Cardano Design Rationale

Cardano has been built as a resilient and sustainable blockchain using the core principles of security, scalability, and interoperability. Fundamentally, it was designed as a proof of stake system which means it is undoubtedly more efficient, by orders of magnitude, than proof of work. Crucially, our ground-breaking proof-of-stake consensus protocol Ouroboros is proven to have the same security guarantees that proof of work has.

Formal methods, such as mathematical specifications, property-based tests, and proofs, are the best way to deliver high assurance software systems and give confidence to users for the management of digital funds. Cardano has been built using formal methods to get strong guarantees on the functional correctness of core components of the system.

Security is one of the founding principles of Cardano. It is written in Haskell, a secure functional programming language. A functional language like Haskell encourages building a system using pure functions, which leads to a design where components are conveniently testable in isolation. Furthermore, advanced features of Haskell enable us to employ a whole range of powerful methods for ensuring correctness of the code, such as basing the implementation on formal and executable specifications, extensive property-based testing, and running tests in simulation.

For Cardano to deliver a resilient infrastructure on a global scale, it needs to be able to scale on par with legacy financial systems. Even though we have designed Cardano with resource efficiency in mind, scaling remains a fundamental problem for blockchain systems of all kinds. To get towards a solution of the scaling problem, our researchers have invented our scalability solution Hydra, a protocol that can be executed on top of Cardano, allowing transaction and smart contract processing off the main chain. This will multiply the capacity of the overall system by a multitude.

Performance engineering was used to assess whether design decisions helped us move closer to the resilience, performance and scalability targets. Distributed systems performance engineering was applied to anticipate and mitigate issues associated with long-term, continuous and scalable operations in a real-world open environment.

Another major aim in the design of Cardano is to reduce centralization while actively working against economic incentives that would drive the system towards centralization. As soon as you have stake pools, you have an economic incentive for these pools to grow, so it was important to make it less attractive for a stake pool to become too big. It is more cost-efficient to have a small number of large pools, than a large number of small pools. Cardano was designed to work against the economic incentive where large pools dominate the system, by making it less attractive for a pool to become too big. This was achieved by changing the reward formula. In a naive system, the total rewards for a pool would be proportional to its stake, so the bigger it gets, the better. In Cardano, if a pool attracts more stake than a certain threshold (1/k, where k is a configurable parameter), its reward will no longer increase. So, if everyone acts in their own self-interest to maximize their rewards, you expect k pools of roughly equal size.

The ability to interact with other systems, or interoperability, is a fundamental design feature of Cardano. One of the current design innovations in Cardano is the use of sidechains, which means that you can compartmentalize the system and enable interoperability within the blockchain platform. Data can be kept off the main chain in what is called a sidechain. Multiple sidechains can run concurrently, so if one part fails, the rest of the system does not fail, as it is maintained separately. This results in greater assurance and reliability within the blockchain. By using sidechains you can transfer assets between parallel blockchains that operate in different rules, mechanisms or languages and ways of utilizing the network.

Governance is also central to the design of Cardano to ensure system sustainability and adaptability. A well-developed governance strategy will enable effective, democratic funding for Cardano’s long-term development. The Cardano treasury system is currently being designed as a sustainable funding mechanism to maintain Cardano. It will be controlled by the community and will enable a decentralized, collaborative decision-making process to sustain Cardano’s development and maintenance. Various potential funding sources will be used to refill the treasury on a constant basis, such as the aggregation of newly-minted coins, a percentage of stake pool rewards, transaction fees, and donations or charity. With funds being accumulated in an iterative process, it will be possible to fund the project development and pay for improvement proposals. In addition, Cardano Improvement Proposals (CIPs), will also be delivered to foster and formalize discussions around new features and their development within the community.

Central to the treasury is a democratized voting mechanism where ada holders will themselves decide how funds are allocated by voting on funding proposals. This will ensure that decisions are made by a democratic vote rather than by just a handful of stakeholders. This voting system will influence decisions such as funding initiatives, authorizing updates to the protocol, and rolling out any constitutional updates such as changes to the decision-making process, or the minting of new tokens.