Cardano (ADA): What It Is, How It Differs from Bitcoin

What Is Cardano (ADA)?

Cardano (ADA) is a decentralized proof of stake (PoS) blockchain designed to be a more efficient alternative to proof of work (PoW) networks.

Cardano’s cryptocurrency is named Ada after Augusta Ada King, Countess of Lovelace (1815–1852), who is commonly regarded as the first computer programmer. Ada is used in the blockchain’s PoS consensus mechanism. It is given as a reward for work done for the blockchain by users participating in a stake pool.

History of Cardano (ADA)

Charles Hoskinson, the co-founder of Ethereum, began the development of Cardano in 2015 and launched the platform in 2017. Cardano has positioned itself as an alternative to Ethereum. Both platforms are used for similar applications, such as smart contracts, and have goals of building a connected and decentralized system.

Cardano considers itself an updated version of Ethereum and has anointed itself a “third-generation” platform, compared with Ethereum’s “second-generation” credentials. The blockchain platform also has a goal of providing banking services to the world’s unbanked.

Proof of Stake vs. Proof of Work

The Cardano platform runs on the Ouroboros consensus protocol. Ouroboros, created by Cardano in its foundation phase, is the first proof of stake (PoS) protocol designed to reduce the energy expenditure required by proof of work (PoW) mining. It does this by eliminating the massive computing resources that the proof of work algorithm uses.

There are currently two major consensus mechanisms that cryptocurrencies use to verify transactions:

• Proof of work, which is used by Bitcoin, requires users to solve complex cryptographic puzzles before they are added to the blockchain. This is also known as cryptocurrency mining.
• Proof of stake is more energy-efficient because it does not rely on crypto mining. Instead, it relies on multiple random validators to agree that a transaction is accurate before it is added to the blockchain.
  

What Is Cardano Staking?

In Cardano’s PoS system, staking determines a node’s capability to open blocks on the blockchain. A node’s stake is equal to the amount of Ada that it holds over the long term. A stake is an interest held by a pool participant, secured with Ada that is pledged. Pledged Ada cannot be used or spent by the holder because it is held as collateral for honest validation behavior. Users with pledged Ada are given rewards in the form of transaction fees. The rewards are distributed according to the amount of Ada that a user has staked.

Users join staking pools—groups of Ada holders who have pledged their coins—and work together to update the ledger, open new blocks, and earn rewards.

How Do Cardano Staking Pools Work?

Cardano uses the PoS consensus mechanism, in which users “stake” a coin for the opportunity to become a validator. Users can participate in the staking and validation process in two ways: You can become a stake pool owner or a stake pool operator. Stake pools are trusted server nodes that conduct the work of validating transactions.

A stake pool owner is someone who has delegated Ada to a pool. You can create your own stake pool and keep it private or allow others to join. You can also become a pool owner by pledging your Ada to another pool.

A stake pool operator is a trusted person tasked with maintaining the stake pool by renting servers, monitoring the node, holding the pool key, and other pool administration tasks.

Smart Contracts

Cardano implemented smart contract support in 2021 with its Alonzo update. This testnet update was the first iteration of bringing the promised scalability and use cases to users. This update allowed users to create smart contracts and non-fungible tokens (NFTs) and manage multiple assets. Future releases and forks will bring smart contracts and more capabilities to the mainnet.

Future of Cardano

Cardano is designed to be developed in “eras” named after notable figures in poetry and computer science history: Byron, Shelley, Goguen, Basho, and Voltaire. Basho is the era of scaling and optimization, intended to bring more capabilities to Cardano. As of 2023, Cardano is anticipating the transition from Basho to Voltaire. Voltaire is the final era for Cardano development, intended to bring voting and treasury management of the blockchain and network through previously introduced smart contract functionality and system improvements.

How Is Cardano Different from Bitcoin?

There are several key differences between Bitcoin and Cardano. Bitcoin was developed to be a peer-to-peer payment system. Cardano is an ecosystem that allows other developers to create tokens, decentralized applications (dApps), or other use cases for scalable blockchain network.

Cardano uses PoS in its consensus and doesn’t reward its cryptocurrency as an incentive in a competitive mining process like Bitcoin does. This reduces the energy and waste footprints by not requiring large amounts of electricity to power computers specifically designed for mining. Cardano users can install compatible wallet software on their computers or devices, stake their Ada, and begin earning rewards for participating.

What Is the Best Place to Stake Cardano?

There are several staking pools you can choose from to stake your Ada. It’s essential to thoroughly read through a pool’s website, user reviews, complaints, or issues to be sure that you’re joining a reputable pool. IOHK supports the Daedalus wallet, which lets you choose a pool to join. You can also use the community-built tools adapools.org, cardanoscan.io, pool.pm, poolstats.org, or pooltool.io to help you select a pool.

You can also use the Yoroi, Exodus, or Binance wallets to stake your Ada. However, Binance is a custodial service, which means it will hold onto your Cardano keys for you.

The Bottom Line

Cardano is a decentralized PoS blockchain that was founded in 2015 and launched in 2017. It has positioned itself as an alternative to PoW blockchain like Bitcoin mostly because it is more energy-efficient, as it does not rely on crypto mining.

The plans behind Cardano’s development are ambitious. Its developers see Cardano as eventually becoming fully decentralized when voting and treasury management of blockchain are added to its capabilities in the future.

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