Cardano (ADA) Deep Dive: Strong Technicals, “Smart Money” Traction

We go behind the headlines to examine Cardano (ADA), its fundamentals and opportunities for traders. BTSE welcomed ADA onto its platform in June.

Cardano’s ADA token has made impressive gains since the start of this year, even weathering through April’s cryptocurrency “flash crash” in fine form. In fact, the project with its token quickly made a name for itself after launching in 2017, gaining steady traction ever since. Setting out to provide nothing less than “the internet of blockchains” got a lot of people excited about the project and its promises.

ADA is Cardano’s native PoS token, named after Ada Lovelace, the first recognized computer programmer. To this day, Cardano receives strong support from a large base of investors who believe in the project and its future.

Nowadays, however, overpromising and under-delivering have sadly become as common as Elon Musk changing his mind about crypto. More in-depth information will go a long way towards helping traders better understand the risks and opportunities they are taking on. This article aims to do just that, covering the technicalities of the protocol and its ADA token, as well as the project’s background and prospects.

Solid Corporate Structure, Pedigree

First of all, any informed investor should look beyond just the unique value proposition of any one company to determine its value. In the blockchain and crypto space, this means that corporate structure, the management or development team, or the effectiveness of business activities should be evaluated as well when making an informed decision on any future investment.

In the case of Cardano, three independent entities employ a decentralized team of experts to stay true to the purpose of blockchain. The first of the three is the Cardano Foundation, the legal custodian of the protocol and owner of the brand. The Switzerland-based non-profit primarily works to drive partnerships looking in and outward of the blockchain realm (including regulatory bodies and institutions).

Emurgo, the second founding member of the Cardano protocol, is a for-profit organization that pursues commercial opportunities and integrates businesses into the blockchain system. The third entity involved, IOHK, is contracted for the development and engineering of code. Founded by two prominent names in blockchain — Charles Hoskinson, Ethereum’s co-founder and former CEO, and Jeremy Wood, operations manager at Ethereum — IOHK is a leader in distributed computing systems and the innovator of Ouroboros, the backbone of Cardano.

Technicals and Fundamentals

Understanding how a protocol works starts right at a blockchain’s base layer: the code, or more precisely, the programming language used to write the code. There are fundamental differences to coding languages, just like there are to human languages — consider, for example, the 15 different cases the Finnish language uses compared to the three in the English language (i.e. subjective, possessive, and objective). Those differences hold benefits and drawbacks, depending on the use case. 

The programming language, called Haskell, used to build Cardano’s blockchain was selected for its focus on “pure” functionality. While many programming languages define functions as dependent on many variables, Haskell emphasizes separating those “side effects” from functions as much as possible. This allows for functions to always give the same result for the same input and is crucial for writing blockchain code that needs to be inherently correct and free of bugs first and foremost.

It’s About Science: One to Make It Through?

Usually, when new blockchain projects launch, a single company publishes a whitepaper, implementing it straight to code and starting funding rounds. Checks and balances sometimes go amiss but are crucial to determining whether the proposed protocol is safe or coherent.

Cardano took a different approach, which already distinguishes the project from some other blockchains. Their Ouroboros protocol, along with its ADA token, launched in September 2017 after nearly two years of development, all based on peer-reviewed scientific papers. That means every piece of code has undergone the process of being checked and approved by scientists, cryptographers and researchers all over the world.

Meanwhile, investors can be grouped into two camps. One comprises the average retail investors known to trade based largely on hype or belief. The big money, however, is with professional investors, such as the corporates and institutional investors, whose “smart money” typically seeks longer-term risk-adjusted positions.

Cardano can not only claim, but also scientifically prove the viability of its protocol — and not many can do that. That’s a strong reason why Cardano is among the blockchains gaining some of the largest institutional traction to date. Institutional inflows into ADA reached US$10 million in a single week, while the crypto market itself recorded net outflows of US$97 million in the same time period, according to a May report by Europe’s largest digital asset investment firm, CoinShares.

Proven Security Thanks to Ouroboros Genesis

While Bitcoin’s PoW concept is highly secure — using physical recourses — it is also rather slow and extremely energy-intensive. PoS-based protocols, however, rely on the token stakes, like with ADA, that participating nodes hold. While solving the issues of speed and energy usage, PoS, in turn, creates new problems.

Because blocks can be created at virtually no cost, an adversary can mount a so-called “long-range attack”, essentially building a whole new blockchain with fraudulent transactions from the genesis block. This then leads to the bootstrapping problem, making it impossible for new nodes to determine the “honest” blockchain to synchronize with.

In a PoW protocol, it can be seen as a given that the “honest” chain will always be the longest since it would take immense computing power to create a fraudulent chain that is longer. That means that dynamic availability in PoW (not all nodes being online all the time) is feasible only using the genesis block, while on average PoS concepts (re)joining parties need to know a somewhat recent “honest” block.

Fortunately, Cardano has IOHK on board, who have done their homework. Ouroboros Genesis uses a number of algorithms that stood the test of the scientific community and are proven to solve the bootstrapping problem and prevent long-range attacks. Therefore, through Ouroboros Genesis, Cardano can provably match the security guarantees of PoW blockchains.

The Need for Interoperability

Cardano makes the assumption that in the future there will not be a single cryptocurrency to rule. Rather, it believes that multiple coins will co-exist and aims to be “the internet of blockchains”. While others shut themselves off, Cardano is already moving to a future-oriented, multi-asset blockchain with the ‘Mary’ protocol update. Further work is being done to achieve interoperability with the traditional world of finance. This, however, may mean being subject to the same or similar laws and regulations (like attaching metadata to each transaction).

A prerequisite for those ambitious goals was the development of Cardano’s protocol, in a very unique two-layered architecture. The first layer is called the settlement layer (CSL), which acts as the balance ledger and runs the transfer of ADA tokens. The second layer is the computation layer (CCL) which contains information on why transactions occur and also runs Cardano’s smart contracts. This yields a high insurance structure, crucial for real-world use cases in industries where reliability is paramount — including public utility, medical, digital agriculture, and even space transportation (e.g. Nasa or Space X). It also makes the development of cross-chain bridges easier.

Cardano has recognized the dire need for interoperability with the traditional world of finance as well as provable reliability as key future success factors. Leveraging the complementary expertise of all three partner organizations, the team has managed to grow retail interest and institutional traction, validated by smart money investments into ADA. Its corporate-focused strategy will help fuel innovations in the spaces of DeFi and NFTs, from which retail investors can benefit. Perhaps the best thing about this is that investors need not worry about security issues or rug pulls thanks to Cardano’s robust peer-reviewed protocol.