Cardano ($ADA) Fundamental Analysis

Cardano is one of the biggest cryptocurrencies in the game by market cap, but it’s also one of the most misunderstood. For many of us, Cardano’s appearance on CoinMarketCap.com was a bit of an anomaly. One day, it was just there, ranked high up, and nobody knew what the hell it was. To this day, that may still be the case.

Let’s break the ice on Cardano and get a firm grasp of what the project is, what its developers hope to accomplish, and where the project is headed. As you may well know, Cardano’s underlying currency is called ADA. At it’s most basic, the Cardano blockchain is a financial system which operates in two layers, with the most basic of those layers being the one upon which ADA is exchanged. This basic layer of Cardano is expressly built to enable a digital currency economy with ADA as the native monetary unit.

All things considered, Cardano’s primary goal of creating a digital currency economy using its ADA token isn’t much different from Bitcoin’s purpose. People want to send and receive digital currency on a secure and decentralized blockchain — they can do it using Cardano. But, is that all Cardano is for? The answer is no.

Cardano’s second layer and the way it interacts with the first is where things start to get interesting. Atop the first layer, called the Cardano Settlement Layer (CSL), is the Cardano Computation Layer (CCL). This is the layer for smart contracts — but at this point, you may be wondering — why create separate layers for settlement and computation at all? Ethereum handles settlement and computation on the same layer and seems to be just fine.

This question gets to the crux of Cardano’s raison d’être. The Cardano team is building its blockchain using a scientific philosophy and a system of academic peer-review. In scientific academia, Occam’s razor prevails. For the unfamiliar, Occam’s razor essentially means that the most simple answer with the least complexity (and assumptions) is usually the correct one. Cardano brings that viewpoint to the blockchain by introducing the following fundamental guiding principles in designing their blockchain:

  1. You cannot predict the future, so build in wiggle room
  2. Complexity is nice on paper, but simplicity usually wins
  3. Too many cooks spoil the broth
  4. Once a standard is set it will probably stick around, regardless of whether it is suboptimal
  5. Bad ideas can actually evolve into pretty good ones if there is a will

Owing to the Cardano team’s dedication to simplicity, they’ve chosen to keep the ledger aspect of the blockchain (accounting of value) separate from the computation aspect of the blockchain (why the value was moved). Using a dual-layer setup keeps things neat, tidy, and allows for design flexibility.

True to its name, the CSL’s purpose is to account for value. Cardano built this layer with the following goals in mind:

  1. Support two sets of scripting languages, one to move value and another to enhance overlay protocol support
  2. Provide support for KMZ sidechains to link to other ledgers
  3. Support multiple types of signature including quantum resistant signatures for higher security
  4. Support multiple user issued assets
  5. Achieve true scalability, meaning as more users join, the capabilities of the system increase

According to the Cardano team, Bitcoin’s scripting language is too rigid, whereas Ethereum’s Solidity language is far too complex. That’s why the team has developed Simon, a simple scripting language that can handle the range of common transaction types for the CSL. The main purpose of developing a simple scripting language is that it can be understood by more people, thus allowing widespread peer review and, in theory, enabling greater script security and execution.

If you’re already familiar with the way sidechains operate, then Cardano doesn’t offer anything too new in this regard. KMZ sidechains operate much like other sidechain solutions like Lightning, Celer, and Matic. The only big difference here is that Cardano-specific sidechains allow for the movement of funds in/out of the CSL and onto computational layers or other blockchains built to support KMZ/Cardano. The nice thing to note in regard to KMZ sidechains is, however, that Cardano is already built with scaling its settlement layer in mind. While there aren’t too many details about its sidechains as of current, we’d hope that this functionality will help to avoid transaction speed bottlenecks like the ones that so drastically affect both Ethereum and Bitcoin.

The CSL is also the site of what is termed User Issued Assets (UIA). Similar to Ethereum’s ERC system, Cardano UIAs allows users to create and issue tokens on the Cardano blockchain. However, whereas ERC token creation and use require ETH in every transaction, adding bloat and expenditure of resources, UIA tokens won’t require ADA as a fuel source. Instead, ADA will act as a bridge token to create decentralized markets around the UIAs on the network.

The CCL is where smart contracts come into the frame. Whereas the CSL handles the accounting of the movement of assets, the CCL deals with the why of those movements. The reasons behind asset movements are typically complex, from a dataset standpoint, and as such are resource/storage intensive, often requiring terabytes of data. Additionally, the activities/reasons behind decentralized applications running on a blockchain may not be ones supported or endorsed by the network and its operators as a whole. For instance, should users engage in illegal behavior by creating dark web-like apps, then in a sense, the entire network of operators endorses their behavior, even if they don’t agree with it (or are aware of it), just by virtue of continuing to devote resources to the network.

As such, Cardano opted to create the CCL as a separate layer. Decentralized programs will require some form of gas economics and nodes will have to opt to include the transactions from those programs in their blocks, giving the network leverage over the types of behavior that are permissionable on the Cardano blockchain. So, this separation between the root CSL layer and the CCL layer allows for a degree of network protection from computational, legal, and moral perspectives.

The CCL can be used to partition different use cases like enterprise/permissioned ledgers, gambling apps that are KYC or geo-restricted, and much more. Again, the advantages of separating the CSL and CCL layers of Cardano allow for a great degree of use-case flexibility, especially for applications that require a blockchain but aren’t comfortable with a public chain like Ethereum.

The key to Cardano’s scalable, decentralized future is Ouroboros, its unique proof of stake consensus algorithm. Proof of stake algorithms are becoming a staple of the blockchain world for a few good reasons:

  1. They’re energy efficient and place much less strain on the Earth’s resources than proof of work-based blockchains like Bitcoin do.
  2. They have a lower barrier to entry for participants since they don’t require specialized hardware (i.e., expensive and powerful mining rigs).
  3. They promote decentralization because they’re easier for more people to join in on.

However, PoS algorithms aren’t without their issues. The biggest strike against them is what’s known as the nothing at stake problem. It costs nothing (in ADA) for stakers to create a block. If a clever attacker created blocks or was able to incentivize others to do so, and if that chain became long enough, it could effectively rewrite the blockchain’s history.

Ouroboros gets around the nothing at stake problem with a clever yet simple solution. Each block has a pre-assigned producer, and that producer (called a slot leader) is approached under the assumption that they’re compromised. This skeptical approach leads to all participating nodes evaluating the slot leader to the maximum, ensuring an honest operation of the blockchain’s rules.

Apart from having an elegant solution to security, Ouroboros has been designed with flexibility in mind. According to the Cardano team, “As a network develops from having thousands to millions and even billions of users, the requirements of its consensus algorithm will also change. Thus, it is vital to have enough flexibility to accommodate these changes and thereby future-proof the heart of a cryptocurrency.”

Rather than reinvent the wheel, Cardano has contented itself with creating a hybridized system which runs on original blockchain innovations mixed with traditional systems solutions. Ouroboros, after electing a quorum of consensus-building nodes in a decentralized way, runs traditional protocols built to scale systems like Google and Facebook. So, when they say that they envision hosting billions of users one day, they mean it — and are building for that future in an appropriate manner.

Who is Cardano for, and what is their vision for the platform? At its most basic, Cardano is a blockchain-based financial stack aimed at revolutionizing finance for emerging markets like Africa, Southeast Asia, and other underserved parts of the world.

In the Cardano team’s view, the banking industry will be disrupted by blockchain, but there’s a good chance it can absorb that disruption and appropriate the revolution in its favor. Emerging markets, on the other hand, have been historically underbanked and so represent a more fertile ground for entrenching a new and more beneficial decentralized financial system.

As written in the Cardano whitepaper, “…one ought to look to places where it is simply too expensive to deploy the existing banking system, where many live on less than a few dollars a day, have no stable identity and credit is impossible to find.”

In Cardano’s vision of the decentralized financial future for the developing world, users will have a payment system, property rights, stable identity, and credit/risk protection all bundled into one neat app running on a mobile phone. It’s a clear vision from a team that seems laser-focused on delivering a targeted objective rather than a catch-all blockchain — and if anyone can deliver on it, they can.

Cries of “when Shelley?” reverberate across every Cardano social media channel there is. Shelley is a major milestone in Cardano’s roadmap that has been pushed back for several fiscal quarters. The update will see staking finally rolled out to normal participants instead of being run amongst a closed test network of participants.

In the Shelley era, a delegation and rewards system will be introduced which gives stakers an incentive to decentralize and validate the network. It’s understandable if Cardano hodlers have been impatiently waiting for this update as it will soon give ADA tokens a purpose — and real value. Shelley is slated to be released in this fiscal quarter (Q2), however, with June running out of days, whether they’ll meet that release date is yet to be seen.

Cardano’s team hardly needs an introduction — and by team, we mean Charles Hoskins, the founder of IOHK and one of the founders of Ethereum. But first, about all those foundations… There are three foundations currently contributing to the development of Cardano. They are IOHK, Cardano Foundation, and Emurgo. Each organization plays a different role in the development of Cardano. The Cardano Foundation is the media and adoption arm tasked with promoting Cardano far and wide. Emurgo, a Japanese support structure for Cardano, is seeking out and building support for the ecosystem across Asian markets. Lastly, IOHK is the technology arm composed of engineers who are doing the actual coding/construction of the Cardano system.

Together, all three organizations support Cardano’s total vision and bring numerous talented PhDs, research scientists, and world-class software engineers into the fold. Amongst those talents is Prof. Aggelos Kiayias, Ouroboros’ chief architect.

Strength: Cardano’s undeniable strength rests in its unique value proposition. They aren’t targeting the entire smart contract market along with every possible DApp out there. Instead, they’re focused on creating a plausible decentralized financial system for the developing world. Given how unattended by the banking industry the developing world is, as a concept and humanitarian goal, Cardano is spot on. Given that they have real firepower on board to make the goal a reality, and have several foundations filled with talented people doing the legwork, Cardano has a real shot at adoption in places like Ethiopia, where Cardano recently struck a deal to use their solutions in the agritech industry there.

Weakness: Cardano has been slow to deliver on their promises. Time and again they’ve delayed the rollout of Shelley, and backers are starting to get concerned over whether the team is stalling, or genuinely needs the extra development runway. Secondly, and even more notably, is the turbulence between different foundations supporting Cardano. In late 2018, Charles Hoskins released an open letter the head of the Cardano Foundation, Michael Parsons, in which he called for Parsons to resign. He accused Parsons of not supporting Cardano as promised. The dispute ended in Parsons’ resignation after the Cardano community stepped in to support Hoskins.

Opportunity: Cardano represents a significant opportunity for investment should its financial ecosystem begin to take hold within the markets it’s seeking to impact. The ADA token supply is capped at 45 billion, and given that the network’s strength grows with decentralization, the incentive to buy, hold, and stake ADA tokens out of circulation is intact. Given those factors, and the wide-sweeping mission of the Cardano project — one that is unique to Cardano — there is ample opportunity for HTF investors.

Threat: Cardano’s value proposition may be unique, but other smart contract platforms can do what it wants to do without a hitch. Those other smart contract platforms include Ethereum, Zilliqa, Quarkchain, Stellar — the list goes on. Cardano’s lag time in getting ahead of roadmap milestones is concerning if DApp developers building on rival platforms wise up and take aim at the same markets Cardano hopes to operate in.

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