During the Byron era, the network was permissioned (federated), but as the Shelley era matures, nodes outside the team’s control will help run the network. Once the majority of nodes are run by network participants, Cardano will enjoy greater decentralization and security. Cardano aims to be decentralized by allowing its community to govern the protocol along with the network's decentralized treasury in a future roadmap update called Voltaire. The aim is to replicate a true democracy in the digital realm where individuals are incentivized to participate and vote on project decisions. This way, token holders are empowered to decide the future of a platform and the community will dictate the use of Cardano’s treasury funds.
Cardano will include a decentralized trust funded from monotonically decreasing inflation and transaction fees called Voltaire. Voltaire enables the Cardano community to make meaningful decisions about software updates, technical changes, and project funding. Known together as Cardano Improvement Proposals (CIPs) and Funding Proposals (FP's), these allow the future of Cardano development to be determined by its users. ADA holders and stake pool operators will be able to vote on protocol improvement proposals by staking or delegating their ADA. Voltaire will also see the addition of a treasury system whereby a fraction of all transaction fees will be pooled to provide funds for development activities undertaken following the voting process. If Shelley is the technical foundation of the network without a central authority, Voltaire plans to be the decentralized community focal point.
After Voltaire’s rollout, users will be able to request funds from the trust via a ballot system and the CSL stakeholders vote on approval. This process creates a productive feedback loop seen in other cryptocurrencies with treasury/trust systems, such as Dash, by starting a conversation about who should and should not be funded. A group of ~50 volunteers and developers have been allocated $8 million worth of ADA to begin constructing Voltaire.
Beyond Voltaire, Cardano has plans to eventually include a formal blockchain-based system to propose and vote on both soft and hard forks. This model would be similar to on-chain governance seen in Tezos or Decred.
Currently, Voltaire is incomplete and the Cardano project remains dependent on the three entities that helped build and still support Cardano. The three entities, each of whom acts independently of the other, are IOHK, the Cardano Foundation, and EMURGO.
IOHK is the development branch of the community and is responsible for designing, building, and maintaining the network through 2020. The Cardano Foundation works to promote network adoption through education and representation of the ecosystem. IOHK and the Cardano Foundation currently develop and implement all Cardano protocol updates through off-chain governance. This will continue until the network reaches the previously discussed "Voltaire" era. After Voltaire’s rollout, developing and submitting code changes off-chain will remain, but on-chain governance will be used to determine whether the proposals get implemented or not.
Cardano was the top-ranked crypto project for daily development activity on Github for July and August, 2020. The ADA project has 290+ repos, over 15 of which have been highly active in the past 90 days on Github.
EMURGO is responsible for the commercial and enterprise adoption of Cardano. Its goal is to help onboard existing companies to the network, invest in and support startups that want to build applications with Cardano.
With on-chain governance via voting with staked ADA, Cardano staking pools will play a critical role in the network. Achieving decentralization among staking pools, both in numbers and geography, means preventing one entity from harnessing too much power. Since Shelley and the introduction to staking, it can be observed that the staking pool community is heavily concentrated in the US and Western Europe (Figure 1) with a notable lack of participation in Asia. However, the percentage of controlled stake via any one staking pool is quite evenly distributed (Figure 2).
Figure 1. ADA participants.
Figure 2. ADA staking pools.
Since Cardano has a very limited history of being a live project with active users and is still a work in progress, much of the criticism surrounding the project stems from these issues. Cardano is competing in a crowded space of general-purpose smart contracting Proof of Stake blockchains like Tezos, Cosmos, Polkadot, NEAR, Solana, soon to be Ethereum 2.0, and many others. It remains to be seen which project(s) the market will adopt but for now, all are playing catch up to Ethereum which has the industry’s only meaningful adoption.
Before the project even launched, there were minor issues between the three Cardano entities on how the project was being handled. In 2018, the Cardano Foundation and specifically its head, Michael Parsons, was accused of a lack of transparency and mismanagement by the other entities. Both sides published open letters with the IOHK and EMURGO joint letter serving as the ultimate vote of no-confidence, essentially exiling the Cardano Foundation. This resulted in the resignation of Michael Parsons and others. The Cardano Foundation Council then added new members: Nathan Kaiser, Manmeet Singh, Domino Burki, of which the first two came from IOHK and EMURGO.
Although that problem has seemingly been resolved, the Cardano Foundation is still currently dealing with legal issues. In 2020, the Cardano Foundation announced legal proceedings initiated by Z/Yen Group Limited. According to the post, “The proceedings relate to an alleged agreement between the Z/Yen Group Limited and the Cardano Foundation dated July 2017. The Cardano Foundation voided/terminated the agreement for various reasons. The Cardano Foundation fully rejects the claims raised by the Z/Yen Group Limited. Due to the ongoing nature of this judiciary process, no further information will be given while proceedings are in progress.” The case is still ongoing but poses little threat to the health of the Cardano Project.
Beyond legal skirmishes, Cardano still has much to prove as it remains incomplete. Part of this is delivering on meaningful decentralization from the three aforementioned Cardano entities. Up until recently with the Shelley release, all ADA nodes were controlled by IOHK, EMURGO, and the Cardano Foundation in a centralized manner. Since then, the transition to a more community-driven control has been underway but until the final stage, Voltaire, is released, the project, technical developments, and decisions will still be driven by the three entities.
Additionally, because Cardano has a high profile founder (Charles Hoskinson) and such a long lead up to launch, anticipation around the project was able to build for quite some time. However, this means the project may be “overvalued” (on a relative basis compared to comparable smart contract blockchains) because it is so new and lacks real use cases and adoption. A quick comparison between similar coins utilizing staking shows ADA as first in market cap and total daily transaction volume by a considerable margin. However, ADA is towards the middle and rear of the pack in total daily fees, transactions per day, daily active addresses, and git commits on the main repo over the past year. This suggests the price may reflect the speculation of the final product more so than current progress.
Figure 3. Cardano comparison vs similar projects.
Another potential attack vector built directly into the Cardano project is the ability for the project to essentially censor certain types of transactions and use cases within the network.
The CCL deals with the “why” of the ADA transactions and is where smart contracts come into play, versus the CSL which handles the accounting of the movement of assets. The activities/reasons behind certain applications running on a blockchain may not be ones supported or endorsed by all in the network. For instance, should dark web-like apps be created on Cardano, the entire network, in a sense, endorses this use case behavior by continuing to devote resources to the network (staking, development, etc.)
Because of this, Cardano decided to split the CCL and CSL into distinct layers. Decentralized programs will require some form of gas and nodes will have the option of whether to include the transactions from those programs in their blocks. This gives nodes leverage over the types of behavior they deem permissible on the Cardano blockchain. So, this separation between the root CSL layer and the CCL layer allows for a degree of network protection from computational, legal, and moral perspectives.
While this sounds like an overall positive feature, it introduces subjectivity, moralism, and politics into a decentralized digital world. This, in a worst-case scenario, could open the door for potential social engineering attacks and even censorship. Part of what makes blockchains so powerful is they are neutral, immutable, and censorship-resistant platforms that have no sense of right or wrong. They produce unstoppable, immutable code for all use cases so long as they conform to the protocol’s rules. The opinions and whims of the outside world, which often can be authoritarian or change, are not factors.
While the advantages of separating the CSL and CCL layers of Cardano allow for a greater degree of use-case flexibility, it introduces human complexity that may have unforeseen consequences.
From a technical perspective, Cardano has suffered no known critical bugs. This is encouraging since the project does not have any formal bug bounty program for others to find bugs.