In 2015, Ethereum co-founder Charles Hoskinson and his colleague Jeremy Wood left the Ethereum Foundation to start their own company, Input Output. In 2017, this company launched Cardano (ADA 11.51% ), a blockchain powered by the ADA token. Since its inception, its price has climbed 4,700%, reaching a market value of $ 42 billion. This makes Cardano (or ADA) the sixth most valuable cryptocurrency today.
However, Cardano is worth 10 times less than Ethereum, but its team of developers are executing an ambitious growth strategy. For this reason, this cryptocurrency still has many potential benefits. Here is what you need to know.
The five phases of development
Like Ethereum, Cardano is a programmable blockchain, which means it was designed to support smart contracts (i.e., self-executing computer programs). However, Cardano’s team of developers took a more delicate approach to building the platform, frequently submitting research papers for academic peer review. In fact, the project itself is divided into five distinct phases: Byron, Shelley, Goguen, Basho and Voltaire.
The first two phases have been completed. They focused on building the foundation and decentralizing the network. During this time, Cardano was brought online with a unique Proof of Stake (PoS) consensus protocol known as Ouroboros. This term refers to an ancient Egyptian symbol of a dragon eating its own tail, believed to represent infinity.
In September 2021, the third phase added support for smart contracts, meaning that decentralized applications (dApps) and decentralized finance (DeFi) products can now be deployed on the Cardano blockchain. Currently, very few dApps are online, but some 4,000 developers have projects in the works, which means that Cardano could be a thriving ecosystem in the not-so-distant future.
Going forward, the fourth and fifth phases – which have not yet been scheduled – will deal with scalability and governance. Meanwhile, Cardano’s developer team are planning to implement Ouroboros Hydra, a version of the PoS consensus mechanism that could theoretically increase throughput to 1 million transactions per second (TPS). To understand why this is important, let’s talk about scalability.
The Ouroboros consensus protocol
Ouroboros consensus protocol divides time into 20 seconds slits. During each slot, a participant in the network (i.e. a stake pool) is chosen at random to verify the transaction blocks and add them to the blockchain. Unlike the Proof of Work (PoW) consensus, Ouroboros doesn’t require huge amounts of computing power, which means it’s much more environmentally friendly.
However, the Cardano blockchain currently only supports 250 TPS. This is pretty good compared to Ethereum, which manages around 30 TPS. But that is nothing compared to a global payment network like Visa, which can theoretically handle 24,000 TPS. In other words, virtually all blockchains have a scalability issue.
For example, as the addition of more users crowded the Ethereum network, transaction speeds slowed and transaction fees rose sharply. Now that smart contracts are live on Cardano, its platform will eventually suffer the same fate – at least without the implementation of Ouroboros Hydra, a name referring to the multi-headed serpent from Greek mythology.
To this end, Hydra will add multiple side chains to the main blockchain, dividing the network load onto a larger infrastructure. The Hydra upgrade is still in development, but simulations have shown that each side chain can process around 1,000 TPS. So with 1,000 side chains, Cardano’s throughput would reach 1 million TPS. At this point, the platform could support the widespread adoption by users around the world.
The investment thesis for Cardano
DeFi products have seen a sharp increase in adoption, increasing eleven times to $ 260 billion since the start of 2021. But DeFi services are not free. Users are charged a transaction fee in the form of the underlying cryptocurrency – in Cardano’s case, that would be the ADA token. In other words, as more and more users adopt dApps and invest in DeFi products on the Cardano blockchain, the demand for the ADA token is expected to increase, pushing up its price.
Of course, Cardano’s ecosystem is currently tiny compared to the 2,800 dApps and $ 171 billion invested in DeFi on the Ethereum blockchain. But Cardano remains a compelling investment. Blockchain is based on peer-reviewed research and the team of experienced developers have put in place a very methodical growth strategy, which should ultimately make Cardano a highly scalable platform.
More broadly, owning ADA makes you a player in the Cardano ecosystem. You can delegate these tokens to a stake pool to earn rewards or even create your own stake pool. And as the ecosystem grows, more transactions would translate into more rewards for you. In a way, it’s similar to owning shares in a company. This is why this cryptocurrency looks like a smart long term investment.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.