An Introduction to the Cardano Blockchain

A comprehensive review of Cardano exploring its inner workings, benefits, and unique place in the blockchain ecosystem

Cardano is a layer 1 blockchain, meaning it functions like a computer's operating system. It provides a basic framework and rules for everything else to run on top of it, such as applications and software. Like an operating system that controls how different programs interact and share resources, Cardano facilitates transactions and operations within its blockchain network. Cardano stands out as a third-generation blockchain, building upon the successes of earlier blockchains like Bitcoin and Ethereum while addressing their limitations. As a result, Cardano performs as a more scalable, robust, and adaptable network for a broader range of uses, including supply chain management, finance, healthcare, or manufacturing.

How does Cardano work?

As a public, permissionless blockchain, Cardano is designed for inclusivity and accessibility. In this context, public means anyone can participate in the network's activities, such as validating transactions or developing applications, without needing prior authorization. Additionally, permissionless signifies that no intermediary controls the access to the blockchain, therefore ensuring an open network.

While most public blockchains are permissionless, some, like Ripple and Stellar, operate as federated networks that rely on a council to grant explicit permissions. For this reason, all permissionless blockchains are public, but not all public blockchains are permissionless.

Regardless of the designation, layer 1 blockchains like Cardano can sometimes become congested, leading to slow transaction speeds. In other instances, such as with Ethereum, congestion can result in higher transaction fees. Sidechains and layer 2 solutions address such potential issues while also increasing the scaling power of blockchain. In fact, Cardano easily accommodates sidechains to deliver this functionality in support of extended scalability.

Both layer 2 solutions and sidechains operate as separate layers on the main blockchain and handle transactions off-chain, boosting speed and lowering costs. However, layer 2 networks inherit their security guarantees from the main blockchain, while sidechains generally have their own rules and guarantees. Both scaling solutions, in combination with public blockchain infrastructure, provide a powerful and efficient infrastructure for decentralized applications (DApps) and transactions.

Moreover, Cardano’s distinct infrastructure has specific benefits for enterprises and newcomers alike. Understanding the basic aspects of its proof-of-stake (PoS) consensus mechanism and the role Cardano’s native cryptocurrency—ada—plays in the network creates a solid starting point for exploring how Cardano handles native assets, smart contracts, the development of DApps, and consequently enables a wide range of use cases across multiple industries.

Reaching consensus on Cardano

Blockchain consensus involves the process of agreeing on the order of transactions and the state of the network. Imagine a group of people working together to keep a record of digital transactions. They all agree to follow specific rules, which is called a consensus protocol.

To participate, each individual contributes some kind of resource. Certain consensus mechanisms require processing power, while others might use storage, space, or even depend on seniority. These combined contributions help to secure data records and ensure everyone agrees on valid transactions.

With proof of work, the more processing power a miner has, the greater their chances of mining the next block first or before the others. In this case, mining entails solving a complex mathematical puzzle, with the winner earning cryptocurrency rewards in exchange for their efforts.

In proof of stake, the more tokens a person controls and stakes, the more likely they will participate in minting the next block. While ada holders generally use their tokens to send and receive payments, pay transaction fees, and interact with DApps built on Cardano, token staking on Cardano’s proof-of-stake protocol is primarily a way to participate in the network's governance and security while having the possibility of earning rewards. By staking ada, users delegate their rights of producing blocks and endorsing transactions to the stake pool operators (SPOs) managing the delegation stake pools. In return, delegators can earn rewards, similar to what happens with interest on a bank deposit.

A lottery system, known as slot leadership, facilitates the selection process of who will produce the next block. On Cardano, a stake pool with more ada has better odds of winning this right to create a block and earn rewards. Notably, Cardano uses the Ouroboros family of protocols as its specific proof-of-stake mechanism to achieve consensus in a secure and decentralized way.

The role of cryptocurrency on the Cardano blockchain

As noted, the delegation and staking of ada is fundamental to producing new blocks, which in itself underpins the blockchain's diverse functionalities.

Delegating to a stake pool requires minimal technical knowledge and can allow users to earn rewards proportional to their stake. A stake pool operates similarly to a group savings account for people who hold cryptocurrency, such as ada. Instead of everyone managing their savings individually, they pool their money together.

SPOs run these collective pools, which form the backbone of Cardano's decentralized network. In fact, SPOs manage the necessary hardware and software to validate transactions, ensuring their accuracy and security.

Why stake on Cardano?

The benefit of staking on Cardano comes from its flexibility. Holders can retain full, non-custodial control of their ada, while liquid staking ensures assets can move seamlessly between stakeholders during delegation. Additionally, there are no lock-up periods, meaning users can freely withdraw their stake at any time without incurring penalties, and rewards are not slashed for potential bad behavior by an SPO.

On other blockchains, slashing acts as a penalty mechanism, partially or fully confiscating a validator’s staked funds for malicious or negligent behavior like double signing or prolonged inactivity. Cardano relies on other mechanisms to ensure the security and integrity of the network, such as SPO pledges, robust operational resilience, and a high degree of decentralization.

Cardano performs consistently in terms of staking ratio and minimum attack vector (MAV). The staking ratio measures the participation of ada holders in delegating their funds and has a direct correlation with decentralization, which in turn diversifies the number of actors maintaining the network and leads to greater security. In fact, Cardano’s MAV is multiple times greater than other proof-of-stake chains, and over 3,000 registered stake pools ensure a diverse, decentralized network.

Cardano’s transaction model

Most blockchains, or blockchain protocols, operate using two primary transaction models: unspent transaction output (UTxO)-based and account-based.

UTxO, pioneered by Bitcoin, tracks individual units of cryptocurrency like entries in a ledger. Each transaction references specific ledger entries, ensuring precise and transparent movement of funds. Cardano's extended unspent transaction output (EUTxO) model builds on the UTxO foundation, enriching each ledger entry with additional data. This enhancement enables smart contracts to function as self-executing agreements with predetermined conditions, like automated escrow services. By referencing specific ledger entries, these contracts guarantee predictable outcomes, mitigating the risk of unforeseen complications.

Conversely, Ethereum's account-based model operates like a traditional bank account, maintaining a running total for each user. With this approach, the entire state of the blockchain, including account balances and smart contract data, constantly updates and remains publicly accessible.

This interconnectedness, while providing flexibility for developers, also creates potential vulnerabilities. In contrast, Cardano's EUTxO model employs deterministic transaction validation and isolates smart contracts, which minimizes the risk of errors or malicious exploits. Where the account-based model favors adaptability, Cardano's EUTxO model champions security, transparency, and dependability, making it a robust platform for enterprise-grade applications, as well as the preferred choice for applications requiring critical levels of trust and risk mitigation.

Native assets on Cardano

The fundamental difference in architecture between Cardano's EUTxO model and Ethereum's account-based model extends beyond simple transactions to how these platforms handle non-fungible tokens (NFTs), native tokens, and other digital assets. The contrasting approaches significantly impact the creation, management, and overall security of these assets on their respective networks.

Cardano actually treats these tokens as native assets, meaning that besides sending and receiving ada, users can also interact with custom assets out of the box. Indeed, Cardano users can spend and exchange these tokens directly on the blockchain without the need for smart contracts.

This simplifies the process and enhances efficiency compared to Ethereum, where custom tokens rely on smart contracts, leading to added complexity, cost, and security risks due to repetitive code. Even simpler blockchains like Bitcoin, which lack full-fledged smart contracts, can experience issues with custom tokens because of their reliance on layer 2 solutions, adding another element of complexity. Therefore, this inherent native asset advantage makes Cardano a more attractive platform for enterprises and developers seeking scalable and cost-effective solutions for tokenization.

How Cardano smart contracts work

Cardano smart contracts basically function as an automated validation triggered by a specific, previously determined event, with those terms directly written into code. However, unlike Ethereum, Cardano smart contracts do not have side effects, which means they only validate actions on-chain. As a result, actions and side effects occur separately through an off-chain infrastructure.

As previously explained, with Cardano's EUTxO model, smart contracts reside on the blockchain, ensuring the integrity of rules and conditions. However, the actual execution of actions and any resulting side effects occur off-chain through a separate infrastructure. This separation enhances security by preventing unintended contract interactions and potential disruptions to the blockchain's main operations. As such, Cardano smart contracts similarly ensure trust, transparency, and efficiency in various applications, from simple transactions to complex financial systems.

Regardless of the particular application and its associated use case, any platform that executes smart contracts on Cardano has undergone some form of formal verification. As a result, the specific function of a smart contract is validated, but not the contract itself—this falls to the responsibility of each developer or author. Such an approach does require additional effort on behalf of developers, but it also ensures the reliability and robustness of deployed contracts. And even if formal, structured smart contract methodologies remain uncommon, existing processes still increase security and reduce the risk of vulnerabilities.

Smart contracts on the Cardano blockchain leverage the platform's layered design, separating the accounting and computational functions. Specifically, Cardano splits its blockchain into four layers: networking, consensus, settlement, and scripting.

1. The networking layer is a customized peer-to-peer system tailored for proof-of-stake blockchains, facilitating secure communication and interaction between nodes.
2. The consensus layer implements the Ouroboros family of protocols, ensuring agreement on the state of the blockchain and validating transactions.
3. The settlement layer functions as a formal financial ledger, defining the fundamental Cardano objects and rules and serving as the foundation for all other components.
4. The scripting layer, or Plutus, is a programming language integrated into the Cardano ledger. It enables the creation and execution of smart contracts on the network.

Cardano smart contract languages

Although primarily built in Haskell, Cardano currently displays a dynamic range of programming languages and platforms fit for multiple purposes and developing preferences, such as Rust, Python, TypeScript, Go, C#, or Java.

The Plutus platform, for instance, is a purpose-built collection of tools that includes Untyped Plutus Core (UPLC), the actual low-level execution language on Cardano. Additionally, Plutus includes Plutus Tx, a plug-in for the Glasgow Haskell Compiler (GHC) that supports compiling Haskell code to UPLC. Collectively, the Plutus platform enables developers to create complex, secure, and verifiable smart contracts with Haskell. Its clean functions prioritize predictability and reliability, which remain crucial for financial applications.

Most recently, the Aiken programming language has radically simplified the development of Cardano smart contracts. Instead of Haskell, Aiken is its own language that also compiles to UPLC. It takes inspiration from modern developer-friendly languages such as Rust, Gleam, and Elm and has greatly streamlined the development process on Cardano, making it easier for developers to build secure and reliable DApps on the network. Indeed, Aiken's adoption has seen significant success. From jpg.store or MinSwap to SundaeSwap and many others across the Cardano ecosystem, developers frequently highlight the high programming standard, ease of use, and overall enjoyable experience.

Ethereum vs. Cardano smart contracts

While both Cardano and Ethereum utilize proof-of-stake consensus mechanisms, their smart contracts differ in design philosophy and technical approach. Regarding philosophy, Cardano emphasizes a research-driven, academic approach. Ethereum, on the other hand, adopts a more agile development approach, prioritizing rapid innovation, which presents its own set of challenges.

In technical terms, Ethereum and Cardano smart contracts differ in their execution and activation triggers. For instance, Ethereum contracts activate upon receiving a transaction, potentially creating a cascade of further activations.

Additionally, while the main language for Ethereum smart contracts, Solidity, enjoys wider adoption, it draws frequent criticism for its complexity and potential security flaws. In contrast, Cardano contracts execute when a user attempts to spend an UTxO, acting as validators to authorize or reject the spend without side effects. As a result, Cardano applications rely on off-chain infrastructure to trigger actions based on on-chain activity. At the same time, the term smart contract encompasses both the on-chain validation script and the off-chain infrastructure.

While both platforms enable the creation of DApps, Cardano's focus on formal methods appeals to those seeking robust, secure, and auditable smart contracts. Ethereum does boast a larger ecosystem, but Cardano's inter-blockchain communication protocol (IBC) integration now bridges this gap, granting access to numerous DApps and developer tools.

The IBC functionality significantly expands Cardano's reach and potential for DApp development. By addressing scalability and interoperability through sidechains and IBC, Cardano offers a compelling alternative for DApp development that may even surpass Ethereum in terms of robustness and future-proofing.

The key advantages of Cardano

Rooted in academic-solid research, Cardano's design principles and technological functions provide a robust base for its distinct advantages in the blockchain ecosystem.

• Peer-reviewed research: Cardano's technological foundation is built upon a rigorous framework, backed by numerous research papers published in peer-reviewed journals, ensuring audited robustness and security. This methodical approach prioritizes long-term stability and minimizes the risk of vulnerabilities.

• Scaling optimization: Cardano's innovative Ouroboros consensus protocol and layered architecture separates the settlement and computation layers. The platform aims to handle a growing user base and DApp ecosystem without compromising speed or efficiency. Cardano’s integration of the inter-blockchain communication protocol further scales the network, enabling reliable transactions and data exchanges across different blockchain networks.

• Deterministic execution model: Cardano's deterministic execution model, a key benefit of its EUTxO design, remains a primary reason that developers choose Cardano over Ethereum. The EUTxO's greater reliability allows developers to build more complex and sophisticated DApps, such as decentralized exchanges (DEXs) with intricate trading algorithms, without worrying about transaction failures or unexpected behavior.

• Competitive capabilities: Implementing sophisticated solutions requires minimal resources and offers predictable costs that align with actual usage.

• Advanced storage efficiency: Metadata records can hold multiple types of information, with a single transaction carrying a significant volume of data.

• International data standards: Metadata records follow structures and enable certification that meets industry standards. Cardano leverages metadata to store additional information alongside transaction data. This structured data enables efficient retrieval and analysis, promoting a more informative and versatile blockchain.

• Interactive information: Streamlined for machine, third-party software, and user readability, on-chain data and records allow effortless access.

What is Cardano used for?

The Cardano blockchain offers a powerful infrastructure for enterprise solutions across various industries. The network enables businesses to create secure, transparent, and efficient systems for supply chain management, identity verification, legal processes, and more. The platform's unique capabilities and characteristics make it well-suited for the traceability, authenticity, and sustainability required to optimize traditional business processes.

• Sustainable development goal (SDG) compliance: Cardano can assist enterprises achieve transparency and traceability in their sustainability initiatives by generating immutable records on the blockchain.

• Healthcare: Cardano can help secure, store, and manage patient records, ensuring data integrity and the seamless sharing of medical information between healthcare providers.

• Identity verification: Cardano's open source decentralized identity (DID) solutions are designed for seamless integration with blockchain and cloud-based systems.

• Intellectual property: Cardano can aid the protection of intellectual property by establishing permanent, immutable, and transparent records on the blockchain, providing a way to validate ownership.

• Supply chain management: Cardano enables end-to-end traceability, ensuring the authenticity and provenance of goods throughout supply chains. This fights counterfeiting and improves efficiency.

• Voting systems: Cardano's secure and transparent platform supports verifiable, tamper-proof voting systems, promoting trust and fairness in democratic processes.

• Financial services: Cardano can contribute to the facilitation and streamlining of payments, helping to reduce transaction costs and improve settlement processes.

• Decentralized finance (DeFi): In addition to enhancing traditional financial models, Cardano boosts a range of DeFi solutions, meaning individuals and enterprises can leverage a diverse ecosystem of secure, transparent, and cost-effective applications for accessing financial services, managing risk, and creating new business opportunities.

• Creative streams: From art to books and music, Cardano's EUTxO model—with its enhanced data support—provides artists with a secure and scalable platform for minting and managing a variety of NFTs, with multiple types of marketplaces further assisting the creative industries.

• Tokenization: Cardano's secure and scalable blockchain infrastructure offers enterprises a robust platform for tokenizing real world assets (RWAs), creating digital twins that bolster transparency and traceability while ensuring verifiable ownership.

The Cardano technical roadmap

Cardano's development has unfolded across distinct eras, each marking a significant milestone in the network's evolution. These eras, named after influential historical figures, focused on delivering specific functionalities and improvements, following a structured and methodical approach to continuously enhance and expand the capabilities of the Cardano blockchain.

• Byron: The foundational era that laid the groundwork for Cardano, establishing the basic infrastructure for the blockchain. It centered on launching the ada cryptocurrency and building the initial network infrastructure.

• Shelley: Cardano transitioned to a decentralized system, introducing stake pools and enabling ada holders to participate in the network's consensus mechanism. This marked a crucial step toward developing a highly decentralized and transparent blockchain, one that, consequently, efficiently aids enterprises to enhance trust in their operations.

• Allegra: This update marked a step towards smart contracts on the Cardano blockchain. Allegra focused on enhancing transaction scripts by introducing validity periods for spent funds, ensuring deterministic transaction execution even with complex time-related logic.

• Mary: Cardano upgraded to a multi-asset ledger, allowing transactions to carry both ada and user-created assets. This enabled minting and burning assets but introduced potential for network abuse. To counter this, Mary implemented a security mechanism requiring each transaction output to carry a minimum ada amount, acting as a deposit and preventing the creation of excessive, worthless tokens.

• Alonzo: Addition of Plutus, a powerful scripting language for creating complex smart contracts on Cardano. These scripts are appropriate for various functions, such as managing funds, delegation rights, and asset creation.

• Babbage: Improved Cardano's programmability, scalability, and governance. It enhanced Plutus, allowing reference to transaction inputs without spending them. It also reduced transaction size by enabling script referencing and optimized network efficiency through peer-to-peer communication and pipelining.

• Conway: Further decentralizes Cardano governance by replacing genesis keys with delegated representatives (DReps) and the Constitutional Committee. DReps represent ada holders in governance, while the committee upholds Cardano's constitution. This era introduces new management mechanisms, revises governance processes, and expands Plutus scripts for programmable governance actions.

The future of Cardano

Initiatives like Project Catalyst currently act as a testing ground for community-led governance. In fact, Project Catalyst allows ada holders to submit funding proposals, with the ecosystem votes determining which projects receive support.

Likewise, Cardano's governance system strives for decentralization and community participation. It involves holders voting on proposals to improve and implement changes to the network. A combination of on-chain voting and a treasury system helps to facilitate community-driven decision-making. The treasury, funded by transaction fees and a portion of newly minted ada, supports the development initiatives chosen by the community.

Additionally, the governance brought about by Conway and the frequently mentioned Voltaire will endow DReps with a flexible influence that can shift within an epoch, while SPO stake changes experience a two-epoch delay. As a result, DReps will play a more active role in governance, contributing to discussions and decision-making on behalf of their stakeholders.

Cardano stands not just as an example of the ongoing evolution of blockchain technology but at its forefront. Its unique architecture, focus on scientific rigor, and longevity differentiate Cardano in the blockchain ecosystem. As Cardano offers more solutions that cater to diverse industries, the platform empowers enterprises to drive innovation and efficiency through secure and scalable solutions, ultimately assisting world systems in shaping a more equitable and transparent future.