Cardano (ADA): What Is It & How Does It Work?

Nicknamed the “Ethereum Killer”, Cardano is an unconventional blockchain designed to support more than just simple digital transactions. Like Ethereum, it’s also a software platform for building smart contracts and other decentralized applications (dApps). Unlike Ethereum, however, Cardano stands out with its unique dual-layer infrastructure and climate-concious Proof of Stake (PoS) mechanism called Ouroboros. Long before ETH 2.0 was black ink on a whiteboard, Cardano was purpose-built for scalability, security, and energy efficiency from conception. At the heart of the project is a commitment to social inclusion and long-term relevance. Here’s what to know about Cardano (ADA).

Cardano vs. Ethereum at a Glance

What is Cardano?

Cardano is a decentralized blockchain that keeps a secure and transparent record of transactions. This record is a distributed ledger stored across a decentralized computer network. That means the network is not owned or controlled by a single person or group of people. Anyone can access the ledger to view the transaction history, but no one can make changes. 

ADA is the native cryptocurrency that runs on the Cardano blockchain. It is used for transactions, smart contracts, and governance - acting as the fuel that powers and secures the network. 

Who Created It & Why?

Cardano is the brainchild of Ethereum co-founder, Charles Hoskinson. As a pre-established heavyweight in the crypto space, he sought to address the major problems faced by older blockchains like Bitcoin and Ethereum. He wanted to design a blockchain with scalability and efficiency baked into its code from the outset instead of the short-sighted “cross that bridge when we get to it” approach. 

Based on his experience, he identified several significant blindspots plaguing legacy blockchains. They operate on a single layer that handles both accounting transactions more complicated functions like smart contracts and other applications. This makes them incredibly inflexible and inefficient in the long run. 

As demand grows, these blockchains struggle to process increasing transaction volumes quickly and cheaply. They also tend to operate in silos, unable to easily interact with other blockchains. This inhibits seamless interactions and information flow between different networks, which can feel like sand in the gears for anyone trying to engage in the space. 

Early blockchains, if not most, are built with exceedingly little regard for evidence-based development methods. This lack of academic rigour has resulted in security vulnerabilities and inefficiencies with many blockchain projects. 

Cardano’s Development Principles

Decentralization tends to erode over time. Network influence and project development becomes concentrated among a small group of people with the means to out-participate others in the community. And finally, the amount of energy required to power older blockchains is a serious environmental concern and unsustainable long-term, especially as crypto adoption grows. 

So Hoskinson set out to do things differently by writing a mission statement for Cardano, rather than a whitepaper. The Cardano blockchain is built differently with a few guiding principles including, but not limited to: 

Splitting the work: a two-layer system separates the job of tracking money called the settlement layer, from the job of running programs, called the computation layer.

Research is king: highly skilled teams including academics, industry professionals, security experts, etc., consult peer-reviewed research, develop evidence-based protocols, and check each other’s work to make sure it’s solid. The team also assesses what other cryptocurrencies are doing and adopts the good parts. 

Long-term thinking: code is written specifically so it’s easier to manage, improve, and scale. This allows the developers to quickly move from theory to building stuff and then back to theory to fix any problems they find. It also makes it possible to execute upgrades without compromising the network. 

Interoperability: designed to support different types of assets on the same network and transactions compatible with traditional systems.

Democratic participation: the people who own and use Cardano have a say in how it’s developed and operated. 

Social responsibility: the team considers how digital money fits into the bigger picture of society and the economy, keeping this top of mind during the decision-making process.  

Environmental sustainability: one of the first blockchains to use the energy-efficient Proof of Stake (PoS) consensus mechanism from the get-go instead of transitioning to it later.

How does Cardano work?

As of 2021, more than two-thirds of Cardano's maximum supply is already in circulation. The fixed supply cap is a feature designed to minimize inflation over time, effectively protecting its value. New coins are mined through a process called staking, when ADA holders earn rewards for validating blocks. 

The total maximum supply of Cardano is capped at 45 billion ADA.

Multi-Layer Blockchain

Cardano’s dual-layer design is a significant departure from the traditional single-layer blockchains. From the beginning, it consisted of the Cardano Settlement Layer (CSL) and the Cardano Computation Layer (CCL). 

The settlement layer is basically the brawn of the operation. It primarily functions as the ledger of accounts and balances. This layer is where all ADA transactions are recorded to ensure that transfers between wallets are fast, cheap, and secure. 

The computation layer is the brain, where things like smart contracts and computational logic reside. This layer is flexible to support the creation, deployment, and execution of complex applications. Updates, optimizations, and changes can be made to the computational aspects of Cardano without impacting the ledger, effectively improving the blockchain's security and scalability.

Ouroboros Consensus Mechanism

The Cardano network uses a PoS consensus mechanism, called Ouroboros, to secure the network, validate transactions, and mint new coins. This protocol is an eco-friendly, digital neighbourhood watch program where ADA holders compete for a chance to ‘serve and protect’.The more ADA you stake, the more likely you’ll be chosen as ‘neighbourhood watch’ and earn rewards. 

If selected, ‘watchers’ validate transactions and add new blocks to the blockchain. They pass this duty to the next selected watcher in a continuous, cyclical process, like a relay race. This method is more energy-efficient than the Proof of Work (PoW) method used by Bitcoin and other cryptocurrencies. It also ensures that all transactions are secure and accurate to maintain the integrity of the network.

Transaction Security

To secure transactions, Cardano uses a specific type of elliptic curve cryptography (ECC) called Ed25519. Elliptic curve cryptography is just a fancy way of creating secret codes that help keep online transactions safe. 

It works by using special curves and points on these curves to make a pair of keys: one key you never share with anyone (private key) and another you can share with everyone (public key). Ed25519 has gained popularity for providing high-speed cryptographic operations while protecting against common attack channels. 

Other Unique Features

Two particular features help Cardano stand out from other projects. A unique scripting language is used to build decentralized applications (dApps), and side chains are used to connect with other blockchains. 

Plutus Scripting Language

Plutus is the programming language used to create smart contracts on the Cardano blockchain. This unique script is designed to be both powerful and safe. It makes it easier for developers to build apps that work exactly as intended without any nasty surprises. 

KMZ Sidechains

In the spirit of interoperability, Cardano has built mini-blockchains called KMZ Sidechains. These sidechains link up to the main blockchain like branches on a tree. This makes it possible for Cardano to securely connect with other blockchains, communicate, and share information. By building bridges between islands, you can move back and forth, share resources, and collaborate.

Development Milestones

Cardano is constantly evolving with continuous evidence-based upgrades. In 2020, the Shelley upgrade was a major leap that made the network operate more like a super-efficient, decentralized city council. This resulted in one of the most accessible and inclusive blockchains in the crypto space. With the Alonzo hard fork in 2021, Cardano now allows users to build their own decentralized applications (dApps), deploy smart contracts, and engage with NFTs on its blockchain.

Pivotal Moments in Cardano’s History

Ready to Invest in Cardano (ADA)?

Thanks to it’s commitment to peer-reviewed research and long-term relevance, Cardano (ADA)  has firmly established itself as a top 10 cryptocurrency by market capitalization. However, it faces stiff competition from Ethereum, the world’s second most popular crypto, and other self-proclaimed “Eth Killer” blockchains. We can’t predict the future, but the 2024 crypto market performance so far indicates a promising year for ADA. 

Skip the intrusive account opening process of online exchanges. You can easily buy ADA at any Localcoin ATM. And you’ll enjoy the privacy and convenience that comes with cash transactions. Even if you’re a beginner, Localcoin ATMs are straightforward with guided prompts to help you every step of the way. 

Secure, private, and right within your reach—experience how easy it is to invest in Cardano. Find a Localcoin ATM near you today!