Cardano has grown to become one of the largest protocols within the cryptocurrency industry. Launched in 2017, the blockchain was designed to improve upon the failings of Ethereum - in particular scalability, interoperability, and sustainability. To overcome these issues, Cardano was developed using a scientific philosophy and peer-reviewed academic approach.
Often referred to as a third-generation blockchain, Cardano was developed to offer solutions to businesses, governments, and enterprises globally. As such, the network can host decentralized finance (DeFi), non-fungible token (NFT), and Web3 applications.
With the long-awaited Alonzo upgrade bringing smart contract functionality in late 2021, many investors have been left wondering if the native cryptocurrency, ADA, is a good investment for the future? This guide will explain exactly what Cardano is, how it works, evaluate the protocol’s pros and cons, and offer advice on the project’s future potential.
Cardano is an open-source layer-1 blockchain that was developed for the deployment of smart contracts. Founded in 2015 by the co-founder of Ethereum, Charles Hoskinson, the blockchain is unique thanks to an academic peer-review approach. The protocol is supported by the Cardano Foundation, a Swiss-based non-profit, Input-Output Hong Kong (IOHK), a for-profit research and development company co-created by Hoskinson, and EMURGO, a commercially-focused blockchain solutions developer.
The ambition of Cardano developers was to design a blockchain that could solve issues faced by first and second-generation blockchains, such as Bitcoin and Ethereum. Specifically, the blockchain seeks to improve scalability, interoperability and ensure the sustainability of operations. With these ambitions in mind, Cardano developers created several proprietary technologies that allow the blockchain to do just that.
The Cardano blockchain is capable of hosting a range of decentralized applications (dApps). With the network’s quick transaction speeds and the ability to scale, these decentralized applications can facilitate a wide variety of use cases. Although DeFi, NFTs, and metaverse are the key focus of dApp developers, the blockchain is capable of expanding beyond that as new sectors of the cryptocurrency industry evolve. At the time of writing, there are over 750 dApps on the Cardano ecosystem.
The excitement surrounding Cardano’s potential is clear to see, however, the blockchain has also come under heavy criticism by experts within the cryptocurrency community due to its lofty ambitions and slow development of smart contracts. Before investing in Cardano, it is sensible to evaluate Cardano’s pros and cons.
- Future proof. Cardano’s developers have focused heavily on future-proofing the blockchain. Cardano’s innovative scalability and interoperability solutions should help the blockchain grow as network usage increases.
- Low fees. Thanks to the blockchain's high throughput, the transaction fees required for completing transactions on Cardano are much lower than competitors. In 2022, gas fees have averaged 0.2 ADA, which in April 2022, is approximately $0.16.
- Open-source. The blockchain’s underlying code is open-source and can, therefore, be verified. All transactions can also be viewed and are immutable.
- Deflationary token. The native coin, ADA, has a fixed maximum supply of 45 million coins. Unlike other blockchains that continually introduce new tokens, the total number of ADA coins will never increase.
- Liquidity. Due to Cardano’s popularity, the market for ADA is highly liquid. The coin can be exchanged and traded efficiently with little slippage.
Alongside transactional data, Cardano is a blockchain capable of processing computations. These computations are more commonly referred to as smart contracts. Smart contracts are a programable set of instructions that allow for the development of decentralized applications, such as decentralized exchanges (DEXs), borrowing and lending protocols, and NFTs.
The Cardano blockchain is a decentralized ledger composed of two layers: (1) the Cardano Settlement Layer (CSL) and (2) the Cardano Computation Layer (CCL). While the CSL handles transactional data, the CCL handles computational data. Keeping the two layers separate allows for the blockchain to develop proactively, changing and updating where necessary.
Alongside the two foundational CSL & CCL layers, the blockchain implements a variety of proprietary technologies to tackle scalability, interoperability, and sustainability.
The first of these proprietary technologies is a Proof-of-Stake consensus mechanism called Ouroboros. The Ouroborous protocol allows Cardano to scale as network usage increases, which should allow the blockchain to grow unhampered as the dApp ecosystem grows. In comparison to Proof-of-Work blockchains, which slow down at times of high network usage, Cardano’s network of validators can distribute resources accordingly if the blockchain experiences high transactional volume.
Cardano’s Proof-of-Stake mechanism relies on a network of validators, also formally known as stake pool operators. Each validator within the network must stake (lock away) native ADA coins to operate a node. The number of ADA coins and the length of time staked determine the likelihood that a validator will be chosen to add a new block to the blockchain.
Within the native Ouroboros protocol, Cardano also offers a Delegated-Proof-of-Stake (DPoS) mechanism which allows ADA token holders to support other validators rather than become a validator themselves. For supporting validators within the network, delegators can earn a share of all rewards. The staking reward is 4.99% for delegators or 5.27% for running a node. The generous rewards are the reason Cardano is one of the best staking coins.
The Ouroboros protocol allows for a throughput of 250 transactions per second (TPS). Although this is lower than layer-1 competitors, such as Solana and Fantom, a native layer-2 scaling solution, known as Hydra, is expected to take the blockchain to 2 million TPS in the future.
To improve interoperability, Cardano has also developed a KMZ sidechain protocol, that allows users to bridge Cardano digital assets to other blockchain ecosystems, and vice versa. Unlike other blockchains, Cardano was designed with the intention that, in the future, it is not going to be the only blockchain used within the cryptocurrency ecosystem.
The operation of Cardano has been ensured thanks to the native treasury. The treasury collects network fees and distributes them to those contributing to the blockchain. This includes those involved with operations, those solving network problems, and the developer community. By using the treasury, Cardano can ensure that it is a self-sustained cryptocurrency project, that is capable of evolving over time.
ADA is the native cryptocurrency of the blockchain and is essential to the Cardano ecosystem. The coin is required to pay gas fees when a transaction is completed and can be staked to support the validator network. The coin provides governance to the protocol and, thanks to its intrinsic value, can also be used as a medium of exchange. ADA has a maximum capped supply of 45 billion coins.
Once purchased, ADA does not have to sit idly in a cryptocurrency wallet. With a growing ecosystem, the ADA coin can be utilized in a variety of ways. The coin can be staked to earn ADA rewards, used to interact with decentralized applications, used to purchase goods and services, or provide liquidity within the growing DeFi ecosystem.
- Stake to earn ADA rewards. The Cardano blockchain is secured by a network of validators that stake native ADA coins. All validators earn ADA rewards which are released after a new set of transactions have been validated. Those delegating ADA tokens earn a proportional share of all rewards. Cardano staking can be completed manually through the native Yoroi wallet. Although ADA can be staked manually, most popular cryptocurrency exchanges also offer staking options, whereby the exchange acts as the validator node in the network. This is a much simpler option for beginners. Review our guide on the best ways to stake ADA to earn rewards.
- Medium of exchange. Although many will purchase ADA with the aim of holding for long-term capital gains, the ADA coin can also be used as a medium of exchange within some cryptocurrency platforms. The coin can also be used to top up crypto-backed debit cards which can then be used to pay for everyday purchases.
- Interact with dApps. Although slow to start, Cardano is developing a strong ecosystem of decentralized applications. As these dApps are built on top of the Cardano blockchain, many offer ADA coin holders additional perks and services.
- Earn yield from DeFi. The decentralized finance (DeFi) ecosystem is composed of dApps that offer users the ability to swap, lend, borrow, and trade without the need for a centralized intermediary. Most DeFi applications rely heavily on user-supplied liquidity, which provides yield earning opportunities for token holders. Opportunities include becoming a liquidity provider or yield farming. Although returns can be high, earning yield from DeFi apps is only suitable for advanced cryptocurrency users. To learn about yield farming and how it works, read our full guide here.
As one of the most popular cryptocurrencies, ADA, can be accessed from a range of cryptocurrency-focused platforms. This includes cryptocurrency exchanges (centralized and decentralized), brokerages, and peer-to-peer (P2P) marketplaces.
- Centralized cryptocurrency exchanges. Centralized exchanges are one of the most efficient methods for accessing crypto. Utilizing a centralized order book, an exchange can match buyers with sellers, allowing for fiat-to-crypto transactions or crypto-to-crypto transactions. Most centralized exchanges are now regulated, which means that Know-Your-Customer (KYC) documentation is required, however, exchanges can offer multiple fiat payment methods which can make them extremely convenient. Examples of centralized exchanges that we have reviewed include Kraken, Crypto.com, Coinbase, and Binance.
- Brokerages. For those that wish to stick with regulated service providers, brokerages provide another alternative to centralized exchanges. Instead of matching buyers with sellers, a brokerage platform fulfills the other side of all trades and then manages that volume through market partners. Although brokerages may require a higher level of capital, exchange rates can sometimes be favorable. Like centralized exchanges, KYC documentation will be required. Examples of brokerages include PayPal, Robinhood, Uphold and eToro.
- Decentralized cryptocurrency exchanges. Decentralized exchanges (DEXs) are applications that allow users to exchange funds without the need for a centralized intermediary. Developed on top of a layer-1 blockchain, such as Cardano, these applications are automated platforms that function thanks to smart contracts and user-supplied liquidity. DEXs do not require custody of funds and all transactions are recorded on the corresponding blockchain. Examples of DEXs that we have reviewed include Uniswap, SundaeSwap, and Bancor.
- Peer-to-peer (P2P) marketplace. Peer-to-peer marketplaces are platforms that allow investors to connect directly. Those wishing to exchange cryptocurrencies can communicate directly with others wishing to fulfill the other side of a trade. All exchange details can be outlined by the two parties involved and the transaction is then overseen by the P2P platform. Funds are only released when all parties in the trade have completed the terms of the deal.
While there are multiple options available, a centralized cryptocurrency exchange is often one of the easiest methods to make an initial investment into Cardano. With advanced security and the ability to store ADA tokens within the platform, a cryptocurrency exchange can often provide the most efficient investment route.
As Cardano is frequently within the top 10 cryptocurrencies by market capitalization, investors can buy ADA using a variety of crypto exchanges and trading platforms. The variety of options can be overwhelming for those new to the industry which is why a comprehensive guide on the top-rated exchanges can be extremely useful. Remember to review the features offered before deciding which one to use. If security is paramount, focus on what security protocols are implemented. If trading frequently, double-check the fees charged.
For more information, read our guide on where and how to buy Cardano which has step-by-step instructions with comparisons of the best exchanges based on HedgewithCrypto's reviews.
Even without smart contract functionality, Cardano climbed and has remained within the top 20 cryptocurrencies for multiple years. Excitement is certainly fierce regarding its ability to scale with network usage. Now that smart contract functionality has been added, there should be very little stopping dApp developers from expanding the native DeFi and NFT ecosystem. However, the transition of dApp developers and end-users is not guaranteed.
Over the last year, the price of ADA soared from $0.17 to reach an all-time high price of $2.98 in September 2021. This is equivalent to a 1653% increase in value. Since then, the price against USD has largely been in a decline. This is due to an overall contraction of the total crypto market cap, with the ADA price breaking the important support line of $1.00 and appearing to be in a dominant downtrend.
Specifically to Cardano, due to the slow integration of smart contracts, a lot of the price advances have been attributed to “hype” rather than actual network usage. It is only now that the blockchain will be truly tested against competitors such as Ethereum, Solana, and Avalanche.
With these in mind, here are some factors to consider before investing in ADA:
- Competition. Cardano is positioned within a saturated sector of the cryptocurrency industry. There are tens of other layer-1 blockchains competing for market share that are all seeking to become the dominant base layer for the deployment of DeFi, NFT, and metaverse applications. Third-generation blockchains such as Solana, Avalanche, and Fantom are all competing to take market share. Cardano needs to continually innovate to compete against other third-generation blockchains as well as the market leader, Ethereum.
- dApp development. Although smart contract functionality is now live on Cardano, the blockchain has come under heavy criticism in 2022 due to the slow development of decentralized applications. Although Cardano-enthusiasts believed the total value locked (TVL) in the blockchain would be high enough to place it within the top 3 blockchain projects, in April 2022, Cardano remains in 31st position. With popular dApps and NFTs, such as Aave, Uniswap, and Bored Ape Yacht Club thriving on Ethereum, the blockchain remains far behind the industry leader. Investors interested in Cardano should pay close attention to dApps being developed on the blockchain and the potential for future growth.
IOHK and Emurgo have released two native cryptocurrency wallets that allow users to interact with the Cardano blockchain. The wallets are called Daedalus and Yoroi, and were developed for slightly different end-users.
Daedalus is the protocol’s native full-node desktop wallet that allows users to establish a validator node within the network. The wallet can be synced with the Cardano blockchain to facilitate validation and security procedures. In comparison, Yoroi is referred to as a “light” mobile and web-based wallet, suitable for day-to-day transactions. The Yoroi wallet allows ADA token holders to delegate tokens to validators within the Cardano network.
All cryptocurrencies, including ADA, must be stored within a cryptocurrency wallet. Each cryptocurrency wallet provides a public key that acts as an address for the transfer of digital assets, and a private key that is used to sign and approve all transactions. While the public address can be shared with people, the private key must be kept extremely secure.
Cryptocurrency wallets can be grouped into two distinct categories: (1) hot wallets and (2) cold wallets.
- Hot wallets. A hot wallet is a cryptocurrency wallet that is either constantly or frequently connected to the internet. These types of wallets are typically either mobile applications, desktop applications, or web-based extensions. Hot wallets are extremely convenient for investors and can be connected to blockchains and dApps extremely quickly. However, frequent connection with the internet leaves these wallets more vulnerable to hacking attempts.
- Cold wallets. In comparison, cold wallets are wallets that are only connected to the internet when in use. These wallets are usually a physical device, such as a hard drive or USB stick, that can be disconnected from a computer once a transaction has been completed. As the device can be disconnected and stored away from the internet, cold wallets are the most secure option for investors. For further information, read our comparison article on the best hardware wallets.
It can be prudent to separate digital assets across both hot and cold wallets. Investors should keep enough ADA within a hot wallet to perform required daily transactions. All other long-term holdings should then be stored offline in a cold wallet.
While there are two native wallets for the Cardano blockchain, there are also several other third-party wallet providers that support the ADA coin. These include:
- Ledger Nano X (used with Daedalus or Yoroi)
- Trezor Model T (used with Daedalus or Yoroi)
- Eternl wallet
- Nami wallet
The Cardano blockchain has been designed with security as a key priority. Thanks to the blockchain’s two-layer CSL and CCL system, Cardano developers can constantly implement upgrades to enhance security features. The blockchain also consistently incentivizes members of the community to look for flaws. All destructive behavior can be prevented as long as 51% of the staked ADA coins are not controlled by malicious users.
Neither Cardano nor the dApps hosted on the blockchain have ever been exploited by a hack at the time of writing.
The Cardano blockchain offers a throughput of approximately 250 transactions per second (TPS). Although the blockchain can process 250 TPS, the finality of each transaction depends on several other factors, such as network congestion. On average, the transfer time of a Cardano transaction is between 30 seconds and 5 minutes.
Cardano has been one of the most hotly anticipated blockchain projects within the cryptocurrency industry for some time. Its scientific philosophy, future-proofing approach, and capability to scale as network usage grows, are just a few of the reasons driving network adoption.
However, in terms of dApp deployment, the blockchain remains far behind competitors. Cardano needs to encourage decentralized application developers and end-users to transition across to the network before it can compete as the number one smart contract base layer within the cryptocurrency industry.
James has been involved in the cryptocurrency markets since 2018. He is a sought-after crypto writer that has published works for cryptocurrency exchanges, fintech platforms, financial publications and investment disruptors worldwide. James' work has been featured on the comparison website Finder and Real Vision, which covers topics in finance, business and the global economy. Outside of writing and blockchain technology, James enjoys playing sports, socializing with friends, and heading to the beach.