Cardano: Peer-reviewed blockchain for the third-generation — Analysis & Review

OVERVIEW

Cardano sees itself as a third-generation blockchain network that will solve problems that currently frustrate the blockchain space, while ensuring that its technology is peer-reviewed and implemented in a high assurance manner.

The project is ambitious and intends to tackle problems of scalability, interoperability, and sustainability. To achieve its goals, the Cardano project is proposing a layered architecture where it splits its stack into two layers, which will function in a coupled manner, but maintained as two distinct parts of the system.

Major components of the Cardano project:

• Cardano Settlement Layer (CSL) is the part of the Cardano ecosystem that is focused on the distributed ledger aspect of the project. The settlement layer is the layer in which value is transacted
• Cardano Computation Layer (CCL) is the part that is responsible for bringing a programming language to the Cardano blockchain. It will interact with CSL to result in settlement
• Daedalus is the name of the wallet which will house Cardano’s tokens. However, Daedalus is not built to just house a single currency. It is an open source wallet aims to eventually be compatible with multiple currencies and even serve as a platform for Dapps to build on

CAPITAL STRUCTURE

The token of the Cardano blockchain is called ADA, the token on the ADA blockchain will serve the dual purpose of being a medium of exchange as well as the method of payment for the transactions fees. The full details of the ADA token can be found here. However, this is a quick breakdown of the capital structure of the project.

Here are some key points related to the ADA crowdsale:

• The crowdsale participants were almostentirely in Asia with Japan accounting for 94% of all initial token sales
• The initial sale was done in the form of redeemable vouchers which allowed the holder to redeem ADA on the Cardano blockchain
• During the sale, 5.1 Billion ADA were generated and divided amongst three organizations — IOHK, Emurgo and Cardano foundation. They represent the technical and business development parts of the Cardano ecosystem
• 31.1 Billion ADA were distributed in total at launch. The remaining 13.8 Billion ADA will be given as rewards for minting as a result of the Cardano Protocol operation
• Given the crowdsale numbers, a total of around $62 million was raised

Distribution of ADA by country in the genesis block

Use of Proceeds

While documents related to the use of proceeds are not easily found, we know that the funds were disbursed to three main organizations:

• Cardano Foundation, generally speaking, is in charge of the community and regulatory aspects of Cardano Protocol and its applications
• Emurgo is the for-profit part of the Cardano ecosystem and is responsible for driving the commercial applications of the Cardano ecosystem
• IOHK is a blockchain engineering company that is responsible for building the Cardano blockchain

Given the fact that IOHK is contracted till 2020 to build the Cardano blockchain, we can estimate that the annual burn rate is around $12million. IOHK has more than 30 listed employees last working on Cardano and Daedalus. Additionally, the Cardano foundation has 6 staff listed on its website. This leads me to believe they are forecasting moderate expansion given their estimated burn rate and their current team size.

THE PROBLEM

Cardano has identified several main issues facing the blockchain space and has laid out a roadmap to address all of them. The problems in question are scalability, interoperability and sustainability.

Here is a quick overview of the problems:

• Scalability — The current generation production blockchains are, by most measures, fairly slow with Ethereum only managing ~15 transactions per second (TPS). Should blockchains want to see major adoption, they will not only need to increase their TPS, but do so in a sustainable manner
• Interoperability — There are more than 1700 different coins and tokens as of the time of this writing. Cardano project believes that the next generation blockchain will need to have some way for them to interoperate
• Sustainability — For a blockchain to have longevity, there needs to be a way to pay for and vote on things. Current funding models tend to front-load most of the funds and may not have a sustainable way to pay for things in the long run

The Cardano project has its sights set on a very ambitious market — the entire blockchain industry. In that sense, the size of the market they are attempting to conquer is not only large but growing. The largest cryptocurrency, Bitcoin, has a market capitalization of $160 billion.

THE SOLUTION

There are many things that Cardano is doing to tackle the three problems mentioned above. The most salient of them are:

• Cardano Settlement Layer which is split from their computing layer, will focus on increasing effective throughput, not just TPS. They do this by working optimizations into all parts of their stack, including their protocol and their consensus layers
• The CCL is focused on providing developers a way of running applications on Cardano’s blockchain. As a start, they are offering compatibility with Solidity (Ethereum’s smart contract language) while developing their high assurance language called Plutus
• Side-chains, which allow the CSL to interoperate with the CCL and other blockchains are also a main feature of the Cardano project
• Ouroboros is the name of Cardano’s proof-of-stake protocol that will power the Cardano blockchain. Ouroboros is a modular by design consensus protocol that has sustainability built into its reward system where a portion of the block reward (25%) will be placed in the Cardano treasury to grow the ecosystem. Ouroboros is also similar to a Distributed Proof-of-Stake (DPoS) system in that staking power can be pooled to trusted parties so that participants can all be part of the governance process
• The wallet, Daedalus, is being built to be multi-currency compatible and also to have its own features such as the ability to runs dapps

While these are what I consider the main points of the project, it is only scratching the surface of what Cardano is trying to achieve. A large part of the project is to achieve all of these while making sure that their ideas are peer-reviewed and implemented in a high assurance way.

Token Utility

There are a few primary uses to the Cardano token, the first of which is to serve as a store of value. With the Cardano project looking to offer native features such as “shop with Cardano” which is a credit card service, the store of value use case is fairly clear.

The second use case of the token is protocol governance through staking and voting. As discussed earlier, Cardano will be running the Ouroboros protocol which is similar to DPoS and will allow users be part of the consensus mechanism by staking their ADA with trusted parties.

The third use case is to pay for fees on the Cardano network. Just like Ethereum, Cardano has a gas mechanic as a means for users to pay for the computing power on CCL.

Token Value

ADA models Bitcoin in the sense that there is a finite supply (45 billion ADA) and a circulating supply that is currently lower than that. ADA will be given out as reward to people who mint blocks on their blockchain.

The token can only gain value through pure supply and demand of the token given that no tokens are burnt as part of normal network operation.

THE TIMELINE

While the Cardano blockchain and Daedalus wallet are already up and running, the work is far from done. The version as of the time of this writing does not have most of the features of the project such as staking. In fact, it would not be wrong to call the current version of the Cardano blockchain an MVP.

These are some key points of the Cardano roadmap which can be found here:

• The first release called Byron was launched on 29th September 2017 and represents the launch of their main net blockchain
• In the Byron release, blocks are minted by Cardano foundation and its partners. There are no rewards and transaction fees are burnt
• The next major release, called Shelley, is expected to launch in Q2 2018 with the major component of the release being the Ouroboros protocol which will allow delegates to be elected and for these delegates to start staking
• Smart contracts will start becoming part of Cardano when the Goguen update is released
• Ouroboros Paros and RINA are planned additions to the Cardano protocol which will help it scale but do not have dates attached to them

Shelley will be a very significant update for Cardano as it allows the community to start staking and be part of the consensus mechanism, thereby decentralizing the project. But that is just scratching the surface as Shelley will also contain many other upgrades to Cardano that will improve security and usability at the same time.

COMPETITION

Cardano obviously sees itself competing with the main crypto blockchains such as Bitcoin and Ethereum. It does also find itself competing with other blockchains that are trying to define themselves as a third generation blockchain; these are chains such as EOS, RChain, Aion and so on. (Check our Analysis of Rchain here)

It should be noted that it does not seem like Cardano is looking to compete with any of the other blockchains head-on by offering the same blockchain but improved. Instead, Cardano is looking to capture the market but releasing what they think a blockchain should be by tackling the problems discussed earlier from the ground up.

In my opinion, Cardano’s biggest competitor is probably Ethereum. However, Cardano’s focus on peer review, high assurance code, interoperability, and sustainability gives Cardano a solid chance against the incumbent Ethereum as long as the project can deliver on its roadmap in the timely fashion.

THE TEAM

The project has a slightly different model where IOHK is contracted the build out the blockchain. As a result, I will consider the IOHK core team as part of the Cardano core team as well.

The Cardano project has a large and prominent team with Charles Hoskinson being their key member. Charles was the CEO of both Bitshares and Ethereum, and now functions as the CEO of IOHK. Besides Charles, the IOHK team consists of many subject matter experts in the areas of computer science, game theory, cybersecurity, and more.

It should be noted that Cardano does not seem to have any listed advisors. However, given IOHK’s employee count, this may not be a factor.

THE HYPE

There is currently a good sized community supporting Cardano:

• Reddit — 3,600 subscribers
• Facebook Group — 6,200 members
• Twitter — 5,500 followers
• Youtube (IOHK) — 2,200 subscribers
• Youtube (Cardano Foundation) — 870 subscribers

The numbers look quite healthy especially if you take into consideration that Cardano’s main-net launch happened only in September. With that said, Cardano did have a fairly lengthy token sale.

SWOT ANALYSIS

CONCLUSION

Positives

• Cardano has a very strong team working on the project
• Tackling the right problems that resonate well in the blockchain space
• Interoperability and scalability built into the stack from the ground up
• Interoperability with ethereum by offering solidity on CSL
• Peer review and high assurance code is a unique selling point that is hard to replicate

Negatives

• Scale of the project is huge which increases executional risks
• Ethereum is improving, and Cardano will have to keep pace at least
• Projects are currently built on other blockchains and might not want to switch to Cardano’s blockchain

SCORE

Cardano is a hugely ambitious project with a great team and a unique approach. As it stands, the project is very transparent about its development and its operations which increases community trust in their project. While the project has a fairly large market cap, there is still huge upside if it can deliver on its promised roadmap. As it stands, the awareness around Cardano is still fairly low. However, this is changing, and we see increased coverage and chatter around Cardano.

Disclosure

This is not investment advice. I have a position in Cardano as well as most of the other cryptocurrencies discussed in this review.

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