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The short version

  • Cardano is a “3rd generation crypto” (Bitcoin > Ethereum > Cardano) that’s significantly faster and more climate-friendly than its predecessors.
  • It uses a scalable proof of stake protocol called Ouroboros.
  • Cardano hasn’t proven less volatile than other tokens in its class.

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What is Cardano?

Launched in 2017 by one of the co-founders of Ethereum, Cardano is an ambitious “third generation” cryptocurrency (Bitcoin > Ethereum > Cardano) that aims to be both scalable and energy efficient.

You can think of Cardano this way: if Bitcoin is a gas-powered car and Ethereum is a hybrid, Cardano is a fully electric vehicle. It’s designed from the ground up to be faster, vastly more energy efficient, and holistically better than everything that’s come before it.

Cardano’s native currency is called ADA. ADA can be used to pay for transaction fees on the Cardano platform. It can also be traded as an exchange of value on popular exchanges like Crypto.comGemini, and Binance.

What is Cardano used for?

The Cardano blockchain can be used for a variety of purposes, including but not limited to:

  • Decentralized applications: Developers can use Cardano to build decentralized applications (dApps). Many of the dApps that have been built on Cardano are related to decentralized finance (DeFi).
  • Smart contracts: Smart contracts are self-executing contracts that can be used to automate transactions. When most people think of smart contracts, they think of Ethereum. But Cardano can run them too and (currently) much more efficiently.
  • NFTs: Cardano can be used to create non-fungible tokens (NFTs). According to Pool.pm, over 5.7 million NFTs have been minted on the Cardano blockchain.
  • Decentralized exchanges: Cardano’s sophisticated smart contract functionality makes it an ideal platform for building a decentralized exchange (DEX). Multiple DEXes have already been built on the Cardano blockchain including SundaeSwap, Cardano Cube, and Minswap.

Cardano is a versatile platform that can be used in several ways. But, to be fair, many other blockchains offer these same core functionalities.

So what makes Cardano stand out from the pack? Let's take a closer look.

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In a sea of 10,000 cryptos, what makes Cardano unique?

Bold plans to dethrone the king and queen of crypto hardly make Cardano special. Virtually every crypto launched since 2011 made some sort of coup attempt, and all have failed.

So if ambition alone doesn’t make Cardano stand out, what does? How and why did Cardano catapult into the top 10 globally-traded coins?

Well, just like a Tesla Model S, Cardano is a collection of cool features that merge into a unique and compelling whole. Among many reasons, Cardano stands out because it’s:

  • Peer-reviewed: Most crypto projects go straight from concept to reality with little outside input, but not Cardano. The team had their white paper peer-reviewed by global experts before doing any development.
  • Capable of insane speed: While the Bitcoin blockchain can process roughly five transactions per second and Ethereum can handle 15, Cardano is designed to scale up to one million TPS.
  • Sustainable: By using a state-of-the-art proof of stake protocol called Ouroboros, Cardano operates at up to four million times the energy efficiency of Bitcoin (and also allows for staking rewards, which we’ll cover in a bit).
  • Interoperable: Cardano’s answer to crypto’s scalability problem is to design an interoperable blockchain with other existing blockchains. The ultimate vision would be to create a massive blockchain chain (my words, not theirs).
  • The treasury: Finally, one of Cardano’s more compelling methods of “future-proofing” is by baking in a unique treasury system. The way it works is a tiny percentage of each transaction is deposited into a wallet controlled by Cardano, almost like a tax. Then, the team and the community can vote on how to spend it to support the ongoing growth and development of the Cardano blockchain.

Next, let’s zero in on the Ouroboros protocol and why it might make some investors choose Cardano over its older brother Ethereum.

Ouroboros and the significance of proof of stake

Brace yourself for some dense crypto jargon:

Insert Pull Quote

Phew. Alright, let’s unpack all that.

In order for crypto blockchains to remain secure and uncorrupted, they need automated programs called “consensus algorithms” that do two things:

  1. Elect a computer (aka node) to play the “accountant” and add the next block of data; and
  2. Ask every other computer on the blockchain if they “agree” with the change.

Without going into too much detail, computers tend not to “agree” with clearly fraudulent data, so they effectively vote “thumbs down” and keep it off the blockchain.

Now, Bitcoin and Ethereum use a “proof of work” consensus algorithm that elects its next temporary “accountant” based on who has the fastest computer. That’s why Bitcoin is sucking up more electricity than Argentina. Everyone is vying for a faster, more powerful computer, so they get chosen as the “accountant” more often and win more Bitcoin as a reward from the blockchain.

But in a proof of stake system, the next “accountant” is chosen randomly. There’s no need to have a more powerful computer than your neighbor. All you need to do is “stake” some of your ADA (Cardano’s official crypto) on the Cardano blockchain, and you’ll generate interest commensurate with the amount you deposit — not unlike a high-yield savings account.

Compared to proof of work, proof of stake is:

  • Significantly more energy efficient;
  • Requires less hardware; and
  • Generates more consistent rewards.

What is Ouroboros?

The Cardano team could’ve used vanilla proof of stake and called it a day, but they innovated a step further and came up with Ouroboros.

Ouroboros built a structure around the pseudo-random selection process of the next computer “accountant” to validate a transaction on the Cardano blockchain. It’s kinda complex, but it looks something like this:

  • Ouroboros divides time into five-day Epochs
  • Each Epoch contains 21,600 “slots” full of transactions
  • Each slot automatically goes to one of 2,500 “stake pools” to validate
  • Cardano adds your ADA to a stake pool
  • Whenever your stake pool gets chosen, everyone inside gets rewarded

Since each stake pool gets plenty of “homework,” everyone can generate pretty consistent APY by staking the Cardano token, ADA.

But Ouroboros isn’t just rewarding and efficient — it’s scalable. That’s a big, big deal because no other crypto is scalable enough to operate as a global currency.

Cardano vs. Ethereum

Even though many crypto enthusiats consider Cardano a direct successor to Ethereum, there’s still plenty of debate around which is the superior crypto.

Both support NFTssmart contracts, and DeFi apps. Both are more efficient than Bitcoin in every meaningful way. Heck, they even share a dad in common.

Fans of Ethereum will quickly point out that its magnitudes are more valuable. Also, although it’s hemorrhaged a little market share as of late, Ethereum still hosts 80% of all NFTs.

But Ethereum has run into the same issue crippling Los Angeles: traffic. The Ethereum network is choked up, resulting in gas wars and high fees.

Plus, until the endlessly-delayed launch of Ethereum 2.0, Ethereum continues to run on a proof of work protocol, ignominiously contributing to crypto’s devastating environmental impact.

So, until Ethereum 2.0 arrives to reignite the debate, Cardano appears to be the superior sequel to the world’s second favorite crypto.

The bottom line

Like the Tesla of crypto, Cardano is an innovative, feature-rich, and fascinating project to watch. It’s easy to buy, easy to stake, and perhaps best of all, guilt-free for ESG investors.

That said, Cardano is still crypto at its core; it isn’t immune from the intense volatility of its asset class.

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Chris Butsch Freelance Contributor

Chris helps young people prosper - both mentally and financially. In addition to publishing personal finance advice for Investor Junkie (now Moneywise) and Money Under 30, Chris speaks on the topics of positive psychology and leadership through CAMPUSPEAK and sits on the advisory board of the Blockchain Chamber of Commerce.

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