Note: BitIRA does not currently offer Cardano IRAs, though it may in the future. Currently, other crypto IRA types are available.
Cardano (ADA), a third-generation coin, has been on the rise lately. In March 2019, it entered the top 10 digital currencies by market cap. Why has it attracted such interest in a crowded field of crypto contenders? There are several features of Cardano that make it unique, not the least of which include its security and efficiency benefits. Some crypto investors are eyeing the coin to hold as an asset in their IRA when Cardano IRAs become available.
Ethereum was created to overcome problems inherent in Bitcoin. And Cardano was designed later to overcome issues encountered with Ethereum. For a next-generation coin, what does this leap forward mean in practice?
A “Third-Generation” Cryptocurrency
There are roughly three generations of cryptocurrencies:
- 1st Generation. Bitcoin was the trailblazing coin that created the cryptocurrency market.
- 2nd Generation. Ethereum, Ripple, and other new coins pioneered alternative approaches, such as proof of stake (PoS).
- 3rd Generation. Cardano, EOS, and other newer currencies built on and refined second-generation technologies.
Cardano was created in late 2017 and follows Bitcoin in being open source, public, and run through a non-profit (i.e. the Cardano Foundation). Its blockchain is written in the Haskell programming language. Like many other cryptocurrencies, Cardano artificially mimics resource scarcity by capping off the maximum supply of ADA coins that can ever be created (to 45 billion tokens).
Cardano Coin Features
The capabilities that make Cardano unique include:
- Team of engineers and academics using a peer-reviewed system
- Scalability on an enterprise scale (through a multi-layered architecture)
- Ouroboros proof of stake algorithm for efficiency and security
- Daedalus built-in cryptocurrency wallet (support for multiple coins)
- Privacy options such as zero-knowledge cryptography (i.e. zk-SNARKS)
These features are impressive. If a blockchain is to thrive, though, in a competitive environment with newer coins, the process of regularly updating existing code with advanced innovations becomes increasingly important for adapting to market realities. The way Cardano accomplishes this is through peer review.
Peer-Reviewed for Maximum Security
The engineering company, IOHK, is in charge of developing the Cardano blockchain. The other two pillars of Cardano leadership are the Cardano Foundation, a non-profit, and Emurgo, a commercial entity for app development.
Development updates to Cardano take place as small professional teams compete for the best research as determined through a peer review process. This system, borrowed from the sciences, may make pushing updates to the blockchain somewhat slower. But what peer review loses in speed it gains in quality. The process ensures that the best ideas rise to the top and that Cardano will continue to integrate ingenious solutions in response to the market.
Peer review has already paid off in terms of blockchain security for Cardano. According to Forbes, “ADA will use a new consensus protocol known as Ouroboros BFT, helping it to fend off potential 51% attacks that can cripple a cryptocurrency.” Remarkably, Ouroboros is the only proof-of-stake algorithm that has been proven to be secure.
Through its unique development process, Cardano is implementing new approaches to smart contracts while Ethereum, by contrast, has yet to transition to PoS.
Multi-Layered Smart Contracts
Ethereum was a pioneer of smart contracts. Cardano’s contribution has been to decouple the smart contracts feature from the currency function of ADA. It accomplishes this with a multi-layered architecture. The Cardano Settlement Layer (CSL) handles the cryptocurrency transactions while the Cardano Computation Layer (CCL) takes care of smart contract resolutions. The third component of the architecture, the Daedalus crypto wallet, will be discussed later in the article.
Ethereum combines settlement and computation into a single layer. This slows down transactions when they are at a high volume, according to The Motley Fool. By dividing computational tasks, Cardano can process a large flow of transactions at faster rates than Ethereum.
How Does Cardano Compare to Ethereum?
Apart from significant differences in architecture, Cardano also departs from Ethereum in terms of programming languages, proof of stake algorithms, and extra features. Both blockchain teams created their own programming languages for writing smart contracts — Ethereum’s is called Solidity and Cardano’s is known as Plutus.
Like Bitcoin, Ethereum still currently runs on a proof of work (PoW) consensus algorithm, though it plans to transition to PoS in the near future. The drawbacks of PoW are security concerns, high energy consumption, and slow transaction processing, according to The Motley Fool. Cardano’s Ouroboros protocol is similar to the distributed proof of stake (DPoS) algorithm of the EOS blockchain and has been mathematically proven to be secure. Future technical upgrades to ADA are projected to be an even greater leap forward for the blockchain.
A unique feature of Cardano is the cryptocurrency wallet that comes included in addition to the CSL and CCL layers. Called Daedalus, the wallet is compatible with multiple cryptocurrencies, can run distributed applications (DApps), and is secured by “the most advanced cryptography in the world”. Ethereum does not have a built-in crypto wallet with these features.
Cardano is a formidable competitor to Ethereum, which has been losing market share to the altcoins that have spun off from it. Nevertheless, if Ethereum continues to evolve, its technology may possibly catch up and outcompete coins such as EOS and Cardano.
The Future of Cardano
In its first full year of operation, Predicoin notes that Cardano achieved five important milestones: “The creation of Ouroboros, the introduction of smart contracts, integrating the interoperability protocols into a ledger, the development of scalable protocols, and the implementation of governance protocols”. The eventual goal of the blockchain is to move to a fully decentralized system.
The “Shelley” update to Cardano is a big step in that direction, which introduces the next generation consensus algorithm, Ouroboros Genesis. Updates such as Shelley may not only transform Cardano into one of the most secure blockchains ever made but also reward ADA staking, promote DApps on the network, and roll out a slew of other features (such as ADA debit cards). As Forbes notes, if the rumors of Cardano launching a mass market payment network prove to be true, Cardano’s popularity will likely rise even further.
All of these positive innovations may induce investors to buy and hold ADA as a long-term asset in their IRA accounts. Though Cardano IRAs are currently not available at BitIRA, they may be offered in the future.
How do crypto IRAs work in general for those that want to diversify their retirement savings with digital currency holdings? Crypto IRAs are Self-Directed IRAs where the IRS allows alternative assets, like Bitcoin, to be held. Existing retirement accounts, like a 401(k) or another type of IRA, can be rolled over into a crypto IRA.
The rollover process works like this. First, contact a financial services company specializing in crypto retirement accounts. With their help, you can choose which digital currencies to purchase for your IRA. The company will assist you with the paperwork for the rollover and coordinate with a qualified custodian that will purchase and store your cryptocurrency. After you crypto IRA is created, you should monitor the performance of your coins and make any necessary trades (tax-free) between asset types within your Self-Directed IRA.