How Cardano works: all about transactions and ADA

Girolamo Cardano was an Italian mathematician, physician, and academic to whom we owe the invention of the eponymous suspension, nautical compasses, and hundreds of other inventions. 

It is said that he was also a very good statesman, and it is likely that these were the reasons that led Charles Hoskinson, former co-founder of Ethereum, to create in 2015 the eponymous project, Cardano, paying homage to the name of the talented academic.

Born as an open-source project, Cardano aims to disrupt the Blockchain Trilemma paradigm, bringing smart contract applications to a new level of interoperability, similarly to Polkadot, a project by another former Ethereum co-founder, Dr.Gavin Wood.

Cardano: a world based on science and innovation

The project differs from the rest of the crypto landscape in several ways. In fact, it uses an unusual development method of a purely scientific nature: its entire development is, in fact, screened by continuous peer-review conducted by one of the three organizations that promote its development and that play an essential role in the Cardano ecosystem. 

One is the company founded by Hoskinson himself, IOHK, which produces, reviews, and publishes technical papers for the project’s development, where any implementation is analyzed by technicians, scientists, and academics. All of their peer reviews can be found on their website. 

The other two organizations are Emurgo, which is responsible for the commercial and entrepreneurial side, and the Cardano Foundation, which deals with the project’s governance and promotion.

It is clear that the character is mainly entrepreneurial and corporate, which distinguishes Cardano. According to some, it was the reason why Hoskinson founded it away from Ethereum and Vitalik’s vision more aimed at the community.

The native token is ADA, yet another reference to the scientific mold of the project, also in honor of a mathematician, Countess Ada Lovelace, also considered the world’s first computer programmer.

ADA uses a particularly efficient Proof-of-Stake consensus algorithm that takes the name of Ouroboros, capable of adapting to the various requests of the network, increasing its scalability by modifying delegators, checkpoints, and various sidechains depending on the use required, thus resulting in cheap, fast and low energy, all accompanied by a model of accounting type UTXO.

More specifically, it is an “extended” version expressly produced for Cardano called eUTXO, which introduces specific functionalities for the protocol’s native smart contracts.

Ouroboros exploits a non-competitive mechanism, as opposed to Proof-of-Work, in which to validate a block, you rely on a so-called Slot Leader. That’s selected randomly based on the staking of the ADA token; the more tokens you have, the greater the probability of being selected to finalize the block and win the block reward.

The rewards for these validators come, in fact, from the staking itself (currently at 5% ROI) provided by the protocol, in addition to the transaction fees for each block that is validated.

The validation of new blocks takes place in a fixed time frame of 5 days that takes the name of “epoch,” in turn divided into “slots,” which amount to 21,600 for each epoch, in essence, a slot every 20 seconds, which is thus a confirmation necessary for the finalization of the block.

Recently the last stage of Ouroboros, Hydra, has been released, introducing sharding in the Cardano PoS system, capable of processing 1000 tx/s.

Cardano Transactions

In Cardano transactions, the fees paid are very low, calculated according to a formula to prevent DDoS attacks and respecting the parameters related to the cost per byte of memories, how many transactions can be processed per second, how big a transaction must be and how much it costs to start a node of the network. 

All these parameters come from papers that the IOHK subsidizes for scientific purposes exposed above, demonstrating the scientific rigor of which the project boasts. The fee formula is as follows:

a = 0.155381 ADA

b = 0.000043946 ADA/Byte

Where “a” represents the fixed cost, and “b” represents the cost per byte of each transaction, it follows that a 200-byte transaction would cost:

0.155381 ADA + 0.000043946 ADA/Byte × 200 Byte = 0.1641702 ADA

All transactions are poured into a virtual pool to be later redistributed among slot leaders during block creation.

If you don’t have enough coins in staking to be eligible as a validator, you can still be a delegator, allowing you to earn part of the reward by delegating an operator and sharing the profits from the block validation. 

At each transaction, then, part of the block-reward (25%) is transferred into a treasury, a special support fund for the entire project, accessible only by voting, aimed at funding implementations proposed by the same token-holders through an on-chain voting system.

The scalability of Cardano produced by the logic we have just seen allows a very flexible throughput capability. ADA was capable of 7 tx/s, a figure deliberately hard-capped by the protocol, so until now, there has been no need to obtain more.

However, with future implementations, such as epoch parceling or native smart contracts, this specification is heading towards the thousand mark, as we have already seen with the Hydra implementation.

At this juncture, the resulting tokenomics involves a deflationary ADA supply mechanism, enacted by a distribution of token reserves for each epoch prefixed by the protocol. It depends primarily on:

• percentage of the circulating supply in staking;
• the number of coins in the treasury.

According to the protocol, no more than 0.3% of ADA reserves can be released for each epoch. Those released correspond to 0.3% multiplied by the percentage of stacked ADA compared to the circulating supply.  

The absolute ADA inflation rate will, in fact, be:

0.3% * 0.7 * 13 billion ADAs = 27,300,000 ADAs each epoch.

That makes ADA inflation tend to zero over time, finding many parallels with Bitcoin’s halving.

Layered Structure

Another feature of Cardano is that it has divided the blockchain’s functions into two separate layers that work in unison. That also contributes to its scalability. These are divided into:

The Cardano Settlement Layer (CSL): a layer responsible for the economy of tokens and balances of all accounts. ADA is traded on this very layer.

The Cardano Control Layer (CCL): this layer houses all the functions of the smart contracts that exist on this layer.

This double management allows you to work separately on these two layers, being particularly useful if you want to insert updates only on the part of the system and in case there is a problem. You can work on only one layer without affecting the other one in both cases.

Roadmap 

There are five release stages of Cardano, and today the platform is only in its third era, called Goguen, which is the implementation of smart contracts. 

Two more significant updates are planned for the future: Basho and Voltaire. With the first of the two updates, the intention is to further optimize the protocol’s scalability by proposing the inclusion of sidechains that will be interoperable with Cardano’s main chain and the parcellation of epochs, as already mentioned. 

Finally, the last planned update aims to realize an even more decentralized system than the existing one that can be self-sufficient in its development, aiming at sustainability and new voting (DAO) and treasury systems.

Conclusions

ADA has been the talk of the town in the last month, registering noteworthy performance although far from its all-time high, a sign that there is still a lot of interest in Cardano and in the project it intends to implement.

That’s reflected in a good portion of users, raising heated controversy in the rest of the detractors who dispute the lack of decentralization due to its entrepreneurial mold and resuming old feuds with the co-founders of Ethereum. 

One thing for sure is that its development is far from stopped, and, strong of a solid community, it is very likely that it still has much to prove to the market.

“Doesn’t matter the shirt I wear or the position I hold, the vision and mission are always the same” – Charles Hoskinson.