Understanding Cardano as a SC Platform

Cardano is a SC platform. What does it mean and how is it different from Bitcoin? Bitcoin is seen primarily as an immutable monetary system. Cardano is a social and financial operating system. Bitcoin is simple and deliberately rigid. Cardano is a complex technology that must evolve. This article will explain to newbies what more the SC platform allows people to do compared to Bitcoin.

Basic Functions of Blockchain

The basic function of blockchain is a monetary policy for minting coins according to fixed rules and the ability to transfer coins between users. Blockchain allows people to own and send coins without intermediaries.

From the users' point of view, these functions are the same for most blockchains.

The differences are in the number of coins, the rules for the minting rate of native coins, and so on. Bitcoin will have a maximum of 21M of BTC coins. Cardano will have a maximum of 45B of ADA coins. At least that's how it's currently defined in the protocol rules.

The second visible difference is the qualities associated with blockchain's ability to transfer coins. Users are interested in how quickly and for what fee the coins can be transferred and how long it takes for the transaction to be finalized (forever irreversibly recorded in the blockchain. Furthermore, how scalable the blockchain is and how often the network is clogged.

It can be said that the two basic functions of any blockchain are monetary policy and transaction network.

If Alice uses Bitcoin, she can send BTC to Bob. At the time of writing, Alice pays a transaction fee of roughly $30. It can take up to 10 minutes for a transaction to be inserted into a new block. A transaction can be considered final within, say, an hour (3-6 blocks).

In the case of Cardano, she can send ADA coins. The fee will be roughly $0.07. The transaction gets into the block within 20 seconds. The transaction can be considered final within 2 to 10 minutes (the user has almost absolute certainty after 25 blocks, but normally it is enough to wait for 5 blocks).

What else does the SC platform enable?

In addition, the platform usually has two basic functionalities. They are minting of custom tokens and programmability (smart contracts).

On Cardano, any user in the world can mint their tokens. The user has the right to define any monetary policy, including the option to burn tokens. Cardano users can send not only ADA coins to each other but also all minted tokens.

The token issuer is responsible for the meaning of the tokens. The market decides their values.

The Cardano protocol treats tokens the same as ADA coins. This means that he works with them equally at the level of the ledger and the rules for their transfer. ADA and tokens share the same security and decentralization. Cardano tokens are censorship-resistant in the same way as ADA coins.

Tokens can represent anything. The tokenization of real-world assets is often talked about. Technologically, the platforms are ahead of the regulators.

Currently, by far the most successful tokenized asset is the US dollar. Tokenized dollars are an essential part of DeFi, but also a widely used asset in developing countries with unstable fiat currency.

A key feature of the platform is to allow third-party developers to deploy their piece of source code (smart contract), i.e. the application. The application runs autonomously and becomes part of the ecosystem. All users have access to the application.

Applications can be seen as an extension of the capabilities of the underlying protocol. The IOG team is responsible for the Cardano protocol and its functionality. The protocol can only transfer ADA and tokens unconditionally.

Applications allow working with a value conditionally. The value is transferred only if a predefined condition is met. The application can act as a smart participant and independent custodian of assets in the interaction between Alice and Bob.

If Alice and Bob do not know each other or do not trust each other, they usually need to find a reliable third party that they both trust. This tends to be complicated and expensive if Alice and Bob are from different continents and speak different languages. However, blockchain is naturally ubiquitous and is referred to as the trust layer of the Internet. It makes sense to expand its functionality to include basic financial operations.

If Alice and Bob want to exchange two digital tokens with each other, say wrapped BTC for tokenized dollars, the Cardano platform will allow them to do so.

The platform must have an execution engine capable of executing a program supplied by a third party. To write such a program, the platform must provide developers with some programming language, documentation, and a bunch of tools to facilitate development.

The Cardano platform can execute Plutus scripts that developers can write, for example, in the Plutus or Aiken language.

Apps can work with ADA as well as all minted tokens.

Multiple Options Require Vigilance

The Cardano protocol and some of its key features, such as monetary policy, are almost impossible to change. The community would have to agree to the change. The monetary policy of ADA coins is therefore essentially unchangeable. The IOG team is currently responsible for the protocol and its functionality.

It's different with tokens and apps, and it's important to understand the difference. Tokens are issued by third parties independent of the IOG team. The same applies to deploying applications. The IOG team has no control or responsibility over third-party code or minted tokens.

Bitcoin is very limited in what it allows third parties. Bitcoin scripts allow you to transfer BTC to the Lightning Network and back. However, more complex functionality is difficult to implement.

SC platforms allow easy creation of DEXs, lending platforms, collateralized stablecoins, etc. Third-party teams are responsible for the quality of applications. They don't have to adhere to as demanding development standards as the IOG team. There may be a critical vulnerability in their code.

If an application is hacked, it does not necessarily mean that there is a vulnerability on the side of the protocol or platform. It could very likely be an app issue.

The effort of the IOG team is to provide such a protocol and such a platform that it is possible to write reliable applications and (formally) verify their functionality. There can be significant differences between platforms in this regard.

Users need to distinguish when they are using a protocol and when they are using a third-party application. A protocol can be considered the most secure and time-tested piece of code. Applications can get this status only after some time when they work without problems.

Difference in Project Philosophy

The missions of the Cardano and Bitcoin projects are fundamentally different. While Bitcoin can be perceived mainly through BTC, which is considered a scarce digital commodity, Cardano's success is primarily about functionality. Native coins cannot be completely separated from the protocol. However, the mission of the project determines the requirements for functionality.

The platform must evolve like any other programming platform from the traditional world. Over time, developers' demands for new functionality, higher efficiency, scalability, etc. will increase. SC platforms, including Cardano, cannot remain rigid. On the contrary, the ability to innovate and improve is an integral part of the platform's existence.

BTC is a HODL coin. No one expects Bitcoin to become the most scalable protocol, or Bitcoin to become the SC platform. The primary feature of Bitcoin is high security and decentralization (which has a decreasing trend). Although these are extremely important features for the user, they are not directly related to direct interaction with the protocol. It can even be stated that Bitcoin can succeed even though the majority of BTC will be held in a custodial manner.

A significant part of the community thinks that Bitcoin is done and there is no need to make significant changes in the base layer. Changes can take place on other layers. Money that cannot be sent quickly and cheaply has no chance of succeeding, so technological progress must necessarily continue in the case of Bitcoin as well. Not necessarily on the first layer though.

In simple terms, one could say that BTC is supposed to replace money while SC platforms are supposed to replace banks. The question is which one is more realistic. However, from the point of view of functionality, the second target is significantly more complex.

Teams building SC platforms have to face many technological challenges as their goal is to build an alternative financial system. As such, it must be able to replicate current banking services while being efficient, scalable, and, most importantly, maintaining a high degree of decentralization.

I believe that money cannot be separated from financial services. Money lending is a concept that cannot be forgotten or stopped. We can ask what the future will be like in this regard. Will traditional banks keep people's BTC and even lend it out for interest? Or is it possible to do the same in a more self-custody way?

Will BTC ever be stable enough to be suitable for loans, or will it be necessary to create decentralized stablecoins that will use scarce digital assets? Even this cannot be predicted.

BTC strives for dominance especially from a narrative point of view, while SC platforms strive for technological dominance. For platforms, success will be determined by direct network effect and enterprise adoption. Platforms must evolve technologically, which in the context of decentralization means striving for on-chain governance. This is another challenge that must be overcome. The community must be able to make the right decisions about the future development of the platform.

Conclusion

Platforms enable the creation of a competitive environment that can resemble start-ups in many ways. There is constant development and innovation as third-party teams try to come up with some kind of competitive advantage. Their efforts are heavily dependent on the capabilities of the underlying protocol and platform, forcing the platform teams to constantly improve and innovate. The platform must be attractive to developers. They must create attractive applications for users. This cycle tends to keep repeating itself.

Users can only use the basic functions of the platform, i.e. the transaction network to transfer values. However, if they want to do more things with value in a decentralized way, they have to use third-party applications.

User activity naturally increases the social and economic value of the platform. The adoption of platforms will take place mainly through utilities. Blockchain networks are essentially a trust layer for the Internet. Greater programmability makes it easier to connect people to decentralized services and increases the potential for financial services disruption. Banks do not have to worry about new digital scarce commodities if they only buy, sell, or lend them. If decentralized banks can be built, they will become an alternative to traditional ones. This is what banks should be worried about.