Cardano’s native blockchain is divided into two separate layers to fulfil different tasks and improve overall efficiency. They are:
- Cardano Settlement Layer (CSL): Used for facilitating peer-to-peer transactions of ADA-native tokens
- Cardano Computational Layer (CCL): Used for executing smart contracts
The Cardano blockchain operates using a proof-of-stake (PoS) consensus mechanism for discovering new blocks and adding transaction data to the blockchain called “Ouroboros.” This PoS system involves ADA holders locking up, aka “staking,” their coins in pools operated by other participants or becoming operators of stake pools themselves.
While anyone can run their own staking pool, it does require a level of technical expertise to do so successfully. Rewards for adding new blocks to the chain are distributed among the stake-pool operator and stakers after every epoch finishes (5 days), proportionate to how many coins are staked in the pool by each person.
The more coins collectively held in a stake pool, the greater the chance it will get randomly selected to become a slot leader and add the next block in the chain. Think of staked coins like lottery tickets. While having more tickets increases your chances of winning it doesn’t guarantee you will. To prevent giant pools from dominating the system, each staking pool is governed by a “saturation parameter” which essentially offers stake pools lower rewards once they reach a certain capacity to incentivize ADA stakers to relocate their coins to smaller pools.
The Ouroboros consensus system is different from Bitcoin’s proof-of-work (PoW) system, which requires users to compete using specialized computer equipment to discover the next block and has no built-in feature that discourages monopolistic mining operations (other than the fact that bitcoin’s value depends on its being controlled by no one).
In order to create new blocks, Ouroboros uses a time-period system called “epochs” where each epoch lasts five days. Inside each epoch, there are 21,600 smaller units of time called slots, or one slot every 20 seconds. Stake pools are randomly assigned to each slot as a “slot leader” and tasked with creating a new block for that slot.