Cardano is a third generation cryptocurrency, after Bitcoin (1st gen), and Ethereum (2nd gen). The whole cryptocurrency movement began with Bitcoin a little over a decade ago, and since then it has exploded into thousands of different currencies.
The whole picture gets pretty complicated, but at its heart Bitcoin is pretty simple. It’s just a store of value. It has value because we agree it has value – because when you want to trade it, someone else will give you something else of value in return for it – just like dollars or gold. Its job is to hold that value for its owner, and increase that value over time. It doesn’t do a whole lot besides storing a number – or many numbers – in a digital wallet. Those numbers represent the amount of Bitcoin a person owns.
A few years after the debut of Bitcoin, Ethereum came along with a whole new trick up its sleeve, and launched the second generation of cryptocurrencies. Ethereum wasn’t just about storing value, it was about tying functionality to that value. In Computerland all functionality is expressed in the form of code, and Ethereum is no different. While Bitcoin simply stores a number, Ethereum also stores code in the form of smart contracts. Why is that a good thing? Because it makes money smarter.
Let’s imagine you own a song that everybody wants to hear. Using a smart contract tied to that song, you can decide you want to receive a certain amount of money every time the song is played. Since the contract exists in the form of code, and since the song is stored digitally and is tied to that code, the smart contract can automatically be executed any time the song is played. And since the smart contract is also tied your crypto wallet, every time the song plays you get paid. Smart contracts are kind of revolutionary.
A few more years passed as people stared on in wonder. And then slowly the problems began to emerge. The biggest problem with Bitcoin is how much energy it consumes for just a single transaction. There have been some attempts at improving this, and if all you want to do is buy and hold for the long run, it’s somewhat manageable. But even at current usage levels, Bitcoin consumes the same amount of electricity as Venezuela. There’s no way it can scale to the level of transaction processing that would be required if billions of smart contracts were executing every day all over the world. Historically, Ethereum has been almost as bad, but that is now changing with the introduction of proof of stake.
Another problem is that, though there are thousands of different cryptocurrencies, for the most part they’re all siloed. That is to say they don’t work with one another, and you have to trade them in a crypto exchange, which can be time consuming and expensive.
Yet another problem is that many cryptocurrencies were basically just experiments. A decade ago, nobody knew if this stuff would even work. Understandably, the creators of early cryptocurrencies weren’t taking the long view. They were just trying to see if they could get the rocket off the ground. The good news was they launched spectacularly. The bad news was they didn’t always know where they were headed. Many of them had no long term plan for governance and growth.
Enter Cardano, at the dawn of the third generation of cryptocurrency. Cardano seeks to solve all of the above problems and to become the gold standard for a useful store of value for the whole world for as long as money is a thing. Hey, nobody’s saying the guy who created Cardano isn’t ambitious. That guy’s name is Charles Hoskinson, and he defines the 3rd generation of cryptocurrencies as being scalable, interoperable, and sustainable. These three attributes are the solutions to the problems described above. The bottom line is that cryptocurrency has the potential to change the world, and Hoskinson’s vision for Cardano is to live up to that potential.
There’s one other important thing to talk about, which is how cryptocurrency actually works.
Wait, don’t go!
I’m not going to get into the weeds talking about consensus protocol algorithms, just the basic idea of how the whole thing works…at a high level. Okay?
Okay, so the whole thing runs on something called a blockchain. A blockchain is essentially just a database, and a database is just a place where information is stored – in this case a Bitcoin balance or an Ethereum smart contract. Simple as that. Traditionally, databases have lived on servers that were stored in a centralized location and controlled by a single entity, often a big corporation. But blockchain is different. It’s a distributed database, which means it’s stored on many computers, controlled by many different people. No one person or company is in control. In order to save new information to the blockchain, someone adds a new block of data onto the existing chain, which can never be changed or destroyed.
But wait, what’s to stop a greedy hacker from updating the blockchain with bad data and taking everybody’s money? That’s a very good question. The answer is that cryptocurrency uses one of two methods to keep the network secure. Bitcoin makes use of the first method, called proof of work (otherwise known as mining), which involves solving super hard math problems in order to verify transactions. The miner who solves the problem gets rewarded with more Bitcoin, and all the other miners are able to verify that miners work. A bad actor would quickly be discovered. This system is very secure, but also requires ridiculous amounts of energy to power all that problem solving.
Cardano and now Ethereum use a different method: proof of stake. Proof of steak, you say? No, proof of stake. Stay with me. Instead of solving hard math problems to validate transactions, a stake pool operator makes use of endorsements from others in the community, who stake that pool operator with their Cardano coins (otherwise known as ADA). With Bitcoin, anyone can jump in and build a mining rig. With Cardano, a good reputation is an absolute bar to entry. Everyone who stakes their ADA has a vested interest in keeping it safe, therefore they only stake legitimate pool operators. As Hoskinson puts it, “Would you rather have mercenaries guarding Rome, or Roman citizens?”
Multiple academic studies have concluded that proof of stake is just as secure as proof of work. But while a stake pool can run on an average computer, a decent sized mining operation requires a hydroelectric dam to keep it going. Also, proof of stake is more accessible to smaller pools just getting into the game. And this brings me to the question, why is gooWee talking about cryptocurrency at all?
The answer is that we’re starting our own Cardano stake pool! Yay! 🎉
You can read about that here.
Stake with GUI Pool! Single, small, mission-driven-pool donating 33% of profits to code.org, expanding access to computer science in schools.