ethereum, have thousands of nodes and miners and it wouldn’t be hard for them to tweak the software in a way that allows them to process transactions faster. The issue is also about storing the data about the transactions and having enough bandwidth on the network to process the information about transactions. Another aspect of the scalability issue has to do with governance. If Bitcoin or Ethereum were to introduce updates to their software, they would need the majority of users to accept the changes and update their software. First- and second-generation blockchain networks do not have a mechanism that would allow them to run a voting process and reach consensus.
To solve all these issues, the Cardano Network chose to use Ouroboros algorithm, which is a proof-of-stake algorithm. Both Bitcoin and Ethereum use proof-of work, in which miners seal blocks with hashes.
Energy consumption and proof-of-work
One of the biggest reasons why Cardano founders decided to go with proof-of-stake and not proof-of-work are energy consumption figures. As the popularity of the Bitcoin network has exploded in 2016 and 2017, so did the electricity that the miner burn in order to mine new bitcoins. For example, according to estimates by Morgan Stanley published in the beginning of 2018 in the Fortune magazine (source: http://fortune.com/2018/01/11/bitcoin-mining-tesla-electricity/), the costs of mining 1 bitcoin in 2017 were between USD$3,000 and USD$7,000. In 2017, Bitcoin miners used over 35 terawatts of electricity. For comparison, according to the data from 2016, in the year of 2014, the entire country of Denmark used 32 terawatts, less than all bitcoin miners in 2017. Also in 2014, the entire country of Bulgaria used 31 terawatts. The list of the countries that per year use less electricity per country than Bitcoin miners used in 2017 include Qatar, Belarus, Serbia, Ireland, Hungary, Ecuador, Iceland, Dominican Republic, Costa Rica, Estonia, and many more.
An analysis by Fortune magazine found that all Tesla cars on the road used about 1.3 terawatts of electricity in 2017, which means that all Tesla cars on the road (about 300,000 of them) used about 3% of electricity that miners in 2017 used to mine Bitcoins.
In August of 2017, generating a block of the Bitcoin blockchain required running over 2^60 (two to the sixtieth degree), or 1,152,921,504,606,846,976 (over a Quintillion) mathematical operations.
Cardano’s Proof-of-Stake: Ouroboros
A natural alternative to proof-of-work is proof-of-stake. In a proof-of-stake algorithm, the network randomly selects one of its members to create a block of blockchain or perform some other action based on the stake in the blockchain ledger that a member holds at the time of selection. This is the algorithm that networks such as Dash and NEO use to create blocks on their blockchains.
The creators of Cardano believe that not only does using proof-of-stake solve the electricity consumption issues, but it also imposes discipline on the network participants because the assignment of work occurs proportionately to the stake of the members in the network.
In the whitepaper that introduces Ouroboros, founders of Cardano come up with two properties that describe robust blockchains. These properties are persistence and liveness. The property of “persistence” means that once a node on a blockchain network claims that a transaction is valid, other nodes will also deem the transaction as valid. Liveness means that once a valid transaction stays on the network for a certain period of time, it becomes stable. The combination of liveness and persistence guarantees that honest transactions on a blockchain network become a part of the network and it becomes impossible to alter them.
Ouroboros algorithm uses two more important concepts, balance and stake. Balance is the number of tokens in the account. When users get some ADA, they can send it to other users up to the total balance amount.
Stake is different from balance as it allows users on the network to control the way the network operates. These ways include block creation, participation in the system of updates and taking part in multi-party computations. Every token on the network is linked to a balance and a stake.
There are two ways for a stake on the Cardano network to be connected to an ADA token. These ways are stake distribution and stake delegation. Stake distribution is a value associated with each token address on the network. Stake delegation deals with an issue of users being offline when being chosen to as slot leaders. Stake delegation process allows certain stakeholders to transfer their voting participation rights to other members of the network.
A stakeholder on the Cardano network is a node that has a positive stake. The network considers the value of the parameter of stake to elect a slot leader, which is a node on the network that has a right to create a block during a slot.
A slot is a term that describes a short period of time, say, 15 seconds. After the Ouroboros protocol assigns a leader to the slot, the leader can create one and only one block of the blockchain. This means that the protocol can choose a trusted set of members to maintain one of the blockchains for a certain period. Because of its design, the protocol allows for creation of multiple blockchains at the same time. The blockchains can run in parallel, allowing the network to process a much larger number of transactions than Ethereum or Bitcoin can handle.