Why Kirkstone chose Cardano as their blockchain platform
What is Cryptocurrency?
Cryptocurrency is commonly defined as any currency (digital or virtual) which is secured by cryptography. This use of cryptography essentially makes the currency built on it nearly impossible to counterfeit. One of the main attractions to the cryptocurrency space is the reduced importance placed on centralised systems. Instead, the users of the cryptocurrency depend on a decentralised system to record the required information.
Cryptocurrencies are a peer-to-peer transactional system which ultimately means the requirements for banks to verify these transactions is eliminated. When cryptocurrency funds are transferred between wallets, a public ledger records this transaction. The distributed public ledger used within the space is referred to as the blockchain.
What is a Blockchain?
Blockchain technology is a distributed database or ledger, which is duplicated and distributed among nodes on a computer network. The distributed ledger created by the blockchain technology is immutable, which means no member of the ledger can edit or disrupt the transactional data once it has been included into the public ledger. Another important aspect of blockchain technology is the opportunity of the implementation of “smart contract”, how exactly this “smart contract” technology can be utilised will be discussed further through the article.
Inside these created blocks, the transactions within them are considered to have occurred at the same time. Any transactional data not contained within the blocks is deemed to be unconfirmed by the blockchain. As mentioned above the network is made of nodes, any node in the network can create a block by combining and grouping the transactional data. If any nodes can propose a new block to the network isn’t there a possibility of multiple blockchain tails. Taking bitcoin as the example, bitcoin utilises a proof of work consensus mechanism (both terms will be discussed in more detail). This method of consensus means it is extremely improbable that two blocks of data will be proposed at the exact same time. However, if such an event occurs a chain of ambiguity is created, once the next block in the sequence is added, the longest chain remains. The block (or blocks) in the shorter chain is removed and the transactional data with the block returned to an unconfirmed status.
A consensus mechanism is the means by which a blockchain confirms that the transactions happening on the network are real and that all members approve the status of the ledger. The introduction of the consensus mechanism ensures that the public ledger is maintained operative and unbiased. There are many types of consensus mechanisms available for blockchain technology. The two major examples are proof of work (PoW) and proof of stake (PoS), blockchains such as Bitcoin and Litecoin use PoW consensus mechanisms and blockchains like Cardano and Algorand utilise versions of PoS mechanisms.
The PoW consensus mechanism is designed to entice members of the system of nodes to continually attempt to add authorised blocks to the blockchain. The PoW consensus model was implemented to eliminate the issue of double spending. Double spending is a potential flaw in the digital cash system, where the owner of the digital cash will be able to spend this money twice. Double spending on a transactional system reduces user trust and devalues the currency, thus must be avoided. The PoW mechanism requires a miner/user to solve each block's specific hash function (hash functions will be discussed in a further article). Solving these hash functions can only be done randomly and thus requires a significant computing power. Once a miner has solved the hash function, the consequently valid block can be added to the blockchain. The miner who completed the has function is rewarded by the network.
The PoW mechanism does ensure a fair and transparent system. The mechanism also negates any malicious fraud, as any entity wishing to successfully fraud the network would have to control more than 50% of the power on the network, which just isn’t viable in today’s market. The PoW mechanism was a massive step forward for the cryptocurrency space; however, it is not without its issues. Firstly, if you want to attempt to mine the cryptocurrency via PoW, the start-up costs are significant due to the level of computation power required. Further, the massive computation power required has a negative effect on the environment, due to the drastic power consumption. For example, the Ethereum network consumes an energy equivalent of Austria (73.2 TWh). As the network scales, the computation power required increases. The computation required, could surge the demand for mining pools, leading to centralization and thus security issues.
PoS was designed to mitigate the issues in the inherently flawed PoW system. The standard PoS system drastically reduces the computation power required to maintain the security of the blockchain. The PoS mechanism removes the competitive aspects of the PoW mechanism, rather than every miner competing to add the next block, which wastes a massive amount of energy, the PoS mechanism selects the next validator. To participate as a validator, a person must “stake” the blockchain coin. The next validator is selected by the mechanism based on an algorithm which commonly factors in variables such as time staked and amount staked. PoS mechanisms vary considerably over different blockchains, from the amount of stake coin required to become a validator, to the amount of validators required to agree transactions are valid. Like PoS, one of the major theoretical threats to a PoS blockchain is a singular entity holding >50%. However, any malicious behaviour is greatly discouraged, as any major fraudulent activity would render the massive amount staked worthless. Furthermore, for any major blockchain, the cost of obtaining 51% staked amount in today’s market is astronomical.
So why has Kirkstone chosen Cardano?
As many of our followers already know, Kirkstone has developed on the Cardano blockchain. Cardano was founded by a co-founder of the Ethereum blockchain, Charles Hoskinson. In 2014, Hoskinson left the Ethereum project, due to disagreements with founder Vitalik Buterin. This enabled Hoskinson (and other former Ethereum colleagues) to be free to create the Input-Output-Hong-Kong or IOHK company, after extensive research IOHK released the Cardano native token ADA. Cardano is the primary project of the IOHK company, which is designed to be a public open source blockchain platform. Cardano aims to “provide a more balanced and sustainable ecosystem” for cryptocurrency projects, and states that ADA is the only blockchain coin created with a “scientific philosophy and research-driven approach”.
Two keywords that are important to understand when discussing the Cardano blockchain are Ouroboros and RINA. As previously stated in the consensus mechanism section of this article, Cardano is a PoS blockchain, specifically the Ouroboros PoS. Broadly, the Ouroboros system allows the network to “elect” a few nodes in the system to create the next blocks; these nodes are termed “slot leaders”. The system then divides the time into “epochs”, which are then divided into “slots”. A “slot” is defined as the exact amount of time required to make one block. The network assigns randomly slot leaders to certain slots, the slot leaders are the only nodes capable of mining during this slot time. The slot leaders await transactions, authenticate them, and then add the transactional data to the block being built. The number of slots per epoch, and epochs being run in parallel can both be increased to improve the scalability of the network. RINA (or Recursive Internetwork architecture) is a technology which is like the TCPIP protocol used by the internet. Essentially, the Cardano network is split into smaller networks that are self-contained and can interact if needed.
Now we will discuss why Kirkstone chose Cardano in the present and looking into the future. Starting with the present, in February 2022 the Cardano blockchain experienced a boom activity, and trailed only Ethereum and Bitcoin in 24-hour transactional volume, while maintaining a significantly lower transaction fee.
In September 2021, Cardano released functional smart contracts to the blockchain network. The number of smart contract and the amount of locked assets in such contracts is increasing constantly on the Cardano blockchain. The simplicity of use has enticed a wide range of cryptocurrency entrepreneurs to develop smart contracts. At Kirkstone, we investigated the many different blockchains and the adjoining smart contract systems, we believe long term Cardano will dominate the smart contract ecosystem.
Interoperability is a major priority for the Cardano developers; at Kirkstone we believe for a blockchain to maintain cross-chain compatibility will be a must. This cross-chain operability will eventually allow Cardano to interact with the standard financial system and multiple other cryptocurrencies. Attesting to this, is the recent Cardano Ethereum bridge testnet created by Milkomeda and Nomad; the development builds on the existing Nervos-Cardano bridge. Furthermore, on February 25th Emurgo (considered the commercial side of Cardano) announced an investment in Fourier Labs – a company which specifically provides interoperability solutions.
Cardano governance protocols maintain the sustainability and incentivise the constant development of the blockchain. A treasury function is built into the protocol, which will allow the community to constantly develop the blockchain. The protocol allows developers to apply/propose a change to the Cardano blockchain, the community can then vote on proposed changes, once a proposal is chosen the treasury protocol releases the required funds for development. The continued decentralisation of any blockchain is of critical importance to the long-term sustainability and usability. Cardano staking pools like others are designed to reduce potential staking rewards, this feature promotes the continual decentralisation. The recent significant increase in projects being built on the Cardano blockchain, is also a big plus for us at Kirkstone. The recent inclusion of Defi and launchpad projects, will allow Kirkstone to raise the necessary funding while joining a blossoming ecosystem.
What is the long term viability of using Cardano?
Long term Kirkstone believes through thorough research that the Cardano will be a leading blockchain. The upcoming Cardano Hydra updated will provide an ensemble of layer 2 solutions which tackles security and scalability. The Hydra update will also include multiple on-chain smart contracts, which will be crucial for the ongoing lifecycle of Hydra.
A Hydra head is described by IOHK as a isomorphic state channel, this simply means Hydra heads act the same as the main chain which means the existing infrastructure of smart contracts and extended UTXOs are available. As stated by IOHK “A serious disadvantage present in current layer-two state channel protocols is that existing layer-one smart contract infrastructure and contract code cannot be reused off-chain without change”, the Hydra update aims to fix this. The update provides the use of on-chain smart contracts which will allow the opening and closing of the Hydra heads, whilst simplifying the off-chain protocols to be more effective.
The Hydra heads facilitate the transactions and the execution of smart contracts off chain. Basically, the main chain is unaffected by multiple transactions or smart contracts occurring in the Hydra head and is only “interested” in the start and end states. The Hydra heads theoretically should have increased transaction times, cost efficiency, and reduce required storage space. Excitingly, IOHK are constantly developing the platform and believe Hydra is only the beginning.