At the beginning of every project, there is a vision or attempt to achieve something new. This is true at least for Cardano. Charles told us what is the vision of the project.
Charles Hoskinson together with colleagues from IOHK, Emurgo, Cardano Foundation, and active supporters celebrated the second birthday of launching Cardano main-net in Plovdiv. It was on Saturday 28 September 2019.
Charles had a great speech and tell the world what Cardano is going to be. Let’s have a look at what Charles told us. It was really visionary and it makes sense to think about it.
You can watch the full video here: https://www.youtube.com/watch?v=wsBBog2rCzY
Costs needed for keeping networks running are really important
“Not only that, but the entire Cardano network runs at a fraction of the power cost of equivalent proof-of-work blockchains, using the electricity equivalent of a single house, rather than a small country.”
The cost needed for keeping the network running should be minimized. Not only for the respect to the environment but also for the network economics. Bitcoin and Cardano subsidize the networks by rewarding block producers and all consensus participants. The subsidy is basically a certain amount of coins that will be released and given to block producers. The subsidy gradually decreases in time and it is expected that the block producers will be rewarded mainly from transaction costs. One day, it will be only transaction costs that must keep the networks running.
Now imagine an expensive PoW network that can handle only a few transactions per second. To keep the PoW network safe the transaction fees must rise significantly. Moreover, there will be second layers of Bitcoin where users will send the majority of transactions. Will be transaction fees sufficient? The Cardano network will handle many more transactions in the future on the first layer and since the cost to keep network running is lower I can easily imagine that it will survive after there will be no subsidy.
In PoW the security depends mainly on the price of coins. In Cardano PoS the most important aspect is the distribution of coins. The price is also important since it prevents an individual to buy the majority of coins. Still, if an individual tries to buy over 50% of coins needed for an attack the price will rise.
PoW proponents could say that electricity consumption is important for security. Well, if you check my older article you will find that it is not the case and security can be provably achieved via smarter consensus algorithm, modern cryptography and high level of decentralization.
The addition of a new block consists of two steps. In the first step, a block producer must be selected. Thus, a new block is created by an individual and offered to the rest of the full nodes for approval. The second step is the approval process. Every single node decides whether to accept the block or not based on the rules in the protocol. The PoW consumes the majority of the electricity only for the first steps and only for finding a block producer. For the approval process, only a minimum of electricity is needed. From the security point of view, the second step is more important than the first one. Even in PoW, an invalid block can be proposed by the winner. However, the second step prevents the network to accept the invalid block.
The network needs to reword users for keeping decentralization and consensus and some part of transaction fees must be used for further development of the protocol. For the decentralized treasury. If all fees are used to cover the electricity costs then what users/miners and the treasury might expect? PoS is a much better concept in the long term perspective.
Functionality helps adoption
“All throughout 2020, we’ll be gradually, slowly but surely, adding features and functionality into Cardano … If you send something on our network, it can make it look like a Bitcoin-style push transaction circa on January 3, 2009. And you can go all the way to a modern Cardano transaction and embed all kinds of interesting data inside that thing and enjoy the power of that.
So if we do that, I have a firm belief Cardano will be the most useful cryptocurrency on the market. But are we done? No. Because we need to scale. We need to go beyond just a few hundred TPS (transactions per second). We need to go beyond just the ability to send a few thousand transactions an hour. We need to be able to move to a world where Cardano can service, realistically, millions to billions of people over an arc of time.”
The transaction context is really important. Try to think about how you can have a transaction context in Bitcoin. Imagine a shoe seller and buyers. The shoe seller has an online shop and wants to pair a buyer with a specific order and payment. How he can do it? The only easy way is to generate a new address for the buyers and maintain a dedicated DB where BTC addresses will be linked with users and their orders. So the seller generates address X for the buyer and once the buyer sends BTC to the address X the seller can send shoes to the buyer. If the buyer sends BTC and the seller decides not to send shoes then how the buyer proves that he has already paid? Hopefully, he has some email with the order confirmation from the seller.
Notice that there is no transaction context in the transaction itself. The context is kept only by the shoe seller and thus it is not trusted. There is an alternative to Bitcoin. You can use OP_RETURN. However, the data will be always stored in the blockchain without a chance to remove them. If you think that the transaction context is not important then check how the current financial world works and how often you have to provide the context in your internet banking. If we want to compete with the current financial system we need to have better technology in our hands.
There was one big announcement in Plovdiv about a partnership between Cardano and shoe producer New Balance. New Balance is one of the world’s leaders producing athletic footwear with revenues of $4,1Bn in 2018. The company has a problem with counterfeit products. For example, New Boom caused damage in the value of $1,5Bn by producing fake shoes similar to one from New Balance.
Giving purchasers a chance to verify the authenticity of shoes might save a lot of money and make more customers happy. Cardano will deliver a consumer-level verification solution for the New Balance.
At the moment it is not clear whether Atala will be used for that but I think it is very probable. Shoe production and inserting a chip into shoes is a local context that cannot be stored in a global ledger.
Technically the chip can be embedded into shoes and it can be hard to remove the chip and not destroy it or the shoes. It makes no sense to destroy expensive original shoes and use the chip in fake shoes. Now imagine that if there is a chip it is easy to add some other functionality. Cardano can basically tokenize the shoes. There can be a cryptographic secret in the shoes so only the producer, New Balance, can confirm the authenticity of shoes.
Let’s back to our example with the online shop. Once shoes get tokenized it is easy to sell them with the context. A smart contract can be created and thus create trust between seller and buyer. And for that Cardano can be used. Cardano and Atala networks will be connected. The buyer orders shoes and pays for that by ADA. ADA will be locked in an escrow account and will be sent back to the buyer if the shoes will not be delivered. Once shoes are delivered to the buyer it can be easily verified that it is the original. The postman makes a transaction that unlocks ADA to the seller. If there is any issue there is a transaction in the blockchain that proves that the buyer has bought the shoes. The owner of the shoes will use them for 2–3 years and then the shoes will be worn. It is time to throw them away. Well, due to context Cardano can do the same with the transaction. It makes no sense to keep it forever in the blockchain. So it is the context that allows Cardano to discard old transactions that will probably nobody use in the future.
You can say that it is not possible to 100% connect the physical and digital world. Well, if the solution prevents at least 50% of counterfeit it will succeed and it makes sense to continue with innovations. You can watch it or you can actively try to prevent fakes. What is a better option?
At the end of the speech, Charles talked about the vision. It was the most interesting part. Charles said:
“If all we accomplished was building a better bank or a better exchange or a better stock market, or clipping off a penny from a transaction that people send, or making wire transfers cheap, this would be an evolution and I guess it would make some people rich, and we’d be able to go home and say, ‘Yes, I did something.’ But it’s not meaningful.
The reason why we’re here — this industry exists — is because the world is changing. The philosophy of the world is changing. The ways the government's work is changing due to the pressures of instantaneous, instant availability of information from the internet, the instantaneous flow of value from the internet and from globalization…
The point of our industry is we’re providing a toolbox and a collection of visions of where we can take the world, where we can collectively decide on how to solve problems, whether they be environmental problems, whether they be problems of governance and wars or problems of resource allocations –without saying that there’s some central country in charge, like China or the United States. Or without building some sort of giant meta government that basically gets rid of the nation-state.
That’s the magic of the blockchain industry. We, in a completely decentralized, libertarian, private way are having conversations about reinventing money and consent and property rights — the very structure of the world.”
The real sense of decentralization is the removal of central points of failures and central points of decision. The power must be divided among all users and they must have bigger control of wealth. If a nation or community elects some leader the community must still have the wealth or part of the power in their hands. We see very often that some leader is elected by the majority and after some time the leader starts to behave irresponsibly or follows only his own profit. It might be a challenge to get rid of such a leader and often waiting for the next election is the only option. If you think about that the reason is that the leader holds all the wealth in his hands. It is what can be easily changed with smart contracts and decentralized voting. It ensures immediate change.
So it is not only about decentralized governance of the protocol. It goes beyond. We can learn to use it, try it with Cardano and tune it. One day, we can apply it to governments or create new communities. People should have the right to choose to which community he or she wants to belong. Our world has a lot of rules, regulations, and laws and with globalization, it is not easy to get oriented quickly. It just makes sense to make bigger changes and digitalized some rules and principles that the majority wants to follow. And if it happens that you do not belong to the majority group you can still go with the minority and create an alternative community with own laws, rules, and currency.
Cardano is really a toolbox that allows all that. Our biggest current weakness globally is the inability to come to a global consensus across states and nations. It seems we need some new tools for that. For the global consensus. The transaction system does not allow us to build governance, rules, and laws. I believe that smart contracts might have a much bigger impact on society than a transaction system. As Charles said, we need to reinvent money and consent and property rights. For that we need Cardano. A new global financial machine.