The renewed surge of ADA over the past year put a spotlight on this established token. Had it not been for its announcement of “smart contract” functions, many folks would have forgotten that Cardano aims to be a public chain infrastructure carrying massive commercial applications just like Ethereum.
To achieve this goal, first and foremost, Cardano must address the challenge of scalability. Right now, Visa, a global provider of payment services, processes 150 million transactions per day, that is, more than 1,700 transactions per second. In comparison, the processing capacity of PoW-based blockchains stands at dozens of transactions per second, and even PoS-based ones can only process hundreds of transactions per second. There is still a long way to go before blockchains can replace traditional financial institutions.
Cardano also faces the impossible triangle of decentralization, scalability, and security, which is an inevitable challenge for any blockchain. The three constitute an impossible triangle because a breakthrough of scalability might compromise the decentralization and security of a blockchain.
How does ADA meet this challenge of impossible triangle?
1) ADA has adopted the PoS consensus mechanism of the Ouroboros protocol to improve scalability while maintaining security.
According to the official Cardano website, Ouroboros comes in 5 versions: Ouroboros Classic, Ouroboros Byzantine Fault Tolerance (BFT), Ouroboros Praos, Ouroboros Genesis, and the research paper on Ouroboros Hydra protocol, which is the latest version released by IOHK in March 2020.
This new protocol was created through a 5-year collaboration between the IOHK team and the DLT research lab at Edinburgh University. The off-chain scalable architecture of Hydra addresses three key challenges facing scalability: high transaction throughput, low latency, and minimum storage of each node. You may find the above illustration longwinded and still have no clue as to what Ouroboros Hydra is and how it meets the scalability challenge.
To improve scalability, Ouroboros Hydra splits time into periods called epochs and then further split them into slots. Each epoch is 5 days, and each slot lasts for about 20 seconds (one block is generated per slot, i.e. 3 blocks per minute). Instead of these divisions, the key here is that the Ouroboros Hydra protocol enables the running of multiple epochs at the same time or the increase of slots within epochs, which significantly boosts Cardano’s network performance.
If an epoch processes 1,000 transactions per second, 1,000 epochs can process millions of transactions per second, which is far more efficient than Visa. This is why IOHK said that the Cardano network is infinitely scalable.
2) How does Ouroboros ensure security?
The key to Cardano’s security lies in the design of a random mechanism. In the Cardano network, not everyone is responsible for the generation of new blocks. Instead, nodes called slot leaders are randomly selected for the generation of the next block. Cardano selects bookkeepers randomly and adopts the Verifiable Secret Sharing to split the confidential information into N copies and send them to N individuals. This mechanism can detect any cheating by the distributor because as long as the number of malicious nodes is kept to a certain level, Cardano nodes can restore the original information by combining the fragments. By adopting such a mechanism, when certain nodes in the network are disconnected or terminated (in the case of malicious nodes), other nodes can still function, thereby ensuring the secure operation of the Cardano network.
3) How will Cardano maintain decentralization under the PoS consensus?
In the PoS mechanism, rights are determined by holdings, which may lead to centralization and threaten network security. Cardano’s solution for this problem is to offer economic incentives to promote decentralization. Under Cardano’s PoS mechanism, token holders can establish a stake pool where they can stake tokens and run nodes for interests and rewards. Token holders can also entrust their holdings to the stake pool for interest earnings. Carrying out bookkeeping and running the nodes, the stake pool distributes the profit from the recorded block generation to its members and leaders in appropriate proportions. In less developed PoS systems, the more tokens a user stakes, the more likely will he obtain the bookkeeping right, which leads to centralization. In such a context, how will Cardano prevent the limitless expansion of a stake pool?
Cardano’s solution
Here is Cardano’s solution: Once the stakeholders and tokens of a stake pool exceeds a certain threshold, its rewards will cease to grow. Therefore, for maximized returns, users will choose other stake pools that are below the threshold. By introducing such a threshold, Cardano achieves the goals of expanding stake pools, extensively distributed nodes, and full decentralization.
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