Could This Eco-Friendly Crypto Surpass Bitcoin and Ethereum?
by Emma Newbery | Updated July 21, 2021 - First published on May 30, 2021
Cardano and Ethereum will both make big leaps forward this year.
Once you've dipped your toe in the crypto waters, you'll discover that Bitcoin (BTC) and Ethereum (ETH) are only the tip of the iceberg. They may be the biggest and most well-known cryptocurrencies, but they're not perfect.
Both face two big issues: high carbon footprints and slow transactions. And while it is possible to layer solutions onto these coins, there are newer, cheaper, and faster cryptocurrencies that consume a fraction of the energy.
Cardano (ADA) is one such coin. Created by crypto trailblazer Charles Hoskinson, who also co-founded Ethereum, Cardano is the result of years of academic research and planning.
Cardano is a third-generation cryptocurrency
When Bitcoin launched in 2009, it was revolutionary. The challenge is that it's difficult to program Bitcoin. For example, I can securely transfer 0.02 Bitcoin to you. But I can't include any conditions, meaning I can't transfer 0.02 Bitcoin to you in exchange for your secondhand car.
That's where Ethereum comes in. It introduced the first programmable blockchain. When you make Ethereum payments, you can include conditions. Plus, other applications and cryptocurrencies can be built on the Ethereum platform.
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But there's still room for improvement. For example, here's how speed and energy consumption compares for three coins:
|Approximate transactions per second (TPS)||3 TPS||15 TPS||1 million TPS|
|Energy consumption||121 TWh||52 TWh||6 GWh|
|Energy consumption comparison||The Netherlands||Portugal||Roughly the same as 600 U.S. homes each year|
Ethereum is upgrading to Eth 2, which will address some of these issues. But third-generation cryptocurrencies like Cardano have skipped the carbon-guzzling, slow transaction stage. Cardano doesn't need upgrades to perform faster and better because it has been engineered differently.
Proof of work vs. proof of stake
The reason Bitcoin and Ethereum consume so much energy is that both use a proof of work (PoW) mining model. Mining is the way these blockchains add new blocks and verify transactions. A blockchain is a sophisticated database made up of interconnected blocks.
As the value of these cryptocurrencies increases, mining new blocks becomes more profitable -- and more companies want to do it. By design, only one Bitcoin block can be mined every 10 minutes. If more computing power is added, the mining becomes harder, meaning more energy is consumed to reach the same endpoint. The inefficiency is built into the system.
In contrast, proof of stake (PoS) only allows people who own some of the currency to validate transactions. This is called staking. The built-in limit means mining can't get out of control as there's no economic incentive to keep adding more computing power.
Cardano is built on a PoS system. Ethereum's Eth2 upgrade would move it to a PoS model and cut its energy by 99.95%.
Can ADA surpass ETH?
It's worth saying that it's not necessarily an either/or situation with these coins. I own both because I think each coin has a lot of long-term potential.
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Now, Ethereum and Cardano are competing in the same space. They're scalable, programmable platforms, and both will offer smart contracts and allow for the development of applications. Both have strong teams with a lot of crypto experience.
But there are some big differences.
Cardano spent years researching, testing, and planning its network. Each step it takes has been peer-reviewed. It has attracted experts in various fields to ensure the system is robust and scalable.
And some believe Cardano can overtake Ethereum. The problem? It isn't there yet. Cardano says it will launch smart contracts (self-executing pieces of code on the blockchain) later this year.
Ethereum already has 2,700 applications running on its network. Its smart contracts are working, it is the backbone of the burgeoning market in non-fungible tokens (NFTs), and it hosts a large number of decentralized finance (DeFi) projects. Decentralized finance applications cut out the middleman (such as a bank) on loans, interest-earning accounts, and other financial services.
However, until Eth2 launches, Ethereum remains energy intensive. It also has extremely high gas fees (like transaction fees) that get more expensive when the network is congested.
Ethereum may have thousands of apps running on its platform, but Cardano already has relationships with governments in developing countries. For example, it recently launched a project with the Ethiopian Ministry of Education. It looked to real-world uses for the platform from the outset.
The next year will be important for both cryptocurrencies. If Ethereum can transition to Eth2 without major hitches -- and without security breaches -- it's likely to lead the pack for the foreseeable future.
But, assuming Cardano's smart contract rollout is problem free, it will soon provide low-fee, speedy transactions to NFTs and DeFi applications, which is likely to attract a big share of the app market. That, plus its real-world relationships, means there's a good chance it could topple Ethereum from that top spot in the long term.
If you do decide to buy any of these cryptocurrencies, bear in mind that these are highly volatile investments and only invest money you can afford to lose.
About the Author
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
Emma Newbery owns Bitcoin, Ethereum, and Cardano.