Cardano works on its own delegated proof of stake (PoS) protocol called Ouroboros. Ouroboros allows ADA to be sent and received easily and securely. This PoS consensus mechanism also rewards token holders who have staked their ADA.
Fun Fact: The term Ouroboros comes from an ancient Greek and Egyptian symbol of a snake or dragon eating its own tail and is said to symbolise unity and constant evolution.
Being the first blockchain based on peer-reviewed research and mathematically verified mechanisms, Ouroboros is the first provably secure proof-of-stake protocol that forms the foundations of Cardano, a third-generation, layer one blockchain.
It’s not just maths and papers though, Ouroboros also combines behavioural psychology and economic philosophy to ensure its security and sustainability.
In short, in Ouroboros, Cardano has a secure, permissionless, easily scalable protocol, that is also hugely energy efficient.
Proof of Stake (PoS) is one of the two most common consensus mechanisms (the method of verifying transactions) used in cryptocurrency. The other is Proof of Work (PoW).
In PoS, the holders of the cryptocurrency can “stake” their coins in order to help verify transactions on that blockchain (thus creating blocks). As an incentive to staking their coins, holders earn a reward for doing so. This reward is usually paid in the same coins as holders have staked, thus earning them a passive income.
Holders can create validator nodes of their own or stake their coins in a “stake pool” node (a group of holders combining their coins for a greater chance of validating nodes and earning rewards).
Ouroboros processes transaction blocks by dividing the blockchain into epochs, which are in turn divided into time slots.
Slots: Each slot lasts for 1 second.
Epochs: An epoch lasts for 5 days.
Each epoch is made up of 432,000 slots.
What’s the point of slots and epochs, I hear you ponder?
Attacks are inevitable; where there are good guys, there will always be bad guys and as with any way of life, crypto is no different. Sadly, this is evident in the billions lost on the Etherum blockchain.
In order to maliciously manipulate a PoS blockchain, an attacker must gain control of 51% of the blockchain.
On Cardano, the blockchain is run by a large number of stake pool operators (over 3100 at the time of writing), each one running a node (a complete copy of the blockchain). The greater the number of nodes, the greater the difficulty (and cost) the attacker would face.
For every slot, a slot leader is elected to add the next block to the chain. The slot leaders are randomly selected from all of the stake pool operators, every stake pool operator runs a node, and therefore, holds a complete copy of the blockchain.
The slot leader verifies transactions made on the blockchain in the previous few blocks, as the chain grows more and more blocks are verified by a large number of slot leaders. Any attempt to alter the blockchain would be very easily identified and the guilty stake pool operator punished.
Maintaining the sustainability of the blockchain is achieved by incentivising the users. Whether you are a node operator or if you stake your ADA in a stake pool, you are rewarded with more ADA.
In addition, Ouroboros is non-custodial, you always remain in complete control of your assets, something not found on most other PoS blockchains.
By staking, you help keep the blockchain running, in exchange you a rewarded. You scratch their back, the blockchain scratches yours!
As we like to say “your keys, your coins”
NB: at ALL times your ADA coins will remain in your crypto wallet and NOT be locked up, you are free to stake, unstake or use your ADA in any way you like.
Ouroboros solves the biggest challenge faced by existing blockchains: energy efficiency!
PoW blockchains (such as Bitcoin and Ethereum) require new blocks to be mined. It is basically a competition for miners to use computational power to solve a complex mathematical puzzle to earn the right to produce the next block.
The drawbacks to PoW blockchains include the following:
Financially expensive to run due to a large amount of equipment needed.
Environmentally costly; all those mining computers need electricity to run, more electricity requires more fossil fuels to be burnt resulting in more Carbon Dioxide (CO2) being released into the atmosphere.
With Ouroboros, holders “staked” coins help verify transactions on the blockchain, rather than using lots of computational power to do the same job (e.g on PoW blockchains).
This reduction in computational power has the knock-on effect of reducing financial and environmental costs, reducing transaction fees and making the network much easier to scale up. According to Cardano themselves, they can securely scale up the network with up to 4 million times the energy efficiency of Bitcoin!
Scaling Cardano up to meet demand requires several upgrades to the blockchain. Hydra is one of the most powerful upgrades planned.
Hydra solves the three key scalability issues: high-transaction output, low latency, and minimal storage per node.
The Hydra whitepaper outlines the introduction of multi-party state channels, which offers parallel transaction processing to dramatically improve Cardano’s transaction-per-second (TPS) output, and instant confirmation of transactions.
Like the mythical monster, Hydra refers to “off-chain ledger siblings – state channels – as heads, which makes the ledger multi-headed”.
In simple terms think of the blockchain prior to Hydra being an animal with only one head. Everything the animal does is controlled by its brain; it is limited, it cannot increase the number of things it can think about simultaneously.
Hydra, like the myth, is a monster with many heads, each independent and capable of doing different things.
Ouroboros Hydra allows any user to open a state channel (a hydra head). Once a hydra head is open the transaction is moved to layer two, upon completion only the results of the transaction are moved back to and recorded on layer one (the blockchain).
Let’s use an analogy to explain this.
I’m sure you’re familiar with this situation.
Imagine a group of friends going out for a meal. They all have a wonderful time and many laughs were had. At the end of the meal, the waiter (waiter = layer 1/the blockchain) places the cheque/bill on the table. Dave looks at it and announces the total (Dave has opened a hydra-head).
We are now on layer 2. The following “ who pays what” discussion ensues (I told you you’d be familiar with it!). Sally didn’t have wine, Mike had two desserts (greedy Mike) and it was Paul’s birthday.
Finally, after a lot of confusion and several mild arguments, a consensus is reached and everyone gives their money to Dave. Dave then pays the waiter, thus closing the hydra-head.
The waiter leaves with the cash and the translation is recorded in the restaurant's accounts (back to layer 1/the blockchain).
All the waiter and the restaurant care about is how much is owed and how much is paid. Once the party have left, the only evidence that the meal took place is what the restaurant recorded; the (lengthy and confusing) “who pays what” conversation is, for all intents and purposes, deleted from existence
In this example, all of the hard work was done off-chain (on layer 2), leaving the waiter and the restaurant (layer 1) to keep working without slowing down.
Hydra allows all the hard work to be done off-chain without slowing down the blockchain (layer 1)
Each hydra-head has the capability to perform 1000 transactions per second, this gives Cardano the capacity to handle millions of transactions per second, far greater than any other blockchain. In fact, these numbers put Cardano on the same level as some global payment systems!
Ouroboros is groundbreaking in so many ways; energy efficiency, security, fairness, scalability, the list goes on.
Working as a collective, ADA holders are all caretakers of the Cardano blockchain.