Cardano shares the same ambition as Ethereum. Both serve as a public blockchain infrastructure where developers can develop massive commercial applications.
The Cardano team's announcement of its "Smart Contracts" launch brought to the spotlight that Cardano shares the same ambition as Ethereum. However, for this goal, Cardano has to solve the scalability problem first.
For example, Visa, a leading global payment services provider, can process 150 million transactions per day, or more than 1,700 transactions per second. In comparison, the processing capacity of blockchain based on the PoW mechanism stands at tens of transactions per second. With the PoS mechanism, you can reach hundreds of transactions per second. It is no more than a delusion at present; the attempt to replace traditional financial institutions with decentralized ones.
Like any other blockchain, Cardano also faces the impossible triangle of decentralization, scalability, and security. That is, any solution to scalability may involve sacrifices in decentralization and security. So how does ADA solve this challenge?
Scalability: ADA uses the Ouroboros PoS consensus protocol
Ouroboros can improve scalability while maintaining security. According to Cardano's official website, Ouroboros is available in five different versions: Ouroboros Classic, Ouroboros Byzantine Fault Tolerance (BFT), Ouroboros Praos, Ouroboros Genesis, and the latest is Ouroboros Hydra, a research paper published in March 2020 by IOHK.
After a five-year collaboration, the IOHK team and the DLT (Distributed Ledger Technologies) research lab at the University of Edinburgh developed the new protocol. This off-chain scalability architecture addresses three key scalability challenges: high transaction throughput, low latency, and minimal storage per node. Possibly the above description is unclear to you, and you have no idea what Ouroboros Hydra is and how it addresses the scalability challenge.
Ouroboros Hydra divides time into cycles or epochs to improve scalability and separates them into intervals or slots. Each cycle has a duration of 5 days, and each interval lasts about 20 seconds (one block is generated per interval, i.e., three blocks per minute). The critical point is not in these divisions but in the fact that the Ouroboros Hydra protocol allows multiple cycles to run horizontally or increase the number of slots in each cycle, thus significantly increasing the performance of the Cardano network.
If one cycle can process 1,000 transactions per second, 1,000 cycles can process millions of transactions per second, much more efficient than Visa. The IOHK spokesman said that the Cardano network is "infinitely scalable."
How does Ouroboros guarantee security?
The key to Cardano's security lies in the design of a randomization mechanism. In the Cardano network, not everyone is responsible for generating new blocks. Instead, nodes called "interval leaders" are randomly selected for the generation of the next block. Cardano selects the counters randomly and adopts the verifiable secret sharing mechanism to divide the confidential information into N copies and send them to N individuals.
This mechanism can detect any deception by the distributor. As long as the number of malicious nodes remains at a certain level, Cardano nodes can restore the original information by combining the fragments. By adopting this mechanism, when some nodes in the network disconnect or terminate the protocol due to malicious intent, other nodes can continue to operate, thus ensuring the secure operation of the Cardano network.
How will Cardano maintain decentralization under the PoS consensus?
In the PoS mechanism, shares of token holdings determine the entitlements, leading to centralization and threatening the network's security. Cardano's solution to this problem is to offer economic incentives to promote decentralization. Under Cardano's PoS mechanism, token holders can set up "stake pools" themselves to leave tokens in stake and operate nodes to earn interest and rewards.
Token holders can also delegate tokens to the stake pool to earn interest income. Stake pools can perform accounting, operate nodes on behalf of the holders, and distribute the profits from block generation among pool members and pool leaders. In less developed PoS systems, the more tokens a staking user has, the more likely they are to obtain the accounting right, leading, as a consequence, to centralization. In this context, how will Cardano avoid unlimited expansion of a stake pool?
According to Cardano's design: Once the stakeholders or tokens in a stake pool exceed a certain threshold, their rewards will stop increasing. Therefore, to maximize rewards, users will choose other pools that are below the threshold. By introducing such a threshold, Cardano can increase stake pools, disperse nodes and achieve maximum decentralization.