Cardano — Blockchain 3.0

Akshay Kant
Jun 30, 2018 · 18 min read

The blockchain is said to be eliminating the central point of failure, changing the government operations, nature of democracy and achieving trust in this centralised world. Here we will be looking at blockchain from different design principles, their movement in solving the problems from digital payment to governance and building a stable platform of trust, acting as a backbone of the new internet. Starting from the revolutionary work from the unknown entity named as Satoshi Nakamoto who brought blockchain technology into existence through bitcoin, to how bitcoin is bringing digital cash over IP. We will be looking at Cardano and how it is using a proof-of-stake algorithm to
building the consensus system over proof-of-work and how it is evolving from the best of Bitcoin and Ethereum.


Introduction

One of the benefits of Blockchain is decentralisation and how this is changing the existing technology and governance, bringing the power of data and control from the hands of the centralised controlled entities to a transparent, decentralized network of trust. We will be looking at the different generation of Blockchain, how they have evolved technologically and changed the fundamentals leading to Web 3.0. Bitcoin, termed by Satoshi Nakamoto has lead to rule-breaking models giving power in the hands of the user from centralized governance, leading to the birth of a decentralised model.

Bitcoin (Nakamoto, 2008) is the first generation of Blockchain, bringing money over IP. Ethereum(Ethereum, 2013) made advancements to Satoshi Nakamoto’s network of trust, by adding smart contracts to it. Ethereum produced a new revolution to blockchain by adding the performance of credible transactions without third parties. Then comes Cardano, which build a network of trust by combining the benefits of Bitcoin and Ethereum and solving their issues of sustainability, security and scalability using Proof-of-Stake (Kiayias, Russell, David, & Oliynykov, 2017) instead of Proof-of-Work. Moreover, Cardano adds interoperability among different blockchains and between centralised entities and the decentralised world. Also adding upgradability feature (Liu, Tang, Chow, Liu, & Long, 2017), which gives the power of updating the network as and when required bringing the latest features to this system of trust. Cardano, which is the third generation of Blockchain, makes it as a possible solution to the new world of the Internet which is Web 3.0. The major issues with existing blockchain are scalability, interoperability, security and inclusion. Cardano’s proof-of-stake Ouroborous protocol based on approximate Nash Equilibrium (Chen & Deng, 2006) from game theory and dealing with the problem of double spend and
building a zero-knowledge proof.


Blockchain design Principles

Achieving trust in the digital age with accountability, transparency and consideration is the key which overpowered with the existing centralised and mutable world of businesses, government and internet. Vitalik Buterin, founder of Ethereum blockchain once stated, “most of the technologies focused on automating workers doing same and menial tasks, while blockchain automates the centre. Instead of putting taxi drivers out of a job, blockchain puts Uber out of a job and lets the taxi driver work with the
customer directly”.(Tapscott & Tapscott, 2016).

The blockchain is rewiring the financial system for speed and inclusion, protecting economic rights globally and cutting out bureaucracy and corruption in the centre. We will be looking at blockchain as a backbone of the new era of the web, through some of these design principles, how different generation of blockchain evolved and how Cardano is becoming the next generation.

Network Integrity

The integrity of the blockchain network is encoded in every step of the process and distributed, not vested in any single entity; it is because trust is intrinsic. Parties in the system can exchange value directly with the expectation that the other side will act with integrity. The value of integrity is encoded in decision rights, incentive structures and operations so that acting without integrity either is impossible or cost a lot more money, time, reputation and energy.

Even if the integrity of the network maintained, there comes a problem of double-spending, which is the problem solved by Bitcoin. “Double-spending is a potential flaw in a digital cash scheme in which the same single digital token can be spent more than once.” Suppose you own a unit of digital cash, it can be copied and send to multiple people. This is the reason banks holds the record of transaction of every customer on its database for payment authorisation.

Satoshi with his white paper on Bitcoin suggested a consensus mechanism to solve “the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions.” (Nakamoto, 2008) To achieve consensus, the bitcoin network uses what’s called a proof of work(POW) mechanism.

Network participants who run the fully operating bitcoin nodes called as miners. The selection of miner who creates the next block done by solving a hard mathematical puzzle which takes a lot of resources(computer hardware and electricity), but it is easy to verify for everyone in the network. To solve the puzzle, miners search for the hash that meets the target. It is statistically bound to occur every ten minutes, as it is a Poisson process. Miners gather pending transactions and run the data through a cryptographic digest function called the secure hash algorithm (SHA256), which output a 32-byte hash value. If the hash value is below a certain target(set by
the network and adjusted every 2016 blocks), then the miner has found the puzzle and has solved the block. The winning miner settle the transaction in the form of a block of data, and the process is repeated. Each block must refer to the preceding block to be valid. Anyone can see the transactions taking place, which make bitcoin more traceable over cash.

The main problem with bitcoin and its proof-of-work(POW) consensus mechanism is leading to centralization of mining pool and huge energy consumption. With the special hardware devices called application-specific integrated circuits (ASICs), providing a 1050x rise in mining efficiency, which is making mining with a regular computers CPU and GPU completely unprofitable. With higher costs both in terms of hardware and electricity, over time, a few pools start to control the majority of the network and the concentrated set of pools continue to gain more power over time.

Ethereum termed as second generation blockchain inherits the censorship-resistant, tamper-proof, economically secure and decentralised nature of Bitcoins consensus process. Moreover, Ethereum is not limited to peer-to-peer electronic cash system, but builds “an abstract foundational layer: a blockchain with a built-in Turing-complete programming language, allowing anyone to write smart contracts and decentralized applications where they can create their own arbitrary rules for ownership, transaction formats and state transition functions.” (Ethereum, 2013)

The Proof-of-Work(PoW) algorithm specifically designed for Ethereum is known as Ethash. The main reason for constructing a new Proof-of-Work function instead of using an existing one of Bitcoin was to solve the problem of mining centralisation, where a small group of hardware companies or mining pool acquire a large amount of power to impact or manipulate the network. Other factors that promote mining centralisation, such as handling of orphaned blocks, are tackled separately within the Ethereum protocol.

Ethash aims to provide a Proof-of-Work(PoW) algorithm for which commodity hardware is already highly optimised is by emphasising a property called memory hardness. Memory hardness essentially means that your performance is limited by how fast your computer can move data around in memory rather than by how fast it can perform calculating operations. Consumer graphics cards compete very strongly in this area, which means that a potential ASIC designer can’t easily do better: if they had a new idea for improving memory bandwidth it would be more profitable to sell that idea to
a graphics card company than to design a mining ASIC for it.

Bitcoin limits the power of smart contract developers to protect the blockchain from developer error attackers, a common pattern in programming platforms. On the other hand, Ethereum hands over most of the power to developers. Again a smart choice, given the purpose of the platform, but with has lead to attacks like the Parity hack (Parity, 2017) and the DAO hack (Dao, 2016) (Atzei, Bartoletti, & Cimoli, 2017).

Cardano said to be the first third-generation blockchain as it aims to solve the scaling, infrastructure and centralisation problems that initially came up in bitcoin, the first-generation network of trust that introduced the idea of digital coins, and ethereum, a second-generation blockchain which expanded use cases for digital coins to smart contracts. Cardano aims to solve problems related to scalability, interoperability, and sustainability with its platforms, eventually leading to building a protocol like TCP/IP which makes it as a backbone for the third-generation of the Internet. Cardano uses Proof-of-Stake(PoS) instead of Proof-of-Work(PoW) to solve these problems, and the
Proof-of-Stake(PoS) algorithm specifically designed for Cardano is known as Ouroboros(Kiayias, Russell, et al., 2017).

Proof-of-Stake(PoS) states that a person can mine or validate block transactions according to how many coins one holds, which is known as stake. There is no block reward, as opposed to Proof-of-Work, so the miners take the transaction fees. Proof-of-Stake(PoS) eliminates the need for hardware and is therefore immune to the hardware centralisation problem. Moreover, since miners are not required to expend massive amounts of energy to compute solutions to Proof-of-Work algorithms, Proof-of-Stake is inherently more energy efficient. It is a safer network as attacks become more expensive if a hacker would like to buy 51 percentage of the total number of coins, the market reacts by fast price appreciation.

Ouroboros is an approximate Nash equilibrium. “Nash equilibrium is a concept of game theory where the optimal outcome of a game is one where no player has an incentive to deviate from his chosen strategy after considering an opponent’s choice.”(Chen& Deng, 2006) Cardanos Ouroboros protocol is a chain-based Proof-of-Stake(PoS)protocol, where a node is selected to generate a new block, the process known as minting, with a probability proportional to the stake the node hold — the percentage of all coins they control, either by direct ownership or via delegation. The Ouroboros proto-
col divides the time into epochs, and each epoch divided into slots. The node is chosen to mint a new block called as a slot leader.(Kiayias, Russell, et al., 2017)

At the beginning of each epoch, a set of slot leaders chosen, and each is assigned the right to produce a block in a specific slot. The leaders and slot assignments are chosen based on the fixed stake distribution and a random seed, which is generated by a multi-party computation (MPC) among stakeholders in the previous epoch. “A multiparty computation (MPC) approach is used to achieve this randomness where each elector independently performs an action which is called coin tossing and after that
shares results with other electors. The idea is that each elector randomly generates results, but eventually they agree on the same final value.”(PoS, 2017)

To ensure that leaders are incentivized to always follow the protocol, Ouroboros introduces a check on block production through transaction endorsing. In each epoch a set of input endorsers is assigned to each slot based on stake. The input endorsers are responsible for endorsing transactions to be included in the block produced by the leader. The leaders block is only valid if all the transactions it includes have been endorsed by an eligible input endorser. Each epoch rewards leaders, input endorsers, and MPC participants to ensure that following the protocol is an equilibrium when all players are rational.(Cardano, 2017)

Ouroboros utilizes a Proof of Stake (PoS) approach to save on energy costs and enable faster transaction processing. Instead of having a copy of individual blockchains on each node (as is common in bitcoin), Cardanos blockchain streamlines the number of nodes in a network by appointing a leaders responsible for verifying and validating transactions from a collection of nodes. Subsequently, the leader node pushes transactions to the main network, and hence maintaining network integrity.

Distributed Power

The system distributes power across a peer-to-peer network with no single point of control, which means no one entity can shut down the system. Also, if more than half of the network attempts to overwhelm the system, everyone in the network can see what is happening. Satoshi builds the bitcoin network such that the energy cost of overpowering the bitcoin blockchain would outweigh the financial benefits. Bitcoin deployed a proof-of-work concept, inspired by Adam Back’s Hashcash (Hashcash) solution, to mitigate spam and denial-of-service attack. Participants maintain blockchain by keeping their copy of blockchain up to date and lending their spare computer processing using for mining. Every transaction broadcasted across the network for subsequent verification and validation, which maintains the distributed nature of the system, withdrawing power from a central third party.

But with the special hardware devices called application-specific integrated circuits (ASICs), providing a 1050x rise in mining efficiency, which is making mining with a regular computers CPU and GPU completely unprofitable and leading to mining pools controlling the majority of the network and gradually making it more centralised. Ethereum tries to solve this with its Proof-of-Work consensus algorithm, keeping network distributed by limiting the power across the memory rather than how fast it can perform calculation operations. But with this control, Ethereum is wasting machines power, as now less of hash power goes towards sequencing transaction.

Cardano with its proof-of-stake protocol Ouroborus, distributed memory pool and network topology, takes the advantages of both bitcoin and ethereum and makes its networks scalable and decentralised. Cardano adopted RINA (Recursive Internetworked Architecture) to scale its network and enables customised increments to heterogeneous networks. RINA takes as a point of departure the basic premise that networking is inter-process communication (IPC) and only IPC. (JohnDay)

Values of Incentives

The blockchain system aligns the incentives of All stakeholders. Satoshi expected participants to act in their self-interest. The network without gatekeeper will be vulnerable to Sybil attacks, where nodes forge multiple identities, dilute rights and depreciate the value of reputation. A Sybil attack in computer security is an attack wherein a reputation system subverted by forging identities in peer-to-peer networks. Satoshi programmed the source code so that, no matter how selfishly people acted, their actions would benefit the system overall and accrue to their reputations. However, they chose to identify themselves. Miners include the transactions in the block as leaving the block empty will not save any time, they still have to hash. Miners have invested in expensive hardware that is valuable only if bitcoins remain valuable. If too many miners mine empty blocks, confirmation times will go up, and the usefulness of the network will be diminished.(Nakamoto, 2008)

The paradox of these consensus schemes is that by acting in ones self-interest, one is serving the peer-to-peer network and that in turn affect ones reputation as a member of the economic set. Before blockchain technologies, people could not easily leverage the value of their reputation online. Ethereum and Cardano work with a similar incentive methodology but with their incentivising scheme and tokens. Cardano incentivises its participants using its Ouroboros protocol which is approximate Nash Equilibrium. This helps them in mitigating attacks like block withholding and selfish-mining. The core idea behind the reward mechanism is to provide a positive payoff for those protocol actions that cannot stifle by a coalition of parties that diverges from the protocol. In this way, it is possible to show that, under plausible assumptions, namely that certain protocol execution costs are small, following the protocol faithfully is an equilibrium when all players are rational.” (Kiayias, Russell, et al., 2017)

Security

Security measures embedded in the network with no single point of failure, and they provide not only confidentiality but also authenticity and integrity of activity. Satoshi required participants to use public key infrastructure(PKI) for establishing a secure platform. PKI is an advanced form of asymmetric cryptography, where users get two keys that have the different function — one is encryption, and other is decryption. Digital currency represented by transactions indicated by a cryptographic hash. Users keep crypto keys with their own money and transact directly with one another. With this security comes the responsibility of keeping one’s private key private.

Ethereum brought the power of smart contract (Al-Bassam, 2017) in their blockchain. Smart contracts are simply computer programs that run on Ethereum blockchain. This brought wider usability beyond digital cash to the blockchain network. Since multiple developers can write the smart contract and publish on the blockchain, it gave power to the hacker to breach the smart code. This lead to various smart contract attacks like DAO attack, Rubixi and many more. (Atzei et al., 2017)

Cardano divided its blockchain into two independent blockchain layers, which helped it in keeping the limited but robust capability of bitcoin and building more applied use cases like a smart contract on its blockchain. The two blockchain layers are:

  • Cardano Settlement Layer (CSL) The value ledger is called the Cardano Set-
    tlement Layer (CSL). This is a standalone blockchain, powered by the Cardano actual digital tokens known as ADA token. Ouroboros allows for features such as delegation, and sidechains, which will help in communicating with other blockchain layers.
  • Cardano Computation Layer (CCL) The second main layer of the protocol is called the Cardano Computation Layer (CCL); this is where information contained in the settlement layer is processed/computed, in particular transactions. This will provide developers ways of running smart contract and compatibility with other blockchains.

To achieve security, Cardano’s Ouroboros uses a mathematical proof of security based on persistence and liveness properties for a robust transaction ledger which is hard to break by an adversary. Persistence is a safety property which mandates that all nodes do not disagree when a transaction becomes stable and liveness requires that all honestly generated transactions eventually become stable. (Kiayias, Russell, et al., 2017) Basically, Cardano provides the same level of security as bitcoin when transacting on Cardano Settlement Layer but higher speed and transactional capability as a result of
its Proof-of-Stake Ouroborous protocol.

Privacy

People ought to have the right to decide the permission about their identity to share with anybody else. Through the network of trust, Satoshi eliminated the need to know the true identities of others to interact with them. With the centralisation of data, corporations are creating the digital clones of the individual by fracking the digital world for their data. Satoshi installed no identity requirements for the network layer itself to use the bitcoin blockchain. That’s how internet uses its transport layer TCP/IP protocol, without knowing the personal details of the end user. The application layer is responsible for that information, if needed. In the same way, identification and verification layers are separate from the transaction layer in the blockchain.(Tapscott & Tapscott, 2016)

Ethereum is building privacy in its blockchain with zk-stark (Zero-Knowledge Succinct Transparent Argument of Knowledge)(ZeroKnowloedge, 2017), which rely on public randomness using a hash function. With zk-stark, they preserve privacy of data, guaranteeing correct output reported, without compromising privacy. Zero Knowledge Proof argument makes use of randomness, cryptography and interaction to solve Computational Integrity and Privacy.

Cardano blockchain with the previous peers observed two common issues which arise in block and smart contract platform — storing metadata decisions and fixed user privacy. They tried to solve this by separating the blockchain into two layers — Cardano Settlement Layer (CSL) and Cardano Computation Layer (CCL). The settlement layer has a unit of account or value, while the control layer runs computations in the form of smart contracts. This separates the transaction layer from identification and verification layer, proving security and privacy with computational cryptography built-in. It is much like separate Transport and Application layer, with added security and immutability.

Right Preserved

The blockchain is a network of trust which have the proof preserved in its network about the existence of a transaction. Once done, it cannot be changed or deleted, which brings trust in the network. Bitcoin is built on this notion. The blockchain can serve as a public registry through such tools as Proof-of-Existence, a site which creates and registers cryptographic digests of deeds, licenses, documents and agreements on the blockchain, at the same time ensuring the confidentiality of the content.

With the same principle, Ethereum and Cardano are build. They incorporate smart contracts, a set of rules that accompanies a blockchain transaction and executes automatically whenever certain conditions met. This brings the potential to automate and streamline a wide range of common financial transactions such as insurance, financial derivatives, legal processes or online commerce and entities sticking to their rights, as there is no point of deviating from the initially set boundaries.

Inclusion

The economy works best when it works for everyone, which means lowering the barrier to participation and creating distributed market and connected to any system giving more accessibility. Satoshi designed the system to work on top of the Internet stack bit it could run without the internet if necessary. It is possible to interact with the blockchain through Simplified Payment Verification(SPV) (SimplifiedPaymentVerification, 2008). SPV interacts with blockchain without the hassles of maintaining a full network node. It ensures your transactions are in a block and provides Proof-of-Work(PoW) confirmations that additional blocks added to the chain.

Ehtereum is extending inclusion with their smart contracts through distributed applications which can run through any platform over the Internet. But lacking the interaction with the existing centralised entities like government, banks and other centralised systems.

Cardano stands out with a balance understanding the needs of regulators and users while working in privacy and regulation. It provides permissioned and permissionless blockchain for existing centralised and regulatory entities to work with their interest and uses to have an open trusted network. A permissioned blockchain restricts the parties who can contribute to the consensus of the system state. In a permissioned blockchain, only a restricted set of users have the rights to validate the block transactions. While in permissionless system, anyone can join the network and work towards the consensus system providing trust to the network. Cardano is acting as a bridge between existing and upcoming blockchain network and the regulated centralised entities; they are leading to a secure, trusted and inclusive Internet. They consider the full spectrum of usage, not just the state of high-end users, but the slow technology and power outages of user in developing to developed nations.


Conclusions

Satoshi with bitcoin gave a ideation to blockchain bringing in digital cash over Internet. Ethereum brought smart contracts to the system making the existance of the rights and inclusion with existing industry and use cases. Cardano is extending the vision of Satoshi and solving issues of bitcoin and ethereum. Cardano is bringing transparency to the centralised world with permissioned blockchain, forming a separate decentralised network, working with its digital cash ADA — making it widely used and accepted across the systems and community because of its versality and functionality. It is building the interconnection for communication among different blockchains through sidechains (Kiayias, Andrew, & David, 2017) and making Ada versatile and functional across the systems.

Cardano considered as the third generation of Blockchain, as it has the growth of community it needs, with a balance of research and development across security using game theory and cryptography, treasury, micro-transactional fee possibility, scalability, interoperability, assurance and smart contracts.(Roadmap, 2018)


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Akshay Kant

Written by

University of Edinburgh | Blockchain | Artificial Intelligence | Payments

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