What is ADA? Exploring the Cardano blockchain and its token

Cardano stands out in the crypto landscape as a unique project. Its difference comes from its scientific philosophy and research-first approach that's underpinned the project since its start. An important cog in the Cardano machine is ADA, the project's native token.

ADA itself is unconventional. Where many other tokens act as a store of value or serve a narrow role, ADA has broad functionality to help the ecosystem function smoothly.

In this article, we'll explore the intricacies of Cardano and its ADA token, shedding light on the origins and architecture of the project, while also discussing the potential it holds for the future of blockchain technology.

TL;DR

• Cardano is a third-generation blockchain platform known for its scientific approach and commitment to peer-reviewed research.

• It's designed for scalability, interoperability, and sustainability, aiming to address the limitations of previous blockchain generations.

• Key features include its unique Ouroboros proof-of-stake algorithm, a layered architecture, and a strong focus on compliance and governance.

• ADA is Cardano's native token. The asset plays many roles in the project's ecosystem, enabling staking and governance while also being used to pay transaction fees.

The origins and philosophy of Cardano

Cardano was developed with the aim of building on the capabilities of earlier blockchain systems. As such, Cardano considers itself a 'third-generation' platform and an alternative to Ethereum and its second-generation foundation.

The project is a product of IOHK (Input Output Hong Kong), a company set up in 2015 by Ethereum co-founder Charles Hoskinson and former Executive Assistant at Ethereum Jeremy Wood. Cardano was set up in 2015 and its mainnet went live in 2017. Cardano is a decentralized proof-of-stake (PoS) blockchain that provides a platform for building decentralized applications (DApps) with a multi-asset ledger and verifiable smart contracts.

Unlike its predecessors, Cardano distinguishes itself through peer-reviewed academic research. Each component of the Cardano blockchain undergoes extensive peer review by academics and researchers. This approach aims to bring greater reliability and scalability to the technology, which in turn addresses common issues with blockchain technology like security vulnerabilities and scalability challenges.

ADA: powering the Cardano network

ADA is Cardano's native cryptocurrency, named after Ada Lovelace, a 19th-century mathematician recognized as one of the first computer programmers. The supply of ADA is capped at 45 billion coins to provide scarcity and, in theory, retain the token's value. By the end of 2023, ADA was among the top 10 cryptocurrencies by market cap.

ADA has many roles in the Cardano ecosystem.

Staking

ADA holders can participate in validating the Cardano network either by running their own staking pools or by delegating their ADA to existing pools. This process not only helps secure the network but also rewards participants with ADA, creating a lucrative incentive for holding the currency.

Governance

Mid-2023 brought a significant change to the Cardano ecosystem with the arrival of CIP-1694 (Cardano Improvement Proposal). CIP-1694 aims to completely revise how decisions are made in the ecosystem. The proposal is an on-chain decentralized governance mechanism that makes sure stakeholder and community member voices are heard as the ecosystem develops. ADA is key to achieving this. Central to the new governance model is the principle of "one lovelace = one vote". This means that voting rights are proportional to the amount of ADA an individual holds — incentivizing participation.

Transaction fees

As Cardano's native token, ADA is used to pay transaction fees on the network. The fee size depends on the size and complexity of the transaction. These fees are used to reward network participants who validate and record transactions, helping to preserve the network's security and smooth running.

About Cardano's technical innovations

Pioneering Ouroboros

Cardano is the first blockchain to implement Ouroboros — the first peer-reviewed PoS algorithm. Ouroboros is a foundation of Cardano's architecture, offering a more energy-efficient alternative to the PoW mechanism used by Bitcoin. The algorithm is vital for achieving consensus, scalability, and security on the network while reducing energy consumption.

Ouroboros operates by selecting slot leaders from a pool of ADA holders who are responsible for creating and confirming blocks. The selection is proportional to the stake they hold, making the process more democratic and less energy-consuming than PoW.

Layered architecture

Another defining features of Cardano is its layered architecture. The architecture is split into two main layers: the Cardano Settlement Layer (CSL) and the Cardano Computation Layer (CCL). The CSL is responsible for handling transactions and ledger maintenance, while the CCL is focused on smart contracts and the execution of DApps. This separation allows for greater flexibility and scalability, making it easier to upgrade the network and implement new features without disrupting existing operations.

Smart contracts and DApps

The Alonzo hard fork that arrived in 2021 brought smart contract functionality to Cardano, enabling the creation and execution of DApps. The development was key to bringing Cardano's functionality up alongside alternative projects, notably Ethereum. It gave developers a platform for building a wide variety of DApps, from decentralized finance (DeFi) applications to non-fungible tokens (NFTs).

Complementing the innovations above are various other key strengths brought by the Cardano ecosystem.

• Superior scalability and performance: The project's Hydra protocol, a layer-2 scaling solution, increases transaction throughput by offloading transactions from the main chain onto Hydra nodes. Each node can process transactions in parallel, potentially leading to thousands of transactions per second (TPS) — far more than Ethereum and Bitcoin.

• Emphasis on interoperability and sustainability: Cardano was designed with long-term sustainability and interoperability in mind. It aims to enable cross-chain transfers, allowing for seamless interaction with other blockchain networks. Many consider this feature to be crucial for the long-term viability and success of Cardano, as it allows for broader collaboration and integration with the wider crypto ecosystem.

The future of ADA and Cardano: governance, community, and prospects

The Cardano roadmap neatly sets out the project's future direction, being a five-phase plan of focused progress. Notably, just as ADA is named after the brilliant mathematician Ada Lovelace, each phase takes its name from renowned scholars, mathematicians, and scientists.

Cardano launched at the Byron phase, which focused on building the community's foundation and the first technological developments. Shelley and Goguen followed with a focus on decentralization and smart contracts respectively. Phase four, Basho, brings scalability into focus, and the project's final phase, Voltaire, will be among its most significant. Voltaire — focused on governance — will see Cardano complete its transition to become an entirely self-sustaining system. This is achieved with the introduction of a voting and treasury system where network participants can use their stake and voting rights to influence the network's future direction.

Importantly, Cardano's five phases were never intended to arrive in sequence, but instead overlap as the ecosystem grows and evolves in harmony. However, Voltaire will contribute to a sustainable and democratic future for the project as voting power grows proportionally to a participant's ADA holdings.

Challenges remain ahead, however. Although Hydra went a long way in addressing concerns over Cardano's scalability, question marks still remain as the network grows. The network will also need to remain agile and react to the changing regulatory landscape. Meanwhile, as a close competitor of Ethereum, Cardano may feel the pressure of Ethereum's own innovations and developments that threaten to attract users away from the network.

The Chang hard fork: What is it all about?

With the implementation of the Chang hard fork on September 1, 2024, the Cardano blockchain has officially entered its ‘Voltaire’ era. By introducing a voting and treasury system, Cardano’s users will be able to make use of their ADA tokens to influence the future of Cardano’s development. This transition will begin in two phases, the first of which begins with the implementation of the Chang hard fork. Named after cryptographer Tsutomu Chang, Cardano chose to name this hard fork after him to honor his contributions to blockchain technology.

Keen to learn more? Here’s all you need to know about the Chang hard fork and what it introduces to Cardano.

Decentralized governance

Chief among the new features introduced by the Chang hard fork is decentralized governance. As part of Cardano Improvement Proposal 1694, the new onchain governance structure effectively allows any ADA holder to submit or participate in the voting process for governance actions and have a say in how Cardano is developed. According to the Cardano Foundation, this achieves their vision for a true self-governing, decentralized network.

Delegated representatives (DReps)

In short, DReps are members of the Cardano Community who you can choose to entrust with your governance vote. By choosing a DRep to vote on important proposals and decisions for you, this frees up the extensive time researching individual community proposals. From voting on changes to the Cardano protocol to treasury allocations, finding a DRep that aligns with your vision of Cardano could save you plenty of time and effort.

Interim constitutional committee

While the full constitutional committee is still being formed, an interim version will oversee governance actions and be supported by a technical script. This script will ensure that governance actions adhere to the principles of decentralized governance and will aim to prevent potential misuses of power. During this interim period, this constitutional committee will have limited governance capabilities that include execution of hard forks and parameter changes.

PlutusV3 improvements

Governance aside, the Chang hard fork also brings about improvements to cryptographic primitives and smart contract security in the form of PlutusV3. By adding a selection of new hash functions and primitives, the network’s overall performance and security is optimized and improved. Overall, PlutusV3 allows for more elaborate and efficient development of DApps on Cardano.

The final word

Cardano has gained a loyal following for its many innovations and efforts to build upon established blockchain technology for the good of its community. Developments such as the Ouroboros PoS algorithm and Cardano's layered architecture have helped to create a more flexible, scalable, and secure environment for network participants, whether they're aiming to build new DApps or create new tokens.

ADA is fundamental to Cardano's various use cases, being a native token that serves many important roles. As a result, ADA finds itself among the top 10 cryptocurrencies by market cap at the end of 2023, despite having faced volatile market conditions.

Cardano is moving towards the final phases of its five-point roadmap. As it does, network participants can look forward to a self-sustaining future where they have the power to decide what comes next.