What Is Cardano [ADA]? Complete Guides [2024] Defined, How it Works

Cardano is a blockchain platform designed to process transactions using a dedicated cryptocurrency called ADA.

The Cardano platform can handle all kinds of transactions, but the real goal is to become the “Internet of Blockchains,” creating an ecosystem that allows seamless interchangeability between different blockchains.

Let’s look at how Cardano (ADA) stacks up against the other major cryptocurrency players.

What Is Cardano?

Cardano is a blockchain and ADA is the coin that powers the Cardano network. This is similar in some ways to ether and the Ethereum blockchain.

Think of Bitcoin as Crypto 1.0. It’s essentially digital gold, but the system is beset with scalability issues. Then there’s Ethereum, often referred to as Crypto 2.0.

Cardano, launched in 2017, is Crypto 3.0, with the goal of improving upon the functionality that Ethereum was initially missing.

Charles Hoskinson founded Cardano, and he’s also a co-founder of Ethereum. Hoskinson had a falling out with the Ethereum team due to a dispute with co-founder Vitalik Buterin in 2014 regarding whether the Ethereum project should be commercial or not.

Hoskinson moved on to launch Cardano as a more scalable, interoperable and sustainable blockchain, intending to improve upon Bitcoin and Ethereum.

“Referred to by supporters as an ‘Ethereum killer,’ Cardano’s ongoing development is supported by the Cardano Foundation and the IOHK research institute, which engage in [resources and development] and peer review via a formal development model,” said Henrik Gebbing, co-CEO and co-founder of Finoa, a digital asset custodian.

One of the major criticisms of Bitcoin and other popular cryptocurrencies is that their blockchain networks, based on proof of work consensus mechanisms, waste huge amounts of energy. Cardano uses a proof of stake consensus mechanism, offering a more sustainable and scalable blockchain.

What Is ADA?

ADA is the cryptocurrency for the Cardano platform. Cardano’s coin is named after Ada Lovelace, a 19th-century mathematician known as the first computer programmer.

People use ADA tokens to pay transaction fees for using the platform. ADA’s also given out to the validators as a reward for running the proof of stake system.

How Does Cardano Work?

With a blockchain network, there needs to be a way to verify transactions to ensure people don’t spend the same tokens twice. Given the decentralization, there’s no central authority like a bank working  to handle the job.

Based on proof of work consensus mechanisms, Bitcoin and Ethereum 1.0 miners run computers to solve complex mathematical equations and add new blocks of data to the blockchain, receiving crypto in exchange for their work. This is time-consuming and uses up large amounts of electricity.

Cardano uses staking, a process where network participants deposit set amounts of crypto to earn the right to participate in the operation of the blockchain.

“The [Cardano] protocol is designed to keep energy expenditure during the block production process to a minimum,” said Daniel Hill, president of Hill Wealth Strategies.

History of Cardano (ADA)

Charles Hoskinson, an Ethereum co-founder who left the project due to disagreements with the direction of Ethereum, began developing Cardano in 2015 and launched the blockchain network with the first mined block in 2017.2

Cardano considers itself an updated version of and has positioned itself as an alternative to Ethereum, anointing itself a “third-generation” platform compared with Ethereum’s “second-generation” credentials. Cardano has a self-proclaimed goal of providing banking services to the world’s unbanked.

An eponymous non-profit foundation, the Cardano Foundation, was established in 2017 to oversee the development of the Cardano blockchain and to promote its adoption. Prior to that, IOHK, an engineering company, was the primary developer of the Cardano blockchain. Throughout its history, the Cardano blockchain has undergone four notable hard forks in its history: the Shelley, Alonzo, Vasil, and Valentine hard forks.

The Shelley hard fork transitioned Cardano from a federated Byzantine Fault Tolerance (fBFT) consensus mechanism to a more decentralized PoS consensus mechanism called Ouroboros. The Alonzo hard fork enabled smart contracts on the Cardano blockchain for the first time, opening up the possibility for a wide range of dApps to be built on Cardano. The Vasil hard fork brought scalability upgrades to further improve dApp functionality, such as increased block size, improved transaction processing, and new scripting capabilities.

In February 2023, the Valentine upgrade occurred, causing another (planned) hard fork. The purpose of this update was to allow more efficient cross-chain applications to be built and add support for other protocols.

Who is the founder of Cardano?

De oprichters van Cardano ADA, Charles Hoskinson en Jeremy Wood, zijn twee van de meest invloedrijke figuren in de cryptocurrency-industrie. Hun visie voor een nieuwe generatie van cryptocurrency was baanbrekend. Hun platform wil revolutie teweegbrengen in de manier waarop mensen omgaan met digitale activa. Met hun expertise en toewijding aan innovatie helpen Hoskinson en Wood de toekomst van blockchaintechnologie vorm te geven.

What are Cardano native tokens?

On March 1, 2021, the Cardano blockchain introduced the ability to create native tokens. Like Ethereum tokens — which can include things like NFTs or stablecoins like USD Coin — Cardano native assets can be created and distributed on the blockchain and are able to interact with smart contracts. 

But unlike Ethereum-based tokens, Cardano native tokens aren’t created via smart contract. Instead, they run on the same architecture as the ADA cryptocurrency itself. According to the nonprofit Cardano Foundation, this makes Cardano native assets “first-class citizens” on the blockchain. Their native architecture can theoretically make these tokens more secure and reduce the fees associated with transactions.

Cardano vs. Ethereum

Both the Cardano and Ethereum blockchain platforms are used for responsive applications and aim to build a connected system similar to the Apple and Android store, but decentralized. The most prominent features offered by Cardano and Ethereum to support dApps are their use of smart contracts and a PoS blockchain algorithm. Cardano had a staking mechanism long before Ethereum did, but it only recently supported smart contracts.

Smart Contracts

Cardano implemented smart contract support in 2021 with its Alonzo update.4 This update took place on Cardano’s test network, a beta version of the blockchain, and was the first iteration of bringing promised scalability and interoperability to users.

Smart contracts allowed Cardano developers to create dApps such as non-fungible tokens (NFTs) and manage multiple cryptocurrency assets associated with these dApps. Future releases and forks of Cardano are expected to formally bring smart contract capabilities to the main network, the official version of the blockchain.

Cryptocurrency Staking

Cardano uses a PoS consensus mechanism, in which users “stake” the blockchain’s cryptocurrency for the opportunity to become a validator. A stake is a pledge of a certain amount of ADA cryptocurrency to represent and secure validator rights in the Cardano network. ADA cannot be used or spent while it is staked because it must be held as collateral to incentivize honest validation behavior.

Validators open and finalize blocks of transactions and are rewarded with ADA from other validators based on the number of tokens they have staked. Users can participate in the validation process by creating or joining a pool, which can be public or private.

Staking pools consist of one or more trusted server nodes that conduct the work of validating transactions, updating the ledger, opening new blocks, and earning rewards. Public pools distribute rewards to members based on how much Ada they have staked. Private pools, as the name suggests, give rewards to their sole owners.

A Cardano staking pool must be run by an operator with the technical knowledge and skills to maintain the stake pool by renting servers, monitoring the node, holding the pool key, and conducting other pool administration tasks.

Cardano vs. Bitcoin

Bitcoin was developed as a peer-to-peer payment system, while Cardano is focused on fostering a general blockchain ecosystem that allows developers to create other tokens, dApps, or any uses a scalable blockchain network can host.

The Cardano platform’s PoS consensus mechanism relies on staking to validate transactions and reward cryptocurrency to validators, whereas Bitcoin’s PoW relies on cryptocurrency mining. Cardano’s PoS expends drastically less energy than Bitcoin’s PoW by removing the need to have computers gobbling up large amounts of electricity to power complex mining calculations.

Cardano’s PoS consensus mechanism also makes its validation process more accessible to the average user than Bitcoin’s PoW. Cardano staking can be done simply by installing compatible wallet software on computers or devices—Bitcoin mining can also be done this way, but it is not very efficient, even if it is done through a pool, which is the least commitment-intensive option for mining.

What makes Cardano unique?

The major difference between Cardano and other cryptocurrencies is its reliance on peer-reviewed research and evidence-based methods in its development. While most of the crypto market moves fast, Cardano veers in the opposite direction. It takes a slower, more methodical approach. The benefit is that this makes it more likely that developers catch potential threats.

However, there are drawbacks to Cardano’s approach. Its development process tends to take much longer than its competitors, which can cause it to fall behind. Critics have also pointed out that today’s peer-review system has its issues, so relying on it isn’t necessarily an advantage.

Another way that Cardano crypto stands out is that it uses a proof-of-stake protocol to validate transactions. Proof of stake is much more energy-efficient than proof of work, the original consensus mechanism introduced by Bitcoin (BTC 1.87%).

Many cryptocurrencies now use proof of stake, but, for a time, Cardano was the largest. This helped it develop a reputation as a green cryptocurrency compared to cryptocurrencies that used proof of work.

How to Use Cardano

You can use ADA like any cryptocurrency. You could hold onto it as an investment, use it for purchases, and exchange it. You can also use your ADA to cover Cardano network transaction fees and stake to earn more tokens. If you want to hold Cardano long-term, pay attention to which wallet you use.

“The two official Cardano wallets are the Daedalus wallet [full node] and the Yoroi wallet [light node]. Both wallets allow users to earn new Cardano by staking their assets and also allow them to vote in Project Catalyst, a fund awarding ADA to Cardano projects,” Gebbing said.

Gebbing also said that developers and institutions can use the Cardano network for projects, even if they don’t use the ADA token directly. “Perhaps most notable is the Atala Prism project, which seeks to issue digital identities to students across Ethiopia, including verifiable information about academic performance,” he added.

There are also plenty of DeFi and non-fungible token (NFT) initiatives within the Cardano ecosystem. Some of these projects include the decentralized exchange Sundaeswap (SUNDAE) and the decentralized and trustless lending protocol Meld (MELD).

Advantages of Cardano

• More environmentally friendly. Cardano is one of the most ecologically friendly blockchain systems. In a 2021 interview with Forbes, Hoskinson claimed that Cardano is 1.6 million times more energy-efficient than Bitcoin.
• Faster transactions. Cardano is also much faster at processing transactions than Bitcoin or Ethereum 1.0, sometimes called Classic Ethereum. Cardano can process more than 250 transactions per second (TPS), compared with around 4.6 TPS for Bitcoin and between 15 and 45 TPS for Ethereum 1.0. This makes the Cardano network very scalable. That said, Ethereum 2.0 is the Ethereum network’s upgrade to address prior security and scalability issues.
• Peer-reviewed network. The Cardano team works closely with academics to generate peer-reviewed research to guide blockchain development. “Its nature as an open-source and peer-reviewed blockchain helps ensure its survival and evolution beyond that of its parent organization,” Gebbing said.

Disadvantages of Cardano

• Catching up to more established competitors. Cardano is trying to create a better version of blockchain, but competitors like Ethereum have the advantage of longer histories of use and more developer uptake. In fact, one of Ethereum 2.0’s upgrades includes a proof-of-stake approach that could negate a key Cardano advantage.
• It could have trouble standing out. The cryptocurrency market is ever more crowded, and it’s not easy to get attention. “It’s not memorable, and there are a lot of competitors in the same space,” said Hill. For example, Dogecoin showed how much crypto could boom based on a popular meme, which the more subdued Cardano brand does not have.

Future of Cardano

Cardano is designed to be developed in “eras” named after notable figures in poetry and computer science history: Byron, Shelley, Goguen, Basho, and Voltaire. Basho, Cardano’s current era, is focused on bringing scaling and optimization capabilities to Cardano. As of April 2024, Cardano is anticipating the transition from Basho to Voltaire.

Voltaire, Cardano’s final era of development, is intended to bring voting and treasury management to the blockchain network through particular smart contract functionalities and system improvements.

Drawbacks of Cardano

There are opportunities to be found everywhere, but often there’s a catch. What should you consider when investing in Cardano? 

• While Cardano has been highly praised for years, can the coin live up to its expectations? Cardano doesn’t have nearly as extensive a track record as, say, Bitcoin, and competition among altcoins is fierce. 
• The academic background of founder Charles Hoskinson has been questioned multiple times. Also, his promises from the past, such as having hundreds of assets on the network by 2021, didn’t come to fruition. 

Should You Buy Cardano?

Cardano’s backers believe its innovative and environmentally friendly system could make it one of the leading cryptocurrencies. However, extensive research and resources indicate that Cardano is a high-risk investment.

“If you’re considering ADA, treat it like any other cryptocurrency. Only invest what you’re comfortable losing, and don’t expect huge gains overnight,” Hill said.

Gebbing recommends that if you like the ideas behind Cardano, you should start with small investments.

“Before investing in any blockchain’s token, it’s advisable to gain experience as a user, experimenting with a small amount by transacting between wallets, staking on the network, and using it to participate in governance,” said Gebbing.

Do your research. If you believe in the Cardano approach to blockchain technology, it could be a solid addition to your cryptocurrency portfolio.

How to Buy Cardano

You do not buy Cardano itself but rather its altcoin, ADA. To buy ADA, you can sign up for an account with one of the major cryptocurrency exchanges. You can then store ADA either on the platform itself or in a crypto wallet.

Where to Buy Cardano

As one of the most popular cryptocurrencies, you can buy ADA for the Cardano network from most top cryptocurrency exchanges. Binance, Coinbase, Gemini and Kraken are a few of the major players that sell ADA. To help find a good fit, check out this review and compare the best crypto exchanges.

The Bottom Line

Cardano is a decentralized PoS blockchain founded in 2015 and launched in 2017. It has positioned itself as an alternative to PoW blockchains like Bitcoin because it is more energy-efficient and scalable.

The plans behind Cardano’s development are ambitious. Its developers see Cardano as eventually becoming fully decentralized when voting and treasury management of blockchain are added to its capabilities in the future.

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