Now that Cardano has might be added to Coinbase, let’s take a little closer look at it. Specifically, I want to dive into the nitty-gritty of how centralized/decentralized Cardano is relative to other projects.
Cardano has several unique features that exhibit both elements of centralization and decentralization. Its delegated proof-of-stake (DPOS) consensus mechanism provides greater centralization than other projects. Additionally, its emphasis on regulatory compliance highlights concerns about censorship resistance. On the other hand, the voting rights and distributed governance system they are building bring elements of decentralization that not many other projects have.
Cardano offers an alternative consensus mechanism than Bitcoin’s proof-of-work system. Rather than utilizing a system of miners, it opts to have a select group of “slot leaders” that stake their own tokens, which are then voted in to create new blocks and validate transactions. This type of system has several benefits. It is more energy efficient without all the heavy computing power that mining requires and it allows for greater scalability of the network. However, this has its tradeoffs, as well. This system can tend towards control falling into the hands of an elite group. At this point, only large token holders can vote on the elected slot leaders, leaving the majority of users out of the process. There are also slightly heightened security concerns, as a smaller group of validators means a higher vulnerability to 51% attacks. Additionally, these validators receive rewards in the form of transaction fees. Because these validators are already the largest token holders, the system can contribute to greater inequality of wealth among the network.
It can be helpful to compare Cardano’s DPOS to that of EOS’ because they are quite similar. In fact, Dan Larimer, the founder of EOS who first invented delegated proof-of-stake, even accused Cardano of copying a large part of his idea without giving any credit. Regardless, EOS is a bit more centralized because it has only 21 validators, known as block producers or witnesses, though Cardano can theoretically have hundreds. However, EOS allows all token holders the ability to vote on its block producers, while Cardano only allows the top token holders to vote at the moment. So, they are both a bit more centralized in some areas, while more decentralized in others. Overall, DPOS is usually more centralized than proof-of-work. Centralization typically entails greater security risks and greater inequality, but it provides a more scalable and energy efficient solution.
Cardano also places a greater emphasis on regulatory compliance than most projects. A big draw for many in the crypto space is the promise that decentralization is a way around government intervention and regulatory oversight. In fact, many blockchain projects aim to replace legacy industries, particularly traditional financial sectors, and are building systems that flout things such as KYC/AML requirements, regulatory approvals and other measures of oversight. However, Cardano has elected to take a slightly more balanced approached. While they are aiming to offer users the ability to remain anonymous and interact on the network without any sort of gatekeepers, at the same time, they are also looking to integrate the processes of traditional institutions, such as KYC/AML and others. By offering this functionality, Cardano aims to accommodate users who value privacy and autonomy, but also to bridge the gap between the emerging cryptoeconomy and the legacy non-blockchain one. They are developing processes that allow users to verify identity and share personal data in a way that still allows users to retain a high-level of control.
On the one hand, these features provide a broader market appeal, which may work to drive greater adoption. By making it easier for businesses to implement the benefits of blockchain into their process, Cardano is poised to bring in a lot of value to its network. For instance, businesses may be more likely to operate on Cardano rather than Ethereum because of this enhanced functionality. However, there are also concerns about censorship. Essentially, providing this functionality can make it easier to censor transactions on the network. This is a comprise that ultimately may drive many users towards other networks, even though it may drive legacy institutions towards it. We’ll see how it plays out.
Cardano is working to provide a robust on-chain governance system that will allow all users to have a say in the development of the network. This provides a significant element of decentralization that other projects are lacking, particularly Cardano’s biggest competitor, Ethereum. By providing on-chain governance, Cardano will be able to more quickly come to decisions about the network, such as hard-forks, allocation of funds, and other necessary improvements.
The governance problem has been a noticeable one in other projects, such as Bitcoin and Ethereum. For instance, disagreements about how to improve Bitcoin’s protocol led to the creation of Bitcoin Cash and has fractured into an ugly public civil war on the legitimacy of each network. Similarly, there was another schism within Ethereum about how to deal with the millions of dollars stolen after the infamous DAO hack. This led to a small, powerful group pushing through the decision to reverse the transactions that were longed promised to be immutable. This then led to a hard fork and a creation of two Ethereum chains, Ethereum and Ethereum Classic. In both these cases, these issues arose because there was no formal enforceable voting process for all interested parties to make their views known. Much debate took place online in forums or behind closed doors between core developers and large stakeholders.
By implementing on-chain voting, issues in Cardano can be resolved more quickly and clearly, reducing the chance of contentious hard forks. This can be beneficial for a network in the long-run, as it can evolve faster when necessary and be sure to incorporate all stakeholders rather than just the most powerful entities.
Another unique feature of Cardano that goes hand in hand with distributed governance is the Cardano Treasury. This is essentially a large fund held in a smart-contract that can be used however the community sees fit. The Treasury is funded from a portion of every transaction fee on the network, essentially like a tax. However, rather than a central group deciding on how to disburse funds, it is voted on by all token holders. Anyone can make a proposal of how to use the funds, which then can be used for investing in new projects, funding research, developing new features or anything else. This mechanism was put in place to ensure that the network is sustainable, so as not to rely on solely what was raised in the ICO. It also relies on the wisdom of the crowd on how to best improve the network. Cardano believes this will lead to better innovation and mitigate any potential for corruption of central stakeholders.
In conclusion, there are many other pros and cons to the Cardano network, which may give other insight to the success and sustainability of the project. However, these are the main features of centralization that users and investors should know before getting involved.
This exercept is from the Tokenscope Cardano Report.
To read the full 24-page research report on the Cardano Project visit https://www.tokenscope.io/blank-1/cardano-report
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