Cardano (CCC:ADA-USD) has risen in popularity over the past few months. This is evident by its meteoric rise in price starting at the beginning of the year. Cardano had a price of 18 cents at the beginning of the year and is currently still up around 550% year-to-date despite the sell-off.
It’s easy to see why Cardano has gathered a lot of enthusiasm within the crypto community. Cardano is the fifth-largest cryptocurrency with a fully diluted market capitalization of $37 billion. It is also the largest cryptocurrency that uses a proof of stake (PoS) mechanism.
In this article, I will highlight the various advantages of this cryptocurrency and why it deserves a place in altcoin investors’ portfolios.
Proof of Stake is the Future of Cryptocurrencies
As mentioned, Cardano is a PoS cryptocurrency, unlike its much larger rivals Bitcoin (CCC:BTC-USD) and Etheruem (CCC:ETH-USD), which rely on proof of work (PoW) as their consensus mechanism. This gives Cardano a much smaller energy requirement at scale. Concern about Bitcoin’s energy consumption and carbon footprint was the root cause of Elon Musk abruptly reversing his support for Bitcoin.
While mitigating environmental harm is certainly important, I believe this isn’t the key issue when understanding the differences between PoS and PoW. The main issue I see is that ultimately PoW has long-term issues concerning scalability.
The consensus mechanism is an important factor to understand in cryptocurrencies as this is how these tokens secure their network and records. PoW requires solving incredibly difficult mathematical problems. As more altcoins are “mined” the difficulty of these complex equations increases, thus requiring more computational power. This increase in computational power is not a linear increase but an exponential one making this mechanism unsustainable in the long term.
The inefficiency of a PoW mechanism results in significant costs. At its current trajectory, the Bitcoin network could consume 7.67 gigawatts of electricity in the near future. This is close to the energy consumption of a small country like Austria. The energy consumption could grow well beyond that number given the exponential requirements of PoW.
Relying on PoS gives Cardano a major long-term advantage over many of its rivals.
Cardano Versus Ethereum
Even Ethereum is making the switch to PoS. The Ethereum Foundation announced that it plans to complete the transition by 2021. Its founder Vitalik Buterin sees this as a way to reduce the cryptocurrency’s huge environmental toll.
However, as you might imagine, such a massive shift isn’t popular with Ethereum’s existing miners. Managing this tension could prove to be a difficult challenge for Ethereum, as it could lose support from a large number of players in its network.
No such tensions exist in Cardano, which is already using the more advanced PoS method. Furthermore, Cardano is rapidly gaining on Ethereum implementing smart contracts and decentralized finance. According to its developers, Cardano has successfully launched the next iteration of their testnet, known as Alonzo white. This is an important step in a series of upgrades as Cardano incrementally implements new functionality.
If Cardano successfully implements its technological upgrades, I can easily see it challenging Ethereum’s dominance. In my view, the pathway for Cardano to implement smart contracts is easier than Ethereum’s switch to a PoS model. This is because Cardano is adding to its technological features and has broader consensus in its community.
Investor Takeaway
I believe that Cardano has a lot of potential to become the dominant cryptocurrency. Cardano has a head start due to adopting a PoS model. It is currently one of the most energy efficient altcoins available. As cryptocurrencies become more widely accepted, the dominant coins that rely on PoW face scaling challenges. Investors should consider adding Cardano to their portfolios.
On the date of publication, Joseph Nograles held a LONG position in Cardano and Ethereum. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.
