Staking on Cardano celebrated 3 birthdays

On July 29, 2020, there was a Shelley hard fork that started staking on Cardano. Staking on Cardano celebrated 3 birthdays. Let's see what this means for the project.

What the Shelley hard fork brought

The Shelley hard fork primarily represented a major shift in the decentralization of the Cardano network. Although the transfer of consensus to the hands of ADA holders was gradual (controlled by a parameter), relatively quickly nodes operated by independent operators produced 100% of all blocks. Cardano has become completely independent of the nodes operated by the IOG team.

I dare say it was also a big shift for the blockchain industry. Although several blockchains using Proof-of-Stake (PoS) consensus were running in 2020, for example, Algorand which was launched in June 2019, PoS was still a young algorithm that had not been tested by time.

Having another blockchain with a unique PoS implementation could certainly be seen as technological progress. Cardano's PoS is based on Nakamoto consensus (probabilistic finality), so it works quite differently from Algorand's PoS. In September 2022, Ethereum 2.0 was launched, bringing another unique implementation of PoS consensus.

If we look into history, we will find that the oldest blockchain with a pure PoS implementation was the Nxt platform, which was launched in 2013 and is still running today.

The Shelley hard fork was one of the biggest events in 2020, as Cardano has been in the top 10 since 2017. Cardano was the first of the big blockchains to switch to PoS consensus (including the possibility of staking and operating block producer nodes). Let's recall that at that time Bitcoin, Ethereum, Bitcoin Cash, Bitcoin SV, and Litecoin were in the top 10. All of these projects used Proof-of-Work. Then there was Ripple and Binance Chain. There was no PoS blockchain in the top 10.

Cardano was the first PoS blockchain in the top 10 to offer people the ability to stake coins. ADA holders could participate in the decentralization and security of the network for which they started receiving staking rewards every 5 days.

Staking can be seen as an analogy to mining. Anyone who is interested in providing services for the network and receiving a reward can freely participate in staking and mining. The decentralization and security of blockchains depend on how many people will be involved in staking or mining and what share individual entities will have.

Cardano has no defined minimum of ADA coins that you must have in order to participate in staking. Literally, anyone who had a few USD could participate.

Almost 1.3M people have participated in staking from 2020 to the present. That's an average of roughly 1,180 people a day. In the ongoing bear market, approximately hundreds of people join staking on Cardano every day. Of course, someone can leave staking and others join. The important thing is that the number of stakers is constantly growing.

Stakers can delegate to around 1,100 pools that regularly produce at least 1 block per epoch and are eligible for a reward. There are several multi-pool operators in the network, yet Cardano is one of the most decentralized networks in the blockchain industry in terms of the number of block producers.

Time test of Proof-of-Stake

Cardano is a top 10 project, so the motivation to attack the network is huge. Attack attempts happen all the time, as do all major blockchain networks. Cardano's PoS has passed an important time test, as 3 years is a relatively long time.

The Cardano network has never had a serious problem at the consensus level and there has never been a network reboot. This also applies to network upgrades handled by the hard fork combinator. Even in these cases, users will not notice any slowdown or limitation in network usage.

There was only one event where 50% of the nodes went down at one point. Nothing serious happened and within a few minutes, the network was again able to produce blocks at regular intervals. The network has proven its robustness.

I remember that back in 2017 it was said that the PoS network could not work securely. In 2020, many people still did not trust the PoS consensus. Today it's different. Proof-of-Stake is considered a secure and time-tested consensus.

Looking at the top 10, you will find that Bitcoin and Dogecoin are the last projects that use Proof-of-Work. Cardano, Ethereum, and other projects ranked by market cap use alternative consensus (not necessarily PoS, but not PoW either).

It is important to note that ADA coins are in the hands of people. The IOG team, Cardano Foundation, and Emurgo also hold ADA coins, but the vast majority of coins are in the hands of ADA holders. Moreover, almost 78% of the total 45,000,000,000 coins are in circulation. No entity can take control of the network's decentralized consensus out of thin air. Some of the coins are held by the pool operators as their own pledges, and the total stake of the pools consists of the delegation of coins from many stakers (usually thousands of people delegate to an ordinary pool).

A certain danger for PoS networks is a high concentration of coins in one place (on exchanges, in custodial banks, in a smart contract, etc.). Cardano has liquid staking, so people can delegate ADA coins directly from their wallets. No third parties need to be used. This is one of the big advantages against competing PoS projects where we can observe a high concentration of coins. Examples are exchanges or smart contracts that people use because of an easier way to stake coins.

It can be said that in this view the Cardano network appears as one of the more secure alternatives.

Those who said that PoS would never work were wrong. Those who do not have confidence in PoS networks even today can wait another year or two. But the fact is that no PoS network has ever been hacked, at least to my knowledge.

Proof-of-Work will forever be a more time-tested consensus for logical reasons. On the other hand, we already know today that PoW networks tend towards centralization. They usually have only a few block producers and a large share of the hash rate is made up of large miners. People are beginning to have doubts about the long-term economic sustainability of PoW networks.

PoS networks are much more inclusive than PoW networks, so they can be more decentralized. In addition, they are much more energy efficient, so transaction fees can more easily sustain them economically.

PoS consensus is definitely a relevant technology for our decentralized future. PoW consensus certainly has many advantages, but some obvious problems must be acknowledged. Of course, there are multiple implementations of PoW protocols that differ fundamentally from each other in the same way that different implementations of PoS protocols differ from each other. The resulting properties of the blockchain are made up of many fine details.

Cardano is definitely a successful project in terms of Proof-of-Stake consensus.

Conclusion

We've looked at the past and the present, so we can think about the future of Cardano. Decentralization seems to be on the right track. What is important to address is scalability. Decentralization must not be sacrificed when trying to increase scalability. That's a big technological nut to crack. The IOG team has already presented a plan to increase the scalability of Cardano through PoS Leios consensus (Input Endorsers). The implementation will be complex, but the IOG team has proven that it is capable of innovating and delivering even such complex technologies. PoS Leios is not the only change that Cardano can see at the consensus level, and there are other things in the pipeline. PoS definitely has a lot more to offer.