Welcome back mate! How’s your week going? Well mine is going great! I couldn’t wait to write you another article. So here we are!
Last week, we dealt with the third generation of cryptocurrency- Cardano. We saw the origin, meaning, technicality, administration and eras of Cardano. Interesting wasn’t it? Now this is not all there is to Cardano. I like to put it this way; “Cardano is much more than just a cryptocurrency”. Sit back, take a cup of coffee and let’s go!!!!
There are three key characteristics that make up a good cryptocurrency. If you have been following up with the series, we talked about the problem of bitcoin which is scalability. This is the ability for a network to increase transactions per second as more users come into the network. Ethereum is also faced with this same problem and some other projects. The more people make transactions on the network, the slower it gets. This is a major challenge because it causes network congestion. Okay Zoe, I get it let’s move on..
The three characteristics of a good cryptocurrency are; Scalability, Sustainability and Interoperability. From the word sustainability, I guess you already know what it means. This is the ability for a network to stand the test of time. Bitcoin is sustainable as it has been in existence since 2009 and looks like it’s not leaving anytime soon. Interoperability is the ability for blockchain networks to interact with each other. For instance; Alice wants to send some funds to Bob and she has $ada currency while Bob needs $btc. The ability for these networks to interact with each other such that when Alice sends her $ada, before it gets to Bob, it changes to $btc, is called interoperability.
These characteristics are the major problems faced by crypto currencies today but guess what! Cardano solves all three of them. Isn’t that awesome? The mission of Cardano is to solve the problem of scalability, sustainability, interoperability and Governance. This mission is not some rocket science that we hope to happen in the future. It is already happening! The more people perform transaction activities on the cardano blockchain, the faster it becomes. Cardano has been in existence since 2015 and it’s growth is incredible. By the time you fully understand what this project is, you will know that it is here to stay. We already discussed last week that the interoperability feature will be present in the Basho era of Cardano.
What do you mean by Cardano will solve the problem of Governance? Good question! If you’re African like I am, you’ll know that bad governance is a major issue for most African countries. I know almost every country in the world is plagued by this issue but it is a matter of urgency for most African countries. Imagine staying in the comfort of your homes to vote for your candidate without any fear of violence or death? Imagine a decentralised election where everyone has a copy of the results making it immutable? This is very possible with blockchain technology mate. This is one of the ways cardano blockchain solves the problem of Governance. This feature will fully come into play during the era of Voltaire.
PROOF OF STAKE — THE MECHANISM OF CARDANO
The mechanism of Cardano or anything, is simply the natural process by which something takes place or is brought about. Recall when we talked about the mining process of bitcoin, which is called proof of work. Bitcoin was designed that way. It is the natural process by which users mine bitcoin. Hence, the mechanism of bitcoin. On the other hand, Cardano is designed to use the proof of stake mechanism.
Proof of stake is a consensus mechanism in which users of the network are selected at random to mint blocks. Relax, let’s take it bit by bit. In the POW mechanism, users of the network have to get these really expensive computers called ASICS, and build a mining farm that consumes so much energy enough to power a whole country. In the POS mechanism, users of the network do not need ASICS, all they need is to build a node. Please stay with me and don’t mind these languages. A node is simply a device like your PC that is connected to a particular network. So, in the POS mechanism, users have to connect their nodes to the cardano network by running some codes and commands provided by the network. Unlike the POW mechanism where the computers solve really difficult puzzles before a mine $btc, the POS mechanism chooses a node at random to mine $ada. The chance of your node getting picked, depends on the amount of stakes supporting your node. I’ll come back to that please just continue. It is very expedient that your node stays online all the time. When a node gets picked, it validates the block and gets rewarded in $ada. The Cardano proof of stake protocol is also known as Ouroboros.
You get it now right? Let’s go deeper!
The mechanism of a cryptocurrency is the way a network is designed to be secure. The POW mechanism is the way Bitcoin is secured. The POS mechanism is the way the Cardano network is being secured. While the Bitcoin network only requires the miners with their mining farms to secure the network, the POS mechanism does not only require the node operators to secure the system.
See, the network also makes provisions for individuals who cannot operate nodes to actually earn rewards too. They are not just normal individuals, but participants of the network by holding the currency. For you to be able to vote in an election in the U.S.A, you must be a citizen of the U.S.A. it also applies here in the POS mechanism. You must be a holder of the currency to show that you are a participant of the network. These people are also known as Stakers or Delegators. By the way, a friendly way to call a node is pool. I’ll be substituting a node for a pool from now on so it doesn’t sound too technical okay?
HOW DO DELEGATORS GET REWARDED?
Before I go straight to how these guys earn rewards, let me explain to you a very important term called staking. This is the process of actively participating in a POS network by delegating your funds to a pool. Remember I said to be a participant of a network, you have to hold the currency. To be actively participating, you have to be staking. This is the only way the network recognises you, and rewards you. The chance of a pool getting picked depends on the amount of stakes a pool has. As a staker, the funds in your wallet are called stakes. When I say “amount of delegations a pool has”, I do not mean that delegators give their funds to that pool. Delegating to a pool simply means supporting a pool and giving it a chance to get picked by the network. The funds in your wallet is what is actually participating and not you. When you delegate to a particular pool, that pool gets a notification that an amount of stake just came in. Although the pool operator gets notified, it doesn’t mean that as a delegator your funds are entering his pool. You still have full control over your funds. It doesn’t get locked in a pool. Delegators also get paid by the network as the pool operators are getting paid. This is a battle of who has the highest stakes. This is just how the network was designed.
SLOTS / EPOCH
The Cardano network divides time into what we call epochs and these epochs are further divided into slots. An epoch lasts for 5days while a slot lasts for just a second. A pool gets picked at an average of 20 seconds. Rewards are paid by the end of every epoch. The network automatically sends out rewards to both the pool operators and delegators of the selected pools. A pool can get chosen multiple times before the end of an epoch to mint blocks and yes! He gets paid for every block minted.
It is very important to note that as a first time delegator, it takes the network approximately 14 days to register your funds to the network. What I mean is that from the day you start delegating till the next 14 days, you’re only a participant. After 14 days, you become an active delegator. Rather, your funds become active.
How much returns am I going to get? Good question!
There is no fixed or direct answer for this question because rewards for each delegator are not fixed. A delegator with a higher stake than you will definitely get better returns. The performance of your choice of pool is also a factor affecting rewards. If that pool doesn’t mint blocks consistently, it will definitely affect your rewards. Basically, rewards vary.
However, your annual percentage yield (APY) if you stake with a good pool, wouldn’t be less than 5%.
Doesn’t this mean that pool operators with influence will attract all the delegators to themselves and mint almost the blocks? No this will not be possible because the network provides a fixed amount of delegation a pool should get to. This point is called saturation. This is a good initiative because if these pools are allowed to gather all the delegators to themselves, then the purpose of cardano will be defeated, which is decentralization. Once a pool reaches saturation point, it starts offering diminishing rewards. You lose rewards when you delegate to a saturated pool.
OTHER USE CASES OF CARDANO
In the first part of this article, we saw the two layers of cardano and specifically the second layer which allows for other projects to be built on the cardano blockchain — The Cardano computational layer. Well, projects are already being built on the network and they are patiently waiting for the transitioning into the next era where they will function effectively.
Cardano also offers a platform where members of the community who have great ideas to build and develop the ecosystem will be funded if voted by other members of the community. Remember Voltaire? Yeah! This is Governance in play. One of my favourite projects being built on the network is Liqwid. Liqwid is a decentralised market place for lenders and borrowers. African Blockchain Center for Developers (ABCD) is a project very dear to me too. It’s mission is to incubate developers here in Africa and train them in not just Haskell programming language, but for them to become blockchain developers. Experts in the blockchain field.
In addition, Cardano has also signed a deal with the ministry of Education in Ethiopia to Implement digital IDs for over 5 million students. Cardano has also partnered with a telecom company to provide internet access to those unable to access the internet in Tanzania. This is not just any internet that the government can control whenever they like, but a decentralised one where no central authority is in control. Amazing!!!
Pools with a mission for the society are also important in the ecosystem. Pool operators that use the funds from their pools to support a mission are awesome! Zoepool is one of them of course. Other mission driven pools include; WEQNT operated by Denicio. He uses the funds from his pool to purchase solar bulbs to African countries with electricity problems. This always brings a tear to my eye. Mission driven pools are too numerous here. When you see one, please do well to support it.
There’s so much to say about Cardano but I’ll call it a day here. Thank you so much for coming along on this ride with me. I’m sure it was worth your time. In the next couple of years, I want to see people using cardano in their day to day activity. Right now, if i mention cardano to anyone they are lost. In the next couple of years, I want this thing to be as popular as facebook. Not just because it is a cryptocurrency, but because it is much more than that.
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