We’re now in the third generation of cryptocurrencies, where we’ve realized that popular first-generation cryptos like Bitcoin and second-gen ones like Ethereum have proven unable to scale to millions and even billions of users.
Notwithstanding all their advantages, first and second-gen cryptos tend to have a problematic governance experience as well as issues with sustainability. They leave a series of questions unanswered, such as who will fund and develop the blockchain once the funds raised through an Initial Coin Offering (ICO) run out.
This article will discuss three major topics in the realm of cryptocurrencies: scalability, interoperability, and sustainability. You will learn why Cardano excels or has the potential to in all three areas, giving it a very powerful foundation to redistribute power to the people.
The Dimensions of Scalability
Transactions per second are a common perspective to view scalability in, but not the only one a cryptocurrency investor should be concerned with. Transactions transport data, and with more transactions comes the need for more network resources. For a system to be truly scalable, it might require hundreds of gigabytes per second of bandwidth to make sure data is carried successfully.
There’s also the aspect of data scale to take into account. Blockchains can store data infinitely. All transactions recorded on the blockchain are logged regardless of relevance. As the number of transactions per second increases, so does the data. As a result, blockchains can grow from megabytes to terabytes and even petabytes. Thus, it’s important to ensure sufficient network resources without compromising security.
The transaction throughput increases with more users and the Cardano platform becomes more efficient over time thanks to Ouroboros, a protocol that guarantees proof of stake security at a negligible energy cost. The Cardano peer-reviewed, research-based blockchain protocol applies cryptography and mathematical game theory to ensure integrity, performance, and sustainability of all related distributed networks.
Interoperability: Ensuring Compatibility
There is a need for choice and diversity on the cryptocurrency market just like on every other market; it’s a basic principle of the market economy. That’s why the cryptos will only become more numerous with time. Having a unified standard in place has become more important than ever. If the different blockchains and systems don’t have a canonical way of communicating with each other, we run the risk of excessive value fragmentation.
While decentralization remains critical as perhaps the biggest advantage of cryptos over fiat currencies, there’s a great need for movement of value between the blockchains.
Enter Sidechains
The basic concept of sidechains is that they can function as a method to structure information from one chain to another. When you carry out a transaction, the information is compressed in a way that the transaction recipient immediately grasps the extent, to which it is legitimate.
Cardano has started working on the integration of sidechains within its platform. In a paper IOHK recently published, they laid out a well-planned approach for how to generate evidence in the world of proof-of-work called non-interactive proofs. They believe we can adapt this approach to a proof of stakes setting and then combine the two with some smart engineering, giving Cardano an in-depth understanding of the processes and features of established cryptocurrencies.
IOHK efforts won’t end here. They want to create true interoperability; an environment where every blockchain can talk to every other, going from isolated to intricately and sophisticatedly interconnected.
Ensuring Financial and Technological Sustainability
As in every facet of the market and life itself, funding is an issue. ICOs are the most common way used to fund cryptos, but that money runs out eventually. To circumvent this problem, they are building a system with a treasury, where a blockchain can print money and deposit part of it into a decentralized bank account. Inflation will fund that decentralized account. Efforts are underway on our part to develop a modular system of this type. This way, it will be possible to upgrade the treasury independently of the protocol itself.
Technological sustainability is another issue. Technology changes, use cases change, and innovations emerge all the time. Cryptocurrency has to change correspondingly. Change is currently achieved through soft forks or hard forks. Before Generation 3, there was no standard, established way to decide on the right type of fork. The choices made haven’t always been ideal, leading to blockchains breaking apart. This happened with Bitcoin and Bitcoin Cash and with Ethereum and Ethereum Classic.
Revising a currency is more reasonable than breaking it. To this end, we hope to be able to apply the same type of mechanics the fiat treasury system uses. We want to transform Cardano and its token, ADA, into something that a machine can understand, much like a formal protocol specification.
Why? If Cardano can make a cryptocurrency understand its own design, they might be able to verify if a client is following a specification. This process will begin with the formal verification of smart contracts, which can not only help reduce the risk of errors and bugs, but also improve reliability and stability.
Goguen: A Historic Milestone in Cardano Development
They are pursuing this area of research quite vigorously as part of Goguen, a historic step in the development of Cardano that will make building decentralized applications possible. When complete, all Cardano users will be able to launch and execute functional smart contracts on the platform. Goguen is launching in late 2020, along with Voltaire (Governance). The treasury, governance, and smart contracts ability make a powerful combination of features that will enable long term evolution and growth of an ecosystem of value.
Our initiative will begin with descriptions of how Cardano should work as a full cryptocurrency stack on a protocol level. As the number of users of the ecosystem increases, we can pursue formal verification. Such platforms eventually outgrow their founders, becoming more sophisticated in the process. This is why it is crucial to have a highly inclusive process to change the protocol slowly, deliberately, and methodically.
So what is Cardano? A third-generation, peer-reviewed cryptocurrency protocol based on superior software standards that is sustainable, interoperable, and scalable.
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