What is the problem
Empires rise and fall, and so do their means of exchange. If we look back at all the currencies that have ever been made in history, they all have something in common. They all have a value of zero. It’s the same old story that is still repeating itself. In order to fix our flawed system, our government has multiplied economic rescue plans. How do they do it? They create a large amount of their own currency and give it to individuals, companies, etc.
It’s a temporary solution which has a negative impact on currencies and the economy. Inflating the supply of a currency reduces its value while lowering our purchasing power. It’s like keeping our economical system on an oxygen mask that is connected to a battery running low. Do it too often and the whole system will crash.
Cryptocurrencies open up a new world of possibilities. The rules of the game can be established in an open protocol for everyone to see. The total supply that will ever be achieved can be determined from the beginning, which forces us to seek the real solution, rather than lose to the half-measures of overstating the money supply. With management rules, voting mechanisms and financial resources built into the protocol, this technology could become the future.
Now that you’re here, you probably already know what a blockchain is. But we will try to clarify it just in case. Blockchain is a shared ledger. It is simply a comprehensive book that everyone has access to with the purpose of reviewing all the transactions (changes) that have ever occurred. In order for you to send a £ 20 coin to your friend, the whole story of how this £ 20 coin ended up in your possession must be correct from the time it was born and through all the transactions that ever happened until it ended up in your pocket.
By storing all transactions in the blockchain, it is nothing more than storing history. This history, however, is not stored centrally but more like the way small societies store information that is passed down from generation to generation. This has its pros and cons. Each of us has our own version of a fairy tale about a sleeping beauty but often our memory fails and we don’t remember all the details. On the other hand, the fact that we constantly pass it on to our children or grandchildren cannot be erased from the memory of society. There would have to be a demographic catastrophe in which the greater part of the population would die for the fairy tale to be completely forgotten. Moreover, if someone with bad intentions wanted to distort a fairy tale and turn the main character into a sleeping prince, he would have to convince the majority of society to his version. This is extremely difficult to achieve. In turn, a book in the library is a reliable source of knowledge and will not be distorted because our mother or grandmother has forgotten some of it. The problem may arise if the library in which the book is stored was destroyed or robbed, which is much easier. As a consequence, the entire society that would benefit from the library wouldn’t know the content of the fairy tale in the next generation. Now imagine, any man who is interested in a fairy tale about a sleeping beauty would have a copy of it in his private library. Then there is no fear of a distortion of the translation nor the probability that someone would steal the books and rob most of society. Apply those statements to managing the history of transfers and you will surely appreciate what revolution the blockchain introduces.
Structure of Blockchain
The smallest unit of a blockchain is a transaction which means a change (transfer or change of ownership). These transactions are stored in blocks which then are chained together. We use blocks for the same reason the tracks are not 10 km long each but 10 m at most. They are easier to shape, move and repair.
Technically the blockchain is maintained by nodes and each one of them keeps copies of the entire blockchain. Thanks to that, when one node fails, we still have a copy in others. It is also important that each node verifies information received independently from others and rejects those considered to be wrong. The problem that the above architecture generates is chain bifurcation. Some nodes may be in a different state or not have the latest information.
Then Blockchain is in a kind of dual state, but does not reject any of them. He uses a simple rule to resolve the conflict. The longer chain wins.
To illustrate this problem, let’s use an example:
We are at a social party and arrive fashionably late at the party. After a short reconnaissance, we notice a new friend named Barbara. Barbara managed to meet other friends. To learn something about her, we start asking our closest friends about Barbara: Alice, Kamil and Thomas. Alice claims that Barbara is polite and nice, Kamil confirms Alice’s words, while Thomas claims that he only talked to Barbara for a few moments, but he did not like her and considers her selfish and arrogant. When we receive conflicting information, whom should we believe? We are not sure about anything, after all, the nice / unpleasant ratio is 2 : 1. That is why we subconsciously operate exactly like a blockchain node that received two contradictory information: it cannot decide on one version of events, so it “forks” the chain of history and waits for more information, in other words we do not exclude any version as maybe Thomas treated Barbara badly, or Alice and Kamil had the wrong impression. Therefore, we accost another friend David and we ask for his opinion. David confirms the versions of the events of Alice and Kamil. Now we are more sure that Thomas’s opinion may be marginal so we assume that Barbara is a nice person. In the future it may turn out that together with Alice / Kamil / David we are wrong, but here and now this is the “truth”. However we always leave ourselves a margin of error and do not reject Thomas’s opinion. Additionally his opinion becomes less relevant over time and finally, if we don’t find anything that confirms Thomas’s version, we definitely forget about that.
It is important how to add information and how to verify them. Each cryptocurrency has a slightly different way to solve this. This method is called consensus.
The most popular consensus is the Proof of Work, used by Bitcoin. Consensus takes some kind of work to be rewarded. As we know, the blocks contain transactions. In order for the chain to accept new transactions, we must consistently add new blocks to the chain.
When Alice sends Barbara 20 Bitcoins, she sends a transaction to one of the nodes (or to several at once). The nodes exchange information about the transaction so that as many nodes as possible can learn about it. Thanks to that, we have a guarantee that the failure of one node will not result in its loss by the network. Then the transaction waits for one of the nodes to put it in the block. The block is usually forged every now and then and it is done in different ways. For example, in bitcoin, all the nodes try to find a solution to a math puzzle. The one who solves it, forges the block, places his reward in it and sends it to other nodes. When they check whether the puzzle has been solved correctly, they accept the block. Hence there is a relationship: the more computing power a given node has, the faster it will find a solution. However, in a consensus based on the Proof of Stake, such a node is drawn based on the amount of cryptocurrency it has. The more cryptocurrencies, the bigger chance a block will be forged. To show the difference between the two consoles, let’s use the example of a taxi:
Suppose we want to order a taxi from the center of Cracow to our apartment in Nowa Huta. We don’t want to favor any of the taxi corporations so we only give the destination, without information from where to pick us up. We only define our special characters ( we wear a yellow hat). In the proof of work consensus, all the taxi corporations would start their cars and look for us while driving around town. The one that would find us and serve the course would collect the fee. In the proof of the rate consensus, we would randomly select one taxi from all available in the city and this one would carry out the course. In both approaches, the same relationship occurs: the more taxis we have, the greater the chance we have to use the opportunity and complete the course. If we want to increase our income, we buy more taxis or set up partnerships with colleagues. The important difference is that we use much less gasoline in our Proof of Stake.
Proof of Work and Bitcoin
Bitcoin, the first cryptocurrency to hit the world uses the Proof of Work consensus mechanism. To write down blockchain transactions in the network you have to solve very difficult mathematical equations. In order to do this, a set of specialized equipment is required. Those who undertake this task are called “miners” and compete with each other to make these equations. Whoever gets the right solution first will win the reward. However, solving the task is not enough, sometimes two miners solve the task at the same time. The chain then forks. Yet no miner is discriminated, blockchain has the so-called two truths. The chain that wins is the one which more miners “believe”, that is, in short the longer one.
Proof of Stake
Proof of Stake is a consensus mechanism that counts how much a given Cryptocurrency you have. Your chance to forge a block depends on the portion of all pledged coins represented by your stake. When you are selected you have the right to forge a block. You can obtain a transaction fees or a reward based on introducting the system. In Proof of Stake, we divide the time into Ages and Slots. Each era contains slots in which a specific node is drawn, called the slot leader. It takes place at the beginning of each era. Thanks to that, everyone knows when they have to forge a block. It saves a lot of electricity as there is no element of hardware competition between nodes.
Proof of Work vs Proof of Stake
A cryptocurrency like Bitcoin uses a lot of energy to secure the network through PoW consensus. As electricity around the world is not always very ecological, this has become a problem. Extractive activities require a huge number of specialized oil rigs to remain competitive as the difficulty level increases. Due to the rapidly evolving technology, mining platforms are quickly becoming obsolete and hardly suitable for any other application. As you always need more computing power to stay in the game, there is less and less space for small operators, meaning the network is now centralized around a few mining operators. The PoW process takes too long, making the number of transactions per second low, making the solution difficult to scale.
A growing number of cryptocurrencies now choose Proof of Stake as their validation system. As an investor, you can use low-cost equipment to participate in these networks, which means low energy demand, no hardware upgrades required. All these factors create better accessibility for any passionate or amateur who would like to be part of this economic revolution.
Of course, Bitcoin has remained secure for the last 10 years and has proven its worth thanks to PoW. However, this does not mean that we cannot achieve such a safe and more efficient consensus. It could be argued that Proof of stake will make the rich even richer because they have more to invest in the system therefore they have a better chance of processing blocks. So the proof of stake has a safeguarding mechanism, in other words “saturation”. It consists in a percentage reduction of the awards received for forging blocks as the stake increases.
We believe, therefore, that Proof of Stake is the right path for the future.
Cardano is a decentralized public blockchain project and cryptocurrency that includes the groundbreaking Proof of Stake algorithm called Ouroboros. It is the first blockchain platform to evolve from a scientific philosophy and research-based approach. The development team consists of a large global collective of engineers and researchers. In addition, Cardano is developing a smart contract platform that aims to provide more advanced features than any previously developed protocol.
The cryptocurrency used on the Cardano network is named after Ada Lovelace, one of the first developers. The base unit is called Ada and can be divided into a million Lovelace. (1 Ada = 1,000,000 Lovelace)
Why do we think Cardano is the future
While Proof of Stake is not new, finding a flawless solution is more difficult than with PoW. That is why IOHK, the company responsible for the development of the Cardano ecosystem has adopted an academic approach to research and solution of this issue. Their “Ouroboros” protocol was developed by an extremely talented team of cryptographers from five academic institutions. Cardano is more than just a cryptocurrency, it is a technology platform that will be able to run financial applications currently used by individuals, organizations and governments around the world.