Layer 1 blockchains are the most basic form of blockchain networks like Bitcoin and Ethereum. They are referred to as the core or foundation of the blockchain network, as they provide the infrastructure on which all other applications and protocols are built.
Layer 1 maintains the distributed ledger, validates transactions, and secures the network from threats.
At the foundation of layer-1 blockchain is a consensus mechanism like the proof-of-work (PoW), proof-of-stake (PoS), and delegated proof-of-stake (DPoS) that validates and records transactions to the ledger, and makes the network sure an immutable ledger that participants can trust
It is the underlying technology for many decentralized applications (DApps) and protocols. Layer-1 blockchains include the very first public permissionless distribution ledger, Bitcoin, and then there is Ethereum, Cardano, Cosmos, Ton, and others.
Each layer 1s has unique features that give it a competitive edge over the others. In this article, we’ll explore what differentiates Cardano from other layer 1s.
What is Cardano?
Cardano is a layer-1 blockchain that facilitates transactions and operations within its blockchain network, just like every Layer-1 function. However, Cardano presents a different and upgraded design. Cardano, designed as a third-generation blockchain, leverages the successes of older blockchains like Ethereum while improving on their limitations. As a result, Cardano boasts a more scalable, versatile, and robust blockchain network that can be utilized for a wider range of use cases, including supply chain management, finance, healthcare, manufacturing, etc.
How Does Cardano Function?
Cardano is Public and Permissionless
Cardano depicts its inclusivity and accessibility design and provides validation of transaction and application development in a free-to-all service as a public and permissionless blockchain. In this context, public means anyone can participate in the network’s activities without authorization. At the same time, its permissionlessness implies that access to the blockchain is open and unrestricted, with no intermediaries controlling participation in the network.
This is in contrast to public blockchains like Cosmos, which only allows public access but doesn’t grant full permission for builders to build applications on its layer. This is because individual zones within the Cosmos chain can implement their own governance and permissions rules, which may sometimes restrict access. Others, like Ripple and Stellar, operate as federated networks that rely on a council to grant explicit permissions. For this reason, all permissionless blockchains are public, but not all public blockchains are permissionless.
Cardano Scales Using Sidechain and Layer 2s.
In rare instances that Cardano becomes congested due to heavy usage, which can cause slower transaction processing, Cardano leverages sidechains and Layer 2 solutions while maintaining transaction fees on the main Layer 1 chain.
In contrast, Ethereum will feature higher transaction fees due to a crowded network.
Cardano’s Sidechain and Layer 2 Rollups for Ethereum
Sidechains are independent blockchains that run parallel to the Cardano blockchain, allowing the transfer of information via a secured bridge. These sidechains can be optimized for specific use cases.
Cardano features a Sidechain Toolkit, which provides developers with the necessary tools to create these sidechains. These sidechains can then be optimized for specific use cases, like the offloading of transactions from the main chain and improving overall network efficiency. Examples of Cardano’s sidechains include Midnight and Milkomeda (Cardano’s EVM sidechain).
Each sidechain can operate under its consensus algorithm, block time, and tokenomics, allowing for a high degree of customization. This flexibility enables developers to tailor their sidechains to meet particular application needs while maintaining compatibility with the leading Cardano network. Both layer 2 and sidechains work on a separate layer on the main blockchain while handling transactions off-chain, thus increasing speed and reducing costs.
Layer 2 networks have inherent security guarantees from the main blockchain, while sidechains generally have rules and guarantees. However, Both scaling solutions, in combination with public blockchain infrastructure, provide a robust and efficient infrastructure for decentralized applications (DApps) and transactions.
Compared to Ethereum, scalability has always been a primary concern as its increase in popularity continues to experience congestion for participants. To address this, Ethereum adopted the use of Layer 2 rollups.
How staking works on Cardano vs other Proof-of-Stake Blockchains.
Some PoS systems require users to lock their tokens for a certain period when they stake them. This can lead to opportunity costs as users cannot access or trade their assets during this time. Cardano presents a standout feature of staking, where the delegation of staked tokens is free without losing funds.
Holders of ADA (Cardano native token) can access their tokens without fear of vesting periods, participate in decentralised finance applications, and still earn staking rewards.
In terms of imposed penalties for things like double signing or failure to validate blocks by delegators, Cardano removes this imposition (slashing), relying on other mechanisms to ensure the security and integrity of the network, such as SPO pledges, robust operational resilience, and a high degree of decentralization. This reduces the fear of losing staked assets due to validator errors. This is in contrast to PoS blockchains like Cosmos and Ethereum, which implement slashing over defaults of validators where they lose a portion of their tokens.
The Proof-of-stake (PoS) presents a feature of “ the more tokens a person controls and stakes, the more likely they will participate in minting the next block.” At the same time, holders use their tokens to send and receive payments, pay transaction fees, and interact with DApps built on Cardano.
Block Selection on Cardano
Cardano uses a lottery system, known as slot leadership to facilitate the selection process for its next block producer. In this system, a stake pool with more ADA tokens has better odds of winning this right to create a block and earn block rewards.
PoS networks like Cosmos require a significant capital investment and expertise before becoming a validator. In Cosmos, the entry threshold for running a validator can be pretty high. In Cardano, on the other hand, while there is a cost associated with creating a stake pool (around 500 ADA), users can easily delegate their stakes without needing to run a node themselves.
How Cardano Ensures Honest Behaviour From Participant Nodes
Cardano ensures honest behavior from participating nodes through several mechanisms, mainly through the Ouroboros protocol and the role of stake pool operators (SPOs). These mechanisms are designed to maintain the security and integrity of its network.
SPO Pledges: Each SPO must make financial pledges of ADA tokens, which align their interests with the network’s health. This pledge acts as a security deposit; if an SPO behaves dishonestly or fails to perform their duties, they risk losing their pledged funds. This mechanism helps deter malicious actions, as the financial stakes are high for those operating pools.
Decentralization and Diversity: Cardano’s design promotes decentralization by encouraging a wide range of SPOs, which reduces the risk of any single point of failure. With over 3,000 registered stake pools, the network’s security is bolstered by having many independent operators who collectively validate transactions. This diversity minimizes the impact of any dishonest behavior by an individual operator.
Robust Operational Standards: SPOs must adhere to strict operational standards and best practices to maintain their pools’ integrity. This includes regular updates, security measures against hacking, and transparency in operations. Such practices foster trust among delegators, ensuring they can confidently stake their ADA without fear of mismanagement.
Cardano’s Transaction Model
The transaction model of Cardano is built on the Extended Unspent Transaction Output (EUTXO) framework, which enhances Bitcoin’s traditional Unspent Transaction Output (UTXO) model. This design allows for greater flexibility and security in transaction processing.
Key Features of Cardano’s Transaction Model
EUTXO Model: For every transaction, each consumes unspent outputs from previous transactions, creating new outputs for future use. This model ensures that each output can only be spent once, simplifying verification and enhancing security. EUTXOs can carry additional data, allowing smart contracts to execute with predetermined conditions and making them self-executing agreements.
Deterministic Execution: Cardano’s design ensures that the outcome of a transaction can be predicted before execution, minimizing unexpected fees or failures. This predictability is crucial for developers and users, as it allows for off-chain validation of transactions.
Two-Layer Architecture: Cardano separates its blockchain into a settlement layer for basic transactions (like transferring ADA) and a computation layer for smart contracts. This separation enhances transaction speed and efficiency, allowing the network to handle more complex operations without congestion.
Smart Contract Integration: Smart contracts on Cardano are validated through scripts that run on the blockchain, ensuring that all conditions are met before a transaction is executed. This approach reduces the risk of errors and exploits compared to account-based models like Ethereum’s.
Cardano’s EUTXO Model
As mentioned, Cardano’s EUTXO model is built on Bitcoin’s UTXO system, where each transaction output can only be spent once. Cardano’s model allows for outcomes that can be predicted before execution, reducing the risk of unexpected fees or failures; this is called deterministic execution.
Each output can carry additional data, enabling complex smart contracts that act as self-executing agreements. This structure supports parallel transaction processing, enhancing scalability and efficiency, as transactions that do not share inputs can be validated at the same time. In comparison with Ethereum, its smart contract is based on an account-based model that functions like a traditional bank account, where each user has a balance that updates with every transaction. This model is more flexible but introduces indeterminacy; a transaction can fail mid-execution if conditions change unexpectedly. Smart contracts on Ethereum are self-executing code that runs on the Ethereum Virtual Machine (EVM), allowing for complex interactions but often at the cost of higher gas fees and potential security vulnerabilities.
Although Ethereum’s account-based model promises adaptability, Cardano’s EUTxO model emphasizes on security, transparency, and scalability, making it a well-suited platform for enterprise-grade applications.
