As Cardano Gears up for Shelley, here’s Three Things You Need to Know

As the end of Q1 2019 approaches, Shelley’s progress marches on relentlessly. But for the uninitiated, navigating the shift into a new phase of Cardano’s development may appear overwhelming. Here are three key areas you’ll need to know about Shelley, ahead of its release.

There is certainly a purposeful mystery in the nomenclature of Cardano, with each aspect of the project interwoven with a degree of history and intrigue.

Whilst others have already done a great job of unraveling the myths behind Cardano’s naming conventions, with the impending release of Shelley, there’s one name which deserves revisiting.

The upcoming ‘Shelley phase’, so named alongside a portrait of its eponymous figure on the Cardano roadmap, is undoubtedly dedicated to Percy Bysshe Shelley; the 18th century English Romantic poet who penned the famous poem ‘Ozymandias’ — but why?

At first glance, Shelley’s renowned sonnet seems to be of little relevance to the nascent field of distributed ledger technology, and similarly, Shelley certainly wasn’t a contemporary of Satoshi Nakamoto. So to name an entire phase of the Cardano project after him may initially seem somewhat odd.

However, on further inspection, what the ‘Ozymandias’ sonnet does signify, and does so with lasting impact, is the decline of authority — the inevitable erosion of even the most powerfully enduring dynasties.

“And on the pedestal, these words appear: My name is Ozymandias, King of Kings; Look on my Works, ye Mighty, and despair!” — Percy Bysshe Shelley

This is a message which could indeed resonate with the Cardano project as it readies itself for a new phase in its ambitious roadmap.

With the move to full decentralisation imminently approaching, the dynasties which could soon be forced to pass into the annals of history are those of legacy financial systems, centralised authorities, and previous generations of blockchain technology.

So at the brink of such an exciting epoch of blockchain history, let’s look at four areas you should be fully up to speed with; before the development team behind the most precisely engineered cryptocurrency in the world begin to roll out Shelley.

1. Proof of Stake vs. Proof of Work

Type that exact phrase into Google and stare aghast at the 38 million search results in front of you.

Now take a breath and relax — because this is what you need to know specifically about Cardano’s unique answer to the issue of consensus which is shipping with Shelley, and why it’s required in the first place. The issue of consensus is of utmost importance throughout the Shelley phase roll-out, as Shelley marks the Cardano protocol’s path to full decentralisation.

Achieving consensus is the most important objective which a decentralised ledger protocol has to meet. Consensus protocols create an immutable and irrefutable agreement between all the devices connected to a distributed network, also called nodes, which theoretically prevents the exploitation of the distributed ledger by dishonest actors.

The first consensus mechanisms began with Proof of Work (PoW) blockchains like Bitcoin, which essentially utilise a ‘physical resource’ manifested through hashing power, requiring the expenditure of electrical energy to validate blocks and maintain trust on a robust, decentralised transaction ledger. This is carried out by ‘miners’, who commonly use specialised ASIC mining hardware to achieve consensus on blocks, through solving difficult cryptographic mathematical problems in return for a reward of BTC.

Therefore, in PoW systems, miners are chosen in an election-like process, whereby the probability of a miner being chosen to generate the next block is proportional to their hashing power. Bitcoin, and other PoW blockchains, have typically drawn criticism from environmental groups and other detractors, who use their mammoth energy consumption as a representation of their un-sustainability. While this is cause for debate, there are new consensus mechanisms which propose far less wasteful methods of achieving consensus.

In contrast, Cardano’s consensus mechanism, which will launch with Shelley, utilises ‘virtual resources’ of ‘stake’ to reach consensus, therefore known as PoS; which confer inherent scalability and energy efficiency advantages without compromising on security or decentralisation.

In PoS systems, miners are substituted for those who have ‘stake’ in a ledger. In the case of Cardano, this will be how many ADA an individual or stake pool owns — we’ll examine this later. To reach consensus via PoS, it is necessary to implement a completely randomised process which takes current stake into account, and elects a miner to validate the next block at random — known as a ‘slot leader’.

As with every aspect of the Cardano project, there’s also an esoteric name for their answer to PoS.

Proof of Stake has never been so precisely engineered.

Cardano’s particular iteration of PoS is known as ‘Ouroboros’ — named after the the self eating snake in ancient iconography. Whilst the first iterations of Ouroboros launched with ‘Ouroboros’ and then later ‘Ouroboros Praos’ presented at EuroCrypt 2018, the version which will be launching during the Shelley phase is the aptly named ‘Ouroboros Genesis’.

A recent February 2019 research paper presents the theory for Ouroboros Genesis, and details what sets it apart from the competition. Whilst other blockchain protocols have naturally graduated to PoS as a consensus mechanism, they have failed to address dynamic availability.

Simply put, PoS blockchain protocols operating in the real world may encounter situations where node or pool operators, or individuals staking their holdings, are either temporarily offline, out of sync with the parent blockchain, or otherwise unreachable. This presents a fundamental issue for PoS blockchains, as all parties must reach consensus to validate transactions. So if a node operator is offline or unreachable, consensus is essentially incomplete — which means that when these participants rejoin, or new participants enter the chain, they can’t be sure they have a secure and trusted copy of the blockchain.

This could result in a loss of funds for retail investors, and a catastrophic system failure for institutional participants running complex financial systems via the PoS blockchain. To date, this has been an issue other PoS blockchain protocols have failed to surmount.

However, Ouroboros Genesis offers a novel solution to this issue. Ouroboros Genesis enables parties to ‘bootstrap from genesis’, which essentially means that new or offline participants can safely rejoin the Cardano blockchain, and re-sync (or bootstrap) their copy of the blockchain from the Genesis block — the very first trusted block on the chain, much like participants of the PoW Bitcoin protocol can.

As Shelley rolls out and Ouroboros Genesis is implemented, participants will see the first implementation of the most secure PoS blockchain protocol ever engineered, exciting for both the frontier tech of the cryptocurrency space, and a boon for adoption, as it means companies who require highly secure software can begin deploying solutions via PoS blockchains.

2. Staking your ADA

Shelley also marks the beginning of the phase in which users may delegate their stake, the key requirement to produce new blocks in a PoS protocol as we’ve discussed above. As PoW consensus mechanisms reward miners with BTC when they validate a new block, Cardano will likewise provide incentives to those who delegate their stake, and become active participants in the PoS consensus protocol.

However, the Cardano team have realised that not every holder of ADA will have the time, knowledge or interest to remain online and keep their ‘node’ available at all times to participate in the protocol. Instead, holders of ADA may choose, for example through the Daedalus or Yoroi wallets, to ‘delegate’ their stake to a stake pool.

When users delegate their stake, they pass their right to protocol participation on to a stake pool operator, and a delegation certificate is created on-chain to record that they have delegated their ADA. It’s important to note, that whilst users are delegating their right to protocol participation on to a pool operator, they are still granted full monetary rights over their ADA holdings — as ADA is a functional means of exchange in it’s capacity as a functioning cryptocurrency.

So, for instance, Amy may have 5,000 ADA held in her Daedalus wallet which she wishes to stake with the ‘Hephaestus’ staking pool (one of the first pools created for delegating stake). While she delegates her stake, and therefore her protocol participation, to Hephaestus, she is still free to spend her ADA from her wallet address at any time.

The Cardano developers have achieved this through allocating multiple addresses associated with different cryptographic key pairs, including one to delegate stake, and another to spend ADA as a functional unit of currency.

For users delegating their stake to a pool, they receive rewards proportional to their stake whenever their pool is chosen to validate a new block, except they pay a fee to stake pool operators to perform this service on their behalf.

Conversely, some protocol participants may choose to become stake pool operators. Stake pool operators must be dedicated participants with the technical know-how, the hardware, and the time to keep their pool running 24/7, to validate transactions on the blockchain. As Cardano moves into a decentralised Shelley phase and away from a federated collection of centralised nodes, pool operators will be integral to the functioning of the blockchain.

As you might imagine then, becoming a stake pool operator carries some weight of responsibility, not least of all to the protocol, but to the individual participants who choose to delegate their stake to a pool, to maintain the pools reputation. Those pools who frequently disconnect from the network or are otherwise unreliable operators would face several challenges.

For example, rewards from validating a block are distributed by the protocol among the slot leader and the pool participants. If a pool frequently disconnects from the blockchain, their ranking is affected, and subsequently rewards are lower. Those delegating their stake to that pool are then more likely to leave and find a more reputable pool, and therefore, the less reliable pool will have lower stake, and a lower probability of being chosen as a slot leader. Therefore, it’s within pool leaders best interests to maintain a reliable pool.

Although guidance for pool operators and those looking to delegate their stake is still being published, staking in the Shelley phase is going to be an exciting era of the Cardano project, where for the first time in the protocols history, ADA holders can reap rewards for simply holding their ADA and participating in the protocol.

3. Shelley’s Gradual Roll-Out — The Shelley Testnet

This one is a short one, but perhaps the most important. There has been a propensity amongst blockchain companies and projects to set hard release deadlines, and fail to meet them. This creates an opening for detractors to spread FUD, and also, it detracts from other important developments happening at a continuous pace behind the scenes of cryptocurrency projects.

Realising this, the Cardano team have made it clear that the Shelley phase is not going to be released overnight. With such a huge engineering undertaking which comes with a project such as Cardano, advances to the protocol are made during a gradual roll-out. This will begin with the Shelley testnet. During this time, developers have the chance to implement new protocol features, and reiterate them when bugs are identified. Likewise, users will have the opportunity to try out stake delegation and registering for staking pools, and provide working feedback to the Cardano team.

Nevertheless, during the wider Shelley phase, users can expect to see the core features of open Ouroboros decentralisation and staking as we have discussed above, but also faster network synchronisation, changes to wallet backends, ADA debit cards, light client support, quantum resistant signatures and more; all rolled out as the Shelley phase develops.

The Future of Cardano

If, like me, you’ve been following the Cardano project intently since its launch in 2017, Shelley represents perhaps the most exciting period in the protocols history to date.

In addition to a move from federated centralised nodes, it also marks the first time that users, even non-technical users, can interact and contribute to the protocol en masse, either through staking their own ADA or delegating their stake.

After what has been a tough year for cryptocurrencies, 2019 is shaping up to be a truly formative year for Cardano.

Disclosure — Elliot Hill is a blockchain copywriter who has no official affiliation with the Cardano Project, though does have an investment in ADA. Thanks to Adatainment for providing essential information.