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An Introduction to Cardano: A Next Generation Smart Contract Platform

Cardano is a cryptocurrency project and decentralized public blockchain developing what it terms a third generation smart contract platform that aims to deliver more advanced features than previous protocols.

Cardano is a cryptocurrency project and decentralized public blockchain developing a smart contract platform that aims to deliver more advanced features than previous protocols. The Cardano project began in 2015, is fully open source, and seeks to maintain a scientific philosophy and a research-first driven approach.

Cardano is being developed by an international team of academics and engineers. Three primary organizations contribute to its development including cryptocurrency research company IOHK led by Ethereum cofounder Charles Hoskinson, the Cardano foundation, and a Japan-based startup accelerator called Emurgo. Cardano is built in the Haskell programming language with peer-review and high assurance software standards baked into their development process. Flexibility is a key consideration, as development of the platform in planned in layers to better facilitate ongoing maintenance and easier upgrades over time through soft forks. A core component differentiating their platform from other smart contract projects is “Ouroboros”, which they claim to be the first Proof of Stake consensus algorithm that is scientifically proven as secure.

The Cardano token, “ADA”, can be used to send and receive digital funds, and must be used with their digital wallet, “Daedalus”. Currently, the team is working to complete the settlement layer that will run ADA and will then shift focus to build an additional layer to handle smart contracts and dapps.

History and Launch

Cardano launched their main net in September 2017. They are currently in the “Byron” phase of their 5 step roadmap which is designed to make Cardano increasingly decentralized and complex as it progresses.

Cardano self-identifies as a third generation blockchain protocol, which began with an unstructured collection of ideas addressing flaws in the first generation blockchain protocol (Bitcoin) and second generation protocol (Ethereum). Cardano aims to inherit the successful features and lessons learned from earlier blockchain projects, discard flaws, and incorporate new technologies and best practices that emerge from a research based approach.

Cardano identifies three major problems with the bitcoin and ethereum protocols in the areas of scalability, sustainability, and interoperability.

Scalability challenges exist due to an increased quantity of actors participating in decentralized networks as they grow, bringing diverse opinions on future changes to core codebase, combined with a lack of formal governance structure that makes it difficult to arrive at consensus in an efficient way. This leads to technology forks, community fragmentation, and the emergence of currencies like bitcoin cash and ethereum classic.

Lastly, the interoperability of bitcoin and ethereum-based tokens with other cryptocurrencies, and also with the legacy financial system when being exchanged for fiat currencies, are processes wrought with friction.

Unique Technologies

Scalability:

Cardano plans to solve scalability issues in three areas: transactions per second, network, and data storage. They plan to address each of these major issues in the following ways:

  1. Transactions per second (TPS): They have developed a “provably secure” proof of state mechanism they call “Ouroboros”. They claim that Ouroboros will be quantum resistant within 2018, whereby proof of stake actors called “slot leaders” will sign a block using a quantum resistant signature scheme. They chose this consensus mechanism to keep costs low, because it’s a system that allows for parallel growth, and also because it potentially allows for maintaining multiple chains concurrently. Cardano emphasizes their commitment to rigorous peer review as a way to ensure the strength of their protocols and systems. This gives them a high assurance that the conceptual design of their system is correct. As far as being able to prove out the integrity of their systems, they are modeling a formal specification of Ouroboros using psi calculus, which is a formal modeling language that is machine understandable. Eventually, they plan to connect this to their Haskell code in their Github repo in order to prove that they have correctly implemented their protocol.
  2. Network: As a blockchain grows, it is imperative that it is able to move large amounts of data across a network. As transactions per second increase as the network grows, the blockchain cannot expect to maintain a homogeneous network topology and simultaneously accommodate that growth. This means that each node cannot be expected to relay every message that passes through the network as it grows. To address this, Cardano is looking at a new type of technology called RINA (recursive internetwork architecture). RINA is a new way of structuring networks that enables a heterogeneous network that still retains privacy and transparency, while scaling more efficiently. The Cardano team aims to launch RINA in its complete form in 2019.
  3. Data: Currently, there are techniques for decreasing the amount of data that a single node needs to retain, such as pruning, subscriptions (such as partitioning through a distributed file storage system), and some form of compression (including sidechains). Cardano’s approach to data storage is to consider each of these solutions and create prescriptive solutions where they may employ these techniques in tandem or in isolation, depending on specific needs, and without compromising security. Their perspective is that data storage is still relatively affordable, so the Cardano team does not feel that this is as urgent as solving other bottlenecks to scaling such as transactions per second and network challenges.

Interoperability is the idea that there will not be one blockchain dominating the space. Instead, there will be many decentralized networks operating simultaneously such as bitcoin, ethereum, dash and others. In addition to these, there are banking legacy systems like SWIFT and ACH operating, which cryptocurrencies inevitably encounter as they are purchased with fiat currency and converted back again. Because each of these systems have unique languages, properties and rules, it is currently difficult for them to communicate with one another. This is especially true when it comes to decentralized networks, where entire ecosystems are launched and grow in isolated spheres. To date, cryptocurrency exchanges are the primary available vehicle for converting cryptocurrencies into other cryptocurrencies, and they are fragile due to murky regulatory environments and their attractiveness to hackers.

Meanwhile, banks have strict KYC (know your customer), AML (anti-money laundering) and ATF (anti-terrorism funding) regulations that they must comply with. Compliance generally stems from their understanding of meta-data included in normal bank transactions (such as personal or business details surrounding who sent money, where they are located, what goods they bought or sold, etc.), and the identities of these actors. Because cryptocurrency transactions are not designed to include these detailed identity and meta data layers, they are by default lumped into the category of suspect and risky from the perspective of a bank, and this trend will continue until a new methodology for evaluating a cryptocurrency’s degree of compliance is available.

Cardano hopes to be such a layer, serving as bridge that wraps any blockchain transaction with the assurance that it is fully compliant by all traditional banking standards. They will employ creative applications of technology to realize this vision, whereby they can expose compliance while still maintaining the privacy of transactors on the blockchain.

They intend for their currency, ADA, to allow cross-chain transfers by utilizing sidechains, without the need for a trusted third party. This means that ADA should be able to monitor cryptocurrency transactions on other blockchains, and verify their validity (that the currency did in fact exist, and that it was not double spent). The outcome would be an “internet of blockchains” where cryptocurrencies can be seamlessly exchanged. Cardano has started their sidechain effort that is further detailed in their paper, “Non-Interactive Proofs of Proof of Work”. In addition to making crypto-to-crypto exchange across different blockchains a seamless experience, they also aim to give users the ability to voluntarily escalate a transaction to one that a bank would accept, by submitting the metadata and identity data necessary for compliance. This would allow for an easy experience when users want to transfer fiat money into cryptocurrency and back again, effectively connecting dots between legacy systems and the world of cryptocurrency.

Sustainability and Governance: Cryptocurrencies are not companies, but rather open source protocols. When it comes to maintaining and funding these protocols long term, it is unclear how that responsibility should be placed and addressed. The Cardano team proposes a decentralized trust that they call a “Treasury”. They define a treasury as a blockchain that is capable of printing money, and retains a portion of that money in a decentralized bank account. That bank account is funded through inflation, which occurs when new coins are created by miners, and through transaction fees.

For context, in the majority of blockchain systems, a miner who successfully mines a block would be the sole recipient of a block reward in the form of newly minted coins, which are automatically created out of thin air and deposited into the miner’s bank account. In Cardano’s treasury system, those reward coins would instead be shared between the miner and the treasury, since a portion of the newly minted coins would be deposited into the treasury’s decentralized bank account.

This is coupled with a democratic process allowing participants to vote on how to spend the funds that the treasury accumulates. The DASH project was the first project to pioneer this model. For the voting component of this process, Cardano is looking into a modification of Liquid Democracy (a voting system that allows voters to either vote on issues directly, or to delegate their voting power to a trusted party), and combining that with an incentivized treasury model (voters are incentivized to participate). This entire treasury model is designed to be independent of the Cardano protocol itself, to allow for upgrades and iteration as needed. It is scheduled to launch mid to late 2018.

Cardano recognizes that cryptocurrencies require new code to go into effect as better systems are identified over time, which requires a fork of some kind. The problem is, that generation 1 (bitcoin) and generation 2 (ethereum) blockchain protocols offer no canonical way to determine which proposed fork is best. To solve this, Cardano looks to the example of government constitutions, which they argue are the best known example of a social system that allows for stability while also enabling updatability. Constitutions can be amended, and offer a process (albeit arduous) for doing so. To mimic this system, Cardano will offer “improvement proposals” that allow a stakeholder to submit a proposal, and other stakeholders can then vote to either ratify it or not. Cardano is deliberately making this process slow and deliberate, with multiple thresholds that must be met prior to the adoption of any proposal. Eventually, they hope to take this social process and make it machine understandable by using techniques from programming language SIRI and formal verification.

Identity: Unlike many cryptographic projects, Cardano has explicitly stated real identity verification as a core tenant of the platform. In fact, on top of the basic settlement layer of the platform, which operates in a similar fashion to Bitcoin, the control layer of Cardano will be designed to recognize identity for the purposes of regulatory compliance and blacklisting will be a core feature of the platform.

User Issued Assets: The ability for users to create and manage their own meta-tokens on top of a blockchain has been tried and implemented in a number projects, including Colored Coins, Mastercoin (now called Omni), and via Ethereum’s ERC20 standard. The Cardano project notes that the first two examples require light clients to rely on trusted servers and are therefore not fully decentralized, whereas ERC20 tokens are decentralized but may have scaling issues. Additionally, all ERC20 tokens still require their parent ether token for transaction fees. The Cardano project seeks to improve on previous design choices by allowing for the creation of fully scalable user issued assets that can be transacted solely with native-token fees (i.e. the user issued assets themselves).

Consensus

Cardano uses a proof of stake protocol called Ouroboros, which was designed by a team of cryptographers from five academic institutions led by Professor Aggelos Kiayias of the University of Edinburgh. They claim that Ouroboros is provably secure through its implementation of a rigorous cryptographic model, and has a flexible design that allows for the composition of many protocols, which enables delegation, sidechains, subscribable checkpoints, better data structures for light clients, different forms of random number generation and even different synchronization assumptions. The logic behind the flexible design of Ouroboros is intended future-proof it. The team’s expectation is that the needs of the network will naturally evolve as it scales from thousands to millions of users, and beyond.

Token

The first layer of Cardano allows for the basic transaction of ADA tokens between users and their sale/purchase on exchanges. The ADA token is capped at a maximum of 45 billion possible units, with approximately 26 billion of these being sold and issued during the initial token sale period, which was conducted in 4 phases between September 2015 and January 2017. Of this initial ADA, 12.6 million was distributed to three entities within the Cardano technical and business development group: IOHK, Emurgo and the Cardano Foundation.

Community and Founders

There are three organisations that are contributing to the development of Cardano. The first is the Cardano Foundation, an independent standards body based in Switzerland with core responsibilities to support the community of Cardano users and to work with authorities on regulatory and commercial matters.

The second entity working on Cardano is IOHK, a cryptocurrency research and development company, which holds a contract to develop the platform until 2020. IOHK was founded in 2015 by Ethereum cofounder Charles Hoskinson, and former Ethereum operations manager Jeremy Wood.

The final business partner is Emurgo, an accelerator based in Japan which invests in start-ups and assists commercial ventures to build on the Cardano blockchain.

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