Three generations of cryptocurrencies. Cardano non-interactive proof of proof-of-work.
Practical consequences of the absence of interoperability of first- and second-generation cryptocurrencies
In practical terms absence of interoperability between digital currency networks means that if you, for example, have ETH and need to get some BTC, you will need to use a third-party exchange. You will need to first send your funds there in ETH, then use the exchange and then withdraw the funds in BTC. This results in traditional third-party exchange platforms still holding the keys when it comes to setting the exchange rates and processing the transactions, which contradicts to the principle of decentralization and digital currencies being “peer-to-peer,” (The word “peer-to-peer” being one of the words in the headline of the original whitepaper by Satoshi Nakamoto in which he introduced Bitcoin to the world).
Another issue that those who mostly operate in cryptocurrencies are likely to experience because of the fact that first- and second-generation cryptocurrencies “do not talk” to each other is difficulty explaining to regular banks where the funds are coming from. If you need to transfer your digital currency into a regular fiat currency, your bank, being a regulated financial institution, will likely ask: “where did this money come from?” The bank will, most likely, not be happy with the answer “from a bunch of anonymous people on the Internet.”
The issues with larger systems and cross-chain applications
Aside from day-to-day practical matters of convenience, Cardano creators believe that making various cryptocurrencies “talk” to each other is important because today more and more blockchain platforms and systems incorporate a number of elements into their structure or even become parts of even larger systems themselves. For example, a network called Catena uses blockchain technology for authentication purposes and a Bitcoin client for certificate validation.
At the end of 2017, the full size of the Bitcoin blockchain was close to 150 gigabytes, which means that the bandwidth and hardware costs of operating a dedicated Bitcoin wallet with a full copy of the Bitcoin blockchain will most likely not be acceptable for a browser add-on or an embedded version of the wallet. The Cardano network algorithms can solve the issue for many other cryptocurrency networks.
Finally, with so many altcoins and blockchain projects on the market, there is a lot of interest in “cross-chain” projects that would work similarly to how API integrations work today on the Internet.
API is short for application programming interface, which is a set of protocols and tools to make various pieces of software communicate with one another.
The simplest version of a cross-chain protocol is a blockchain implementation of Bitcoin-to-Ether exchange. The Cardano protocol would enable similar functionality on a more complex level.
Non-interactive proof of proof-of-work
Bitcoin was introduced by Satoshi Nakamoto in 2009 and, as of the beginning of 2018, it remains the biggest cryptocurrency in terms of market capitalization. Bitcoin and many other cryptocurrency networks use proof-of-work algorithms to create tamper-proof blockchains that contain all the transactions that have ever occurred on the network.
To be able to work with Bitcoin and other cryptocurrencies that use proof-of-work algorithms, the developers of Cardano have created non-interactive proof of proof-of-work approach. This approach is what can enable proof-of-stake networks such as Cardano “speak” to proof-of-work networks such as Ethereum and Bitcoin.
Traditional proof-of-work algorithms need to verify a chain of blocks of a blockchain. For example, for a transaction to be considered valid on the Bitcoin network, it needs at least six confirmations. A confirmation is a reference to a transaction by one block of the Bitcoin blockchain. Six confirmations means that six blocks need to reference either the transaction or the blocks that have a reference to the transaction. Because the Bitcoin network creates blocks at the average speed of one block per every ten minutes, six confirmations may take an hour or even longer.
Non-interactive proof of proof-of-work verifies transactions in a different way. It introduces the idea of trustless side blockchains that developers can create on top of a main blockchain. To send money to the sidechain from the main chain and back, users need to prove that they have the funds that they are sending. To do so, Non-interactive proof of proof-of-work checks only a certain property by verifying one string of data instead of working with the entire blockchain. In the whitepaper for non-interactive proof of proof-of-work, Cardano developers construct efficient payment verification tools, also known as simple payment verification, and sidechain verification proofs. They then show that their constructions can withstand attacks that similar constructions were not able to deal with in the past.