Today, we’ll dive into the world of some commonly used phrases in cryptocurrency and other blockchain technologies, like the very commonly “Smart Contracts”. Not all of us really understands these phrases so we’re taking the opportunity to explain these terms that will make it easier to understand for anyone interested in crypto. We also have some projects cooking up so this guide will help you understand those discussions if you ever choose to stick with us through our journey.
To start with, we have Smart Contracts. A smart contract is an automated digital agreement written in codes that track, verify, and execute the binding transactions of a contract between various parties. The transactions of the contract are automatically executed by the smart contract code when pre-determined conditions are met. Essentially, a smart contract is a short program whose inputs and outputs are transactions on the blockchain.
Smart contracts are self-executing and reliable, and they do not require the actions or presence of a third party. The smart contract code is stored on and distributed across a decentralized blockchain network. This network is transparent and irreversible.
In summary, smart contracts are immutable, meaning they can’t change. As it cannot change, they are distributable and tamper proof, as well as fast and cost effective. As there is no middleman, this saves money and time during creation and execution of a smart contract, and is safe due to encryption.
Cardano has introduced smart contract support in September of 2021. As the fastest of blockchains that support smart contract, this is, in my opinion, the best option for doing smart contracts based off of cost, speed, and overall functionality.
The next term we’ll talk about is Decentralization, or what it means to be Decentralized. To understand decentralization, let’s take a closer look at the existing data storage solutions that we have available right now out there. So, with a centralized system, all the data entries and activities are usually managed by one central server or block of servers. This increases the risk of single point of failure, and also means that the controlling entity, such as a bank or government institution, acts as decision makers.
On the other hand, a decentralized system generally lies on multiple server nodes, each of which serves a subset of the total end clients. This essentially makes it so that there’s no one system that is ultimately the overarching core. A fully distributed system is a system that has all the data and record of transactions encrypted and stored not in one server, but in a system of interconnected, interdependent nodes and terminals. This ultimately ensures independence centralized entities, transparency, and security.
Cardano is an example of a decentralized system. It’s kind of a good balance between the decentralized system and the distributive systems because there is no one, central main server. This means that there is no way to bring down the entire network at this point.
What we have next are the phrases Proof-of-Stake and Proof-of-Work. You’ll often hear that Cardano uses so much less energy and that it’s a network that’s much more eco-friendly than many other cryptocurrencies. This ultimately gets into a discussion of proof of stake versus proof of work.
Now, the proof of stake is a type of protocol that uses the amount of a stake or value held in the system to determine consensus or agreement. In essence, a consensus protocol is what controls the laws and parameters governing the behavior of blockchains.
You can think of the consensus as a rule set that each participant of a network adheres to. As blockchains are not controlled by a single, central authority, a consensus protocol is used instead to allow distributed network participants to agree on the history of the network captured on the blockchain to reach consensus on what has happened and continue from a single source of truth.
Cardano was built on a ground breaking, proof of stake consensus protocol called Ouroboros. At the heart of the protocol are stake pools. These are reliable server nodes run by a stake pool operator to which Ada holders can delegate their stake.
Stake pools come in to ensure that everyone can participate in the protocol, regardless of technical experience or availability to keep a node running. These stake pools focus on maintenance and hold the combined stake of various stakeholders in a single entity.
In contrast, proof of work is a synchronous protocol that encourages minors to compete to be the first one to solve any problem within the blockchain. Then, a reward system will incentivize for this problem solving. However, this approach comes at a cost, with increased electricity usage and longer time spans to solve problems within the chain. These factors can slow the network down significantly and means it’s costly to maintain.
Now, some of the primary advantages of proof of stake over proof of work are:
And if stake pools really excite you, here’s a guide to building Cardano stake pools.
Up next is delegating Ada to earn some passive income. There’s a great article that guides you on how to make passive income with crypto by delegating your Cardano Ada. We also have an awesome YouTube video that takes you through the step-by-step process of delegating crypto to make passive income.
However, here’s a basic explanation for anyone that don’t want to part away from here. So, staking cryptocurrencies is a process that involves committing your crypto assets to support a blockchain network and confirm transactions. With cryptocurrencies that use the proof of stake model, new transactions need to be validated before being added to the blockchain.
Participants pledge their coins to the cryptocurrency protocol. From those participants, the protocol chooses validators to confirm blocks of transactions. Finally, new cryptocurrency coins are minted and rewarded to validators when a new block is added to the blockchain. Benefits of staking Ada, or any other crypto, are:
That covers everything we wanted to let you know for today. We will continue to talk about more of these terms to help you out. So we’ll be on the lookout for any new terms that might not be sounding so obvious. Thank you sticking with me to the very end. We hope this has been valuable information to your journey to skyrocketing with Ada. You can keep track of our blog or YouTube channel to stay updated about Cardano every day. And as always, make sure to keep your kids protected with CleanRouter and CleanPhone. This lets you have the ultimate parental controls with how your kids use their phone 🙂
If you’d like to know more about these terms, kindly check out the video below: