What is Cardano (ADA)? and the Revolutionary Ouroboros Consensus Mechanism

Cardano (ADA) is a blockchain-based cryptocurrency platform for building decentralized applications (dApps) that was first introduced in September 2017 – after undergoing two years of extensive development work. According to its creators, Cardano is different from other crypto networks because all updates to the platform are made only after proposed changes have been subjected to rigorous peer reviews.
Instead of simply writing a whitepaper and converting its specifications into software programs, the Cardano development team regularly submits its technical documents to expert researchers throughout the world. After reviewing feedback from research analysts, Cardano’s developers make the appropriate modifications to their design documents

Sustainability, Scalability, Interoperability

As a third-generation cryptocurrency, which aims to improve upon the technological breakthroughs made by Bitcoin (BTC) and Ethereum (ETH), the developers of Cardano aim to create a highly scalable, interoperable, and sustainable blockchain network. 

A distributed ledger technology (DLT)-powered platform can scale effectively if it can maintain an adequate level of throughput – meaning that it’s able to process a sufficiently large number of transactions per second (TPS). In order to achieve high TPS rates, Cardano’s design team uses a proof-of-stake (PoS)-based consensus algorithm – instead of the energy intensive proof-of-work (PoW) consensus protocol.

PoS-based Ouroboros Consensus Mechanism

Cardano’s PoS-based Ouroboros consensus protocol doesn’t let all network participants mine or generate new blocks. By using a proprietary algorithm, only a few network nodes, called “slot leaders”, are elected to mine blocks on the Cardano platform. 

To coordinate and manage how new blocks are generated, Cardano’s Ouroboros algorithm divides time into three epochs. Each epoch is further split into slots, which are short periods of time for creating a new block. A slot leader is elected to handle the block creation process for each slot. 

Only Designated “Slot Leaders” Can Mine Blocks

Only the designated slot leader is permitted to mine blocks for the time slots to which they have been assigned. Slot leaders are tasked with “listening” for new transactions (TX) broadcasted on the Cardano network. After identifying pending transactions, slot leaders verify them and then place each TX inside a new block. 

If a slot leader fails to complete their assigned tasks on time, or if a slot leader is not present when new transactions need to be checked, then they lose the right to produce new blocks. However, a slot leader may be re-elected by the network participants after meeting the appropriate requirements.

Increasing Number of Epochs, Running Multiple Epochs in Parallel

According to its developers, Cardano’s unique consensus and network management protocol makes the ADA blockchain a highly scalable platform. This type of consensus model allows network managers to increase the number of slots per epoch – while also being able to run multiple epochs in parallel. 

Another major scalability problem that needs to be addressed is not having sufficient bandwidth. By design, the blockchain data structure is stored in a peer-to-peer (P2P) network. Each node on a DLT-enabled network receives a copy of transactions that are broadcasted on the platform. However, when there are thousands of transactions that require processing – which is typical of mainstream payment systems like Visa – then the nodes would require a very large amount of bandwidth to download all TXs. 

Recursive InterNetwork Architecture (RINA)

Given the large amount of data that needs to be processed, only a highly scalable network would be able to handle such requirements. In order to handle a potentially large number of transactions, Cardano’s developers propose splitting up the network into smaller “subnetworks”. 

This is done by using a technique known as Recursive InterNetwork Architecture (RINA).

In this type of design approach, each node becomes part of a subnetwork and can communicate with other nodes from its own subnet or other subnets. In a manner that is similar to how the TCP/IP protocol works, nodes are able to coordination network management tasks by working cooperatively.

Using Appropriate Data Storage Models

The final key aspect of blockchain scalability that must be addressed is implementing an effective and efficient data storage model. This, according to Cardano’s developers, who have pointed out that blockchains require a large amount of storage space because they must keep a record of all transactions that have been registered on their networks.

To handle large amounts of transaction data, the Cardano team has considered various data storage optimization techniques including compression, partitioning, and pruning. At present, however, this is not an urgent requirement as acquiring new storage space continues to remain relatively cheap due to continuous advancements in technology.

Design Challenge: Implementing Blockchain Interoperability

One of the main design challenges that blockchains face involves interoperability. Currently, there are over 2,000 cryptocurrency platforms, however most of them are unable to effectively communicate or exchange information with each other.

Another problem cryptocurrencies face is that traditional financial institutions are usually hesitant when it comes to providing banking services to firms dealing in digital assets. In order to provide a platform that can offer financial services to users of many different cryptocurrencies in the future, Cardano’s developers aim to create a network that will allow multiple blockchains to seamlessly exchange information with each other.

Existing financial service providers require metadata associated with money transfers, however cryptocurrency transaction data usually does not include personal identifiable information. Most banks are interested in knowing why a particular transaction was made, so that they can perform an investigation if they suspect fraudulent activity.

Attaching Metadata to Transactions Is Optional

However, personal financial data is also considered sensitive information, so the developers of Cardano want to give users the option to attach metadata to transactions. But this is not mandatory because the Cardano team believes individuals have the right to maintain a certain level of financial privacy.

In addition to resolving the issues related to blockchain interoperability and financial privacy, Cardano’s developers intend to build sustainable DLT-powered networks. Currently, crypto firms looking to raise funds for projects launch an initial coin offering (ICO) or an initial exchange offering (IEO). 

Sustainability: Financial Management for Crypto Projects

After successfully acquiring capital via an IEO or ICO, blockchain startups have sufficient funds that are needed to launch new projects and to start developing products and services. However, the funds raised must be properly managed, so that crypto companies have enough capital to cover operation costs in the long-term.

In order to maintain an adequate amount of reserves, firms must make the right decisions when it comes to deciding whether to launch another fundraising campaign to generate additional funds or make strategic investments to earn profits. According to the Cardano team, raising money just once is not a viable long-term financial strategy.

Creating and Managing a Treasury

To solve the problem of sustainability, Cardano’s developers recommend creating a treasury that receives a small percentage of every transaction a business makes. Notably, the treasury is like a special savings wallet that is not controlled by anyone, the Cardano team notes. The treasury serves as a type of smart contract that releases a certain portion of the funds to developers who are working to improve the Cardano protocol. 

To recommend changes to Cardano’s existing codebase, developers are required to submit a proposal to the cryptocurrency platform’s community. In the proposal, the developers must clearly specify what they intend to change or add to the current Cardano protocol and how much money they would need to implement the suggested modifications.

After voting on the proposals, the treasury takes what it considers the most important proposals and allocates enough funds for their development. This type of financial management model will keep Cardano-based projects sustainable over an extended period of time, according to the platform’s development team.

Charles Hoskinson and IOHK’s Role in Supporting Cardano’s Development

Ethereum co-founder Charles Hoskinson is also the founder of the Cardano project. While working on Ethereum, Hoskinson decided to take a fundamentally different approach to developing cryptocurrency networks. 

To pursue his own ideas, he established an organization called Input Output Hong Kong (IOHK) with the help of his colleagues. As the Chief Executive Officer (CEO) of IOHK, Hoskinson is working on various initiatives involving Cardano and also the Ethereum Classic (ETC) project.