What is Cardano Crypto and how does it work?

    Cardano Crypto

    Cardano is one of the most valuable cryptocurrencies in terms of market capitalization. It’s envisioned as a next-generation version of Ethereum, with a blockchain that’s a flexible, sustainable, and scalable platform for running smart contracts, allowing the creation of a variety of decentralized finance apps, new crypto tokens, games, and more.

    The smart-contract capability has yet to be implemented by developers as of March 2021. Cardano will release smart-contract functionalities in the second quarter of 2021, putting it one step closer to its aim of giving developers a blockchain platform that is resilient, secure, scalable, and energy-efficient.

    The native cryptocurrency of the Cardano blockchain is ADA, which can be bought or sold on exchanges like Coinbase, much like how the Ethereum blockchain’s native coin is ETH. On the Cardano network, ADA can be used to hold assets (say as part of an investment portfolio), make and receive payments, and stake and pay transaction fees.

    How does Cardano work?

    Cardano aspires to be the most environmentally friendly blockchain platform available. Instead of the energy-intensive proof-of-work approach used by Bitcoin and Ethereum, it uses a unique proof-of-stake consensus process called Ouroboros. (Through the ETH2 upgrade, Ethereum will also switch to a proof-of-stake method.)

    Proof of work

    Without a central authority like Visa or PayPal in the middle, decentralized cryptocurrency networks must ensure that no one spends the same money again. They use a “consensus method” to achieve this. Proof of work is the original crypto consensus process, which was popularised by Bitcoin mining.

    • Proof of work necessitates a massive amount of processing power, which is provided by virtual “miners” from all over the world trying to solve a time-consuming arithmetic puzzle first.
    • The winner receives a predetermined sum of cryptocurrency in exchange for updating the blockchain with the most recent verified transactions.

    Proof of stake

    Proof of stake employs a network of invested participants known as validators rather than a network of miners racing to solve a riddle. Validators stake their own ADA instead of giving processing power to protect the network and validate transactions as miners do.

    • The network chooses a winner depending on how much ADA each validator has in the pool and how long they’ve kept it there, thus rewarding the most invested players.
    • Other validators can attest to the accuracy of the latest block of transactions once the winner has validated it. The blockchain is updated when a certain amount of attestations have been made.
    • The network distributes the reward in ADA proportionally to each validator’s stake to all participating validators.
    • While being a validator entails a significant amount of responsibility, interested parties can alternatively earn ADA by “delegating” a portion of their crypto to a staking pool managed by someone else.

    The Cardano blockchain has two layers: the Cardano Settlement Layer (CSL) and the Cardano Computing Layer (CCL) (CCL). The ledger of accounts and balances is kept in the CSL (and is where the transactions are validated by the Ouroboros consensus mechanism). All computations for apps operating on the blockchain — via smart contract operations — are performed in the CCL layer.

    Splitting the blockchain into two levels allows the Cardano network to process up to a million transactions per second.

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