In 2015, Ethereum co-founder Charles Hoskinson and his colleague Jeremy Wood left the Ethereum Foundation to build their own company, Input Output. In 2017, that company launched Cardano (CRYPTO:ADA), a blockchain powered by the ADA token. Since its debut, its price has soared 4,700%, achieving a market value of $42 billion. That makes Cardano (or ADA) the sixth most valuable cryptocurrency today.
However, Cardano is worth 10 times less than Ethereum, but its developer team is executing an ambitious growth strategy. For that reason, this cryptocurrency still has plenty of potential upsides. Here’s what you should know.
The five phases of development
Like Ethereum, Cardano is a programmable blockchain, meaning it was designed to support smart contracts (i.e., self-executing computer programs). However, the Cardano developer team has taken a more tactful approach to building the platform, frequently submitting research papers for academic peer review. In fact, the project itself is broken into five distinct phases: Byron, Shelley, Goguen, Basho, and Voltaire.
The first two phases are complete. They focused on building the foundation and decentralizing the network. During that period, Cardano went live featuring a unique proof of stake (PoS) consensus protocol known as Ouroboros. That term refers to an ancient Egyptian symbol depicting a dragon eating its own tail, meant to represent infinity.
In September 2021, the third phase added support for smart contracts, meaning decentralized applications (dApps) and decentralized finance (DeFi) products can now be deployed on the Cardano blockchain. Currently, very few dApps are live, but some 4,000 developers have projects in the works, meaning Cardano could be a thriving ecosystem in the not-too-distant future.
Looking ahead, the fourth and fifth phases — which have not yet been scheduled — will address scalability and governance. During that time, the Cardano developer team plans to implement Ouroboros Hydra, a version of the PoS consensus mechanism that could theoretically boost throughput to 1 million transactions per second (TPS). To understand why that matters, let’s talk about scalability.
The Ouroboros consensus protocol
The Ouroboros consensus protocol breaks time into 20-second slots. During each slot, a network participant (i.e., stake pool) is randomly chosen to verify transaction blocks and add them to the blockchain. Unlike proof of work (PoW) consensus, Ouroboros doesn’t require tremendous amounts of computing power, meaning it’s far more eco-friendly.
However, the Cardano blockchain currently supports just 250 TPS. That’s pretty good compared to Ethereum, which handles about 30 TPS. But it pales in comparison to a global payments network like Visa, which can theoretically handle 24,000 TPS. Put another way, virtually all blockchains have a scalability problem.
For example, as the addition of more users has congested the Ethereum network, transaction speeds have slowed, and transaction fees have risen sharply. Now that smart contracts are live on Cardano, its platform will suffer the same fate eventually — at least, it would without the implementation of Ouroboros Hydra, a name referencing the many-headed snake from Greek mythology.
To that end, Hydra will add multiple side chains to the core blockchain, dividing the network load over a larger infrastructure. The Hydra upgrade is still in development, but simulations have shown that each side chain can process roughly 1,000 TPS. So, with 1,000 side chains, Cardano’s throughput would reach 1 million TPS. At that point, the platform could support widespread adoption by users around the globe.
The investment thesis for Cardano
DeFi products have seen a sharp uptick in adoption, soaring elevenfold to $260 billion since the beginning of 2021. But DeFi services aren’t free. Users are charged transaction fees in the form of the underlying cryptocurrency — in the case of Cardano, that would be the ADA token. Put another way, as more users adopt dApps and invest in DeFi products on the Cardano blockchain, demand for the ADA token should rise, sending its price higher.
Of course, Cardano’s ecosystem is currently tiny compared to the 2,800 dApps and the $171 billion invested in DeFi on the Ethereum blockchain. But Cardano is still a compelling investment. The blockchain is built on peer-reviewed research, and the experienced developer team has implemented a very methodical growth strategy, which should ultimately make Cardano a highly scalable platform.
More broadly, owning ADA makes you a stakeholder in the Cardano ecosystem. You could delegate those tokens to a stake pool to earn rewards or even start your own stake pool. And as the ecosystem grows, more transactions would translate into more rewards for you. In a way, it’s similar to owning shares of a company’s stock. That’s why this cryptocurrency looks like a smart long-term investment.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.