IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANOA​ ​Subjective​ ​Approach

CHARLES​ ​HOSKINSON<​Charles.Hoskinson@iohk.io​><C3A6​ ​5E46​ ​7B54​ ​77DF​ ​3C4C​ ​9790​ ​4D22​ ​B3CA​ ​5B32​ ​FF66>

1.​ ​Introduction

Motivation

Sojourn's​ ​End

Proof​ ​of​ ​Stake

Social​ ​Elements​ ​of​ ​Money

Designing​ ​in​ ​Layers​ ​–​ ​Cardano​ ​Settlement​ ​Layer
ScriptingSidechains
Signatures
User​ ​Issued​ ​Assets​ ​(UIAs)

Scalability

Cardano​ ​Computation​ ​Layer

Regulation

What​ ​is​ ​the​ ​Point​ ​of​ ​all​ ​of​ ​it?
2.​ ​Science​ ​and​ ​Engineering
The​ ​Art​ ​of​ ​Iteration

Facts​ ​and​ ​Opinions
Functional​ ​Sins

Why​ ​Haskell?

Formal​ ​Specification​ ​and​ ​Verification

Transparency
3.​ ​Interoperability

The​ ​Grand​ ​Myopia​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​1​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

LegacyCryptocurrency​ ​Interoperability
The​ ​Maze​ ​of​ ​Daedalus

4.​ ​Regulation

The​ ​False​ ​Dichotomy
Metadata

Authentication​ ​and​ ​ComplianceMarketplace​ ​DAOs
5.​ ​Sustainability
6.​ ​Conclusion

1.​ ​Introduction
Motivation
Cardano is a project that began in 2015 as an effort to change the way cryptocurrencies aredesigned and developed. The overall focus beyond a particular set of innovations is to provide amore balanced and sustainable ecosystem that better accounts for the needs of its users as
well​ ​as​ ​other​ ​systems​ ​seeking​ ​integration.
In the spirit of many open source projects, Cardano did not begin with a comprehensive
roadmap or even an authoritative white paper. Rather it embraced a collection of designprinciples,​ ​engineering​ ​best​ ​practices​ ​and​ ​avenues​ ​for​ ​exploration.​ ​These​ ​include​ ​the​ ​following:
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Separation​ ​of​ ​accounting​ ​and​ ​computation​ ​into​ ​different​ ​layers
Implementation​ ​of​ ​core​ ​components​ ​in​ ​highly​ ​modular​ ​functional​ ​code
Small​ ​groups​ ​of​ ​academics​ ​and​ ​developers​ ​competing​ ​with​ ​peer​ ​reviewed​ ​research
Heavy​ ​use​ ​of​ ​interdisciplinary​ ​teams​ ​including​ ​early​ ​use​ ​of​ ​InfoSec​ ​experts
Fast​ ​iteration​ ​between​ ​white​ ​papers,​ ​implementation​ ​and​ ​new​ ​research​ ​required​ ​tocorrect​ ​issues​ ​discovered​ ​during​ ​review
Building​ ​in​ ​the​ ​ability​ ​to​ ​upgrade​ ​post-deployed​ ​systems​ ​without​ ​destroying​ ​the​ ​network
Development​ ​of​ ​a​ ​decentralized​ ​funding​ ​mechanism​ ​for​ ​future​ ​work​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​2​ ​of​ ​44

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A​ ​long-term​ ​view​ ​on​ ​improving​ ​the​ ​design​ ​of​ ​cryptocurrencies​ ​so​ ​they​ ​can​ ​work​ ​onmobile​ ​devices​ ​with​ ​a​ ​reasonable​ ​and​ ​secure​ ​user​ ​experience
Bringing​ ​stakeholders​ ​closer​ ​to​ ​the​ ​operations​ ​and​ ​maintenance​ ​of​ ​their​ ​cryptocurrency
Acknowledging​ ​the​ ​need​ ​to​ ​account​ ​for​ ​multiple​ ​assets​ ​in​ ​the​ ​same​ ​ledger
Abstracting​ ​transactions​ ​to​ ​include​ ​optional​ ​metadata​ ​in​ ​order​ ​to​ ​better​ ​conform​ ​to​ ​theneeds​ ​of​ ​legacy​ ​systems
Learning​ ​from​ ​the​ ​nearly​ ​1,000​ ​altcoins​ ​by​ ​embracing​ ​features​ ​that​ ​make​ ​sense
Adopt​ ​a​ ​standards-driven​ ​process​ ​inspired​ ​by​ ​the​ ​Internet​ ​Engineering​ ​Task​ ​Force​ ​usinga​ ​dedicated​ ​foundation​ ​to​ ​lock​ ​down​ ​the​ ​final​ ​protocol​ ​design
Explore​ ​the​ ​social​ ​elements​ ​of​ ​commerce
Find​ ​a​ ​healthy​ ​middle​ ​ground​ ​for​ ​regulators​ ​to​ ​interact​ ​with​ ​commerce​ ​withoutcompromising​ ​some​ ​core​ ​principles​ ​inherited​ ​from​ ​Bitcoin

From this unstructured set of ideas, the principals working on Cardano began both to explore
cryptocurrency literature and to build a toolset of abstractions. The output of this research is
IOHK’s extensive l​ ibrary of papers​, numerous survey results such as this recent ​scripting
language overview as well as an O
​ ntology of Smart Contracts​, and the ​Scorex project​. Lessons
yielded an appreciation for the cryptocurrency industry’s unusual and at times
counterproductive​ ​growth.
First, unlike successful protocols such as TCP/IP, there is little layering in the design ofcryptocurrencies. There has been a desire to preserve a single notion of consensus aroundfacts​ ​and​ ​events​ ​recorded​ ​in​ ​a​ ​single​ ​ledger,​ ​regardless​ ​of​ ​whether​ ​it​ ​makes​ ​sense.
For example, Ethereum has encumbered enormous complexity attempting to become auniversal world computer, but s​ uffers from trivial concerns potentially destroying the system’sability to operate as a store of value. Should everyone’s program be a first class citizen
regardless​ ​of​ ​its​ ​economic​ ​value,​ ​cost​ ​to​ ​maintain,​ ​or​ ​regulatory​ ​consequences?
Second, there is little appreciation for prior results in mainstream cryptographic research. For
example, Bitshares’ ​delegated Proof of Stake could have easily and reliably generated random
numbers using coin tossing with guaranteed output delivery, which is a technique known sincethe​ ​1980s​ ​(see​ ​the​ s​ eminal​ ​paper​ ​by​ ​Rabin​ ​and​ ​Ben-Or​).
Third, most altcoins (with a few notable exceptions such as ​Tezos​) have not made any
accommodation for future updates. The ability to successfully push a soft or hard fork is pivotalto​ ​the​ ​long-term​ ​success​ ​of​ ​any​ ​cryptocurrency.
As a corollary, enterprise users cannot commit millions of dollars worth of resources toprotocols where the roadmap and actors behind them are ephemeral, petty or radicalized. There​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​3​ ​of​ ​44

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needs to be an efficient process through which social consensus can form around a vision forevolving the underlying protocol. If this process is enormously burdensome, fragmentation
could​ ​break​ ​the​ ​community​ ​apart.
Finally, money is ultimately a social phenomenon. In the effort to anonymize anddisintermediate central actors, Bitcoin and its contemporaries have also discarded the need forstable identities, metadata and reputation in commercial transactions. Adding these data
through centralized solutions removes the auditability, global availability and immutability —which​ ​is​ ​the​ ​entire​ ​point​ ​of​ ​using​ ​a​ ​blockchain.
Legacy financial systems such as those composed of SWIFT, FIX and ACH are rich intransactional metadata. It is not enough to know how much value moved between accounts,
regulation often requires the attribution of actors involved, compliance information, reporting
suspicious activity, and other records and actions. In some cases, the metadata is more
important​ ​than​ ​the​ ​transaction.
Hence, it seems reasonable to infer that the manipulation of metadata could be as harmful as
counterfeiting currency or rewriting transaction history. Making no accommodation for actors
who want to voluntarily include these fields seems counterproductive to mainstream adoptionand​ ​consumer​ ​protection.

Sojourn's​ ​End
The aggregation of our principled exploration of the cryptocurrency space is two collections ofprotocols. Respectively, a provably secure Proof-of-Stake [​1]​ [​2]​ based cryptocurrency called the
Cardano Settlement Layer (CSL) and a set of protocols called the Cardano Computation Layer(CCL).
Our design emphasis is to accommodate the social aspects of cryptocurrencies, build in layers
by separating the accounting of value from complex computation and address the needs ofregulators within the scope of several immutable principles1. Furthermore, where it is sensible,
we attempt to ​vet proposed protocols through peer review and c​ heck code against formal
specifications​.

1​ ​See​ ​Regulation​ ​section​ ​for​ ​list​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​4​ ​of​ ​44

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Proof​ ​of​ ​Stake
Using proof of stake for a cryptocurrency is a ​hotly debated design choice​, however because it
adds a mechanism to introduce secure voting, has more capacity to scale, and permits more
exotic​ ​incentive​ ​schemes,​ ​we​ ​decided​ ​to​ ​embrace​ ​it.
Our proof of stake protocol is called O​ uroboros and it has been designed by an extremely
talented team of cryptographers from five academic institutions2 led by Professor Aggelos
Kiayias of the University of Edinburgh. The core innovation it brings beyond being proven secureusing a ​rigorous cryptographic model is a modular and flexible design that allows for thecomposition​ ​of​ ​many​ ​protocols​ ​to​ ​enhance​ ​functionality.
This modularity allows for features such as delegation, sidechains, subscribable checkpoints,
better data structures for light clients, different forms of ​random number generation and evendifferent synchronization assumptions. As a network develops from having thousands tomillions and even billions of users, the requirements of its consensus algorithm will alsochange. Thus, it is vital to have enough flexibility to accommodate these changes and thereby
future-proof​ ​the​ ​heart​ ​of​ ​a​ ​cryptocurrency.

Social​ ​Elements​ ​of​ ​Money
Cryptocurrencies are a prime example of the social component of money. When restricting
analysis solely to technology, there is little difference between Bitcoin and Litecoin and evenless so between Ethereum and Ethereum Classic. Yet, both Litecoin and Ethereum Classic
maintain large market capitalizations and robust, dynamic communities as well as their own
social​ ​mandates.
It can be argued that a large part of the value of a cryptocurrency is derived from its community,
the way it uses the currency, and its level of engagement in the currency’s evolution. Furthering
the thought, currencies such as Dash have even integrated systems directly into the protocol toengage​ ​their​ ​community​ ​in​ ​deciding​ ​what​ ​should​ ​be​ ​a​ ​priority​ ​to​ ​develop​ ​and​ ​fund.

​ ​University​ ​of​ ​Connecticut,​ ​University​ ​of​ ​Athens,​ ​University​ ​of​ ​Edinburgh,​ ​Aarhus​ ​University,​ ​Tokyo
Institute​ ​of​ ​Technology

2​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​5​ ​of​ ​44

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The vast diversity of cryptocurrencies also provides evidence for their social elements.
Disagreements about philosophy, monetary policy, or even just between the core developers
lead to fragmentation and forks. Yet unlike their cryptocurrency counterparts, fiat currencies ofsuperpowers tend to survive political shifts and local disagreements without a currency crisis ormass​ ​exodus.
Therefore, it seems that there are elements of legacy systems that are missing from thecryptocurrency industry. We argue — and have inculcated into the Cardano roadmap – thatusers of a protocol need incentives to understand the social contract behind their protocol andhave the freedom to propose changes in a productive way. This freedom extends to every
aspect of a value exchange system, from deciding how markets should be regulated to which
projects should be funded. Yet it cannot be brokered through centralized actors nor requiresome​ ​special​ ​credential​ ​that​ ​could​ ​be​ ​co-opted​ ​by​ ​a​ ​well​ ​funded​ ​minority.
Cardano will implement a system of overlay protocols built on top of CSL to accommodate theneeds​ ​of​ ​its​ ​users.
First, regardless of the success of a crowdsale to bootstrap development, funds will eventuallydissipate. Hence, Cardano will include a decentralized trust3 funded from monotonicallydecreasing​ ​inflation​ ​and​ ​transaction​ ​fees.
Any user should be eligible to request funds from the trust by a ballot system and thestakeholders of CSL vote on who becomes a beneficiary. The process creates a productive
feedback loop seen in other cryptocurrencies with treasury/trust systems, ​such as Dash​, bystarting​ ​a​ ​conversation​ ​about​ ​who​ ​should​ ​and​ ​should​ ​not​ ​be​ ​funded.
Funding discussions force a relation of long and short term goals, the cryptocurrency’s social
contract, priorities and the belief in value creation with particular proposals. This conversationmeans that the community is constantly evaluating and debating its beliefs against possible
roadmaps.
Second, our hope is that Cardano will eventually include a formal, blockchain based system topropose and vote on both soft and hard forks. Bitcoin with its block size debate, Ethereum with
the DAO fork, and many other cryptocurrencies besides have endured long standing and, in
frequent​ ​cases,​ ​unresolved​ ​arguments​ ​over​ ​the​ ​technical​ ​and​ ​moral​ ​direction​ ​of​ ​the​ ​codebase.
It can and should be argued that many of these disagreements, and the fracturing of thecommunity that results when action is taken, are a direct result of a lack of formal processes fordebating​ ​change.
3​ ​This​ ​is​ ​also​ ​known​ ​as​ ​a​ ​treasury​ ​system​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​6​ ​of​ ​44

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Where does one go to convince Bitcoin users to adopt Segregated Witness? How should thecore developers of Ethereum measure community sentiment for bailing out the DAO? If thecommunity​ ​fractures,​ ​is​ ​the​ ​cryptocurrency​ ​damaged​ ​beyond​ ​repair?
In the worst cases, moral authority to act could simply devolve to whoever has the developers,
infrastructural relationships and money, not the best wishes of the vast majority of thecommunity. Furthermore, if a large portion of the community is inaccessible or disengaged dueto​ ​bad​ ​incentives4,​ ​then​ ​how​ ​can​ ​one​ ​truly​ ​know​ ​if​ ​their​ ​acts​ ​are​ ​legitimate?
Proposed cryptocurrencies such as ​Tezos provide an interesting model to examine where acryptocurrency protocol is treated like a constitution containing three sections (Transaction,
Consensus and Network) with a set of formal rules and process to update the constitution. Yet
there remains much work to be done with incentives and over how exactly to model and changea​ ​cryptocurrency​ ​with​ ​a​ ​formal​ ​language.
The use of formal methods, ​machine understandable specifications and merging a treasury withthis process for financial incentives are being explored as possible avenues for inspiration.
Ultimately, just the ability to propose a protocol change in a transparent, censorship free way
with blockchain based voting should improve the process, even if more elegant solutions cannotbe​ ​designed.

Designing​ ​in​ ​Layers​ –​ ​ ​Cardano​ ​Settlement​ ​Layer
When​ ​designing​ ​great​ ​protocols​ ​and​ ​languages,​ ​one​ ​should​ ​not​ ​look​ ​to​ ​the​ ​future,​ ​but​ ​rather​ ​tothe​ ​past.​ ​History​ ​provides​ ​a​ ​litany​ ​of​ ​examples​ ​of​ ​great​ ​ideas​ ​that​ ​are​ ​perfect​ ​on​ ​paper,​ ​yetsomehow​ ​have​ ​not​ ​survived,​ ​such​ ​as​ ​the​ O​ pen​ ​Systems​ ​Interconnection​ ​standards​.​ ​History​ ​also
provides​ ​happy​ ​accidents​ ​that​ ​have​ ​endured​ ​from​ ​TCP/IP​ ​to​ ​JavaScript.
Some​ ​principles​ ​extracted​ ​from​ ​a​ ​historical​ ​view​ ​are​ ​the​ ​following:
1.
2.
3.
4.

4

You​ ​cannot​ ​predict​ ​the​ ​future​ ​so​ ​build​ ​in​ ​wiggle​ ​room
Complexity​ ​is​ ​nice​ ​on​ ​paper,​ ​but​ ​simplicity​ ​usually​ ​wins
Too​ ​many​ ​cooks​ ​spoil​ ​the​ ​brothOnce​ ​a​ ​standard​ ​is​ ​set​ ​it​ ​will​ ​probably​ ​stick​ ​around,​ ​regardless​ ​of​ ​whether​ ​it​ ​issuboptimal​ ​See​ r​ ational​ ​ignorance​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​7​ ​of​ ​44

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5. Bad​ ​ideas​ ​can​ ​actually​ ​evolve​ ​into​ ​pretty​ ​good​ ​ones​ ​if​ ​there​ ​is​ ​a​ ​will
Cardano​ ​is​ ​a​ ​financial​ ​system​ ​that​ ​accepts​ ​its​ ​social​ ​nature.​ ​There​ ​will​ ​be​ ​a​ ​tremendous​ ​needfor​ ​flexibility​ ​and​ ​the​ ​ability​ ​to​ ​address​ ​arbitrary​ ​complexity​ ​in​ ​a​ ​particular​ ​user’s​ ​transaction.​ ​Ifsuccessful,​ ​there​ ​will​ ​be​ ​a​ ​need​ ​for​ ​tremendous​ ​computational,​ ​storage​ ​and​ ​network​ ​resourcesto​ ​accommodate​ ​millions​ ​of​ ​concurrent​ ​transactions.
Yet​ ​we​ ​do​ ​not​ ​have​ ​a​ ​digital,​ ​decentralized​ ​Robin​ ​Hood​ ​to​ ​take​ ​from​ ​the​ ​rich​ ​nodes​ ​and​ ​give​ ​tothe​ ​poor​ ​ones​ ​in​ ​order​ ​to​ ​achieve​ ​a​ ​fair​ ​network.​ ​Nor​ ​do​ ​we​ ​have​ ​the​ ​luxury​ ​of​ ​trusting​ ​humanbeneficence​ ​to​ ​altruistically​ ​sacrifice​ ​for​ ​the​ ​greater​ ​good​ ​of​ ​the​ ​network.​ ​Therefore,​ ​Cardano’s
design​ ​borrows​ ​from​ ​TCP/IP​ ​the​ ​concept​ ​of​ ​separation​ ​of​ ​concerns.
Blockchains​ ​are​ ​ultimately​ ​databases​ ​ordering​ ​facts​ ​and​ ​events​ ​with​ ​guarantees​ ​about
timestamps​ ​and​ ​immutability.​ ​In​ ​the​ ​context​ ​of​ ​money,​ ​they​ ​order​ ​ownership​ ​of​ ​assets.​ ​Adding
complex​ ​computation​ ​by​ ​storing​ ​and​ ​executing​ ​programs​ ​is​ ​an​ ​orthogonal​ ​concept.​ ​Do​ ​we​ ​wantto​ ​know​ ​how​ ​much​ ​value​ ​went​ ​from​ ​Alice​ ​to​ ​Bob,​ ​or​ ​do​ ​we​ ​want​ ​to​ ​get​ ​involved​ ​in​ ​figuring​ ​outthe​ ​whole​ ​story​ ​behind​ ​the​ ​transaction​ ​and​ ​deciding​ ​how​ ​much​ ​to​ ​send?
It​ ​is​ ​incredibly​ ​tempting​ ​to​ ​choose​ ​the​ ​latter​ ​as​ ​Ethereum​ ​has​ ​done​ ​because​ ​it​ ​is​ ​more​ ​flexible,
but​ ​it​ ​violates​ ​the​ ​design​ ​principles​ ​above.​ ​Figuring​ ​out​ ​the​ ​story​ ​means​ ​that​ ​a​ ​single​ ​protocolhas​ ​to​ ​be​ ​able​ ​to​ ​understand​ ​arbitrary​ ​events,​ ​script​ ​arbitrary​ ​transactions,​ ​permit​ ​arbitration​ ​incases​ ​of​ ​fraud​ ​and​ ​even​ ​potentially​ ​reverse​ ​transactions​ ​when​ ​new​ ​information​ ​is​ ​madeavailable.
Then​ ​one​ ​has​ ​to​ ​make​ ​difficult​ ​design​ ​decisions​ ​about​ ​what​ ​metadata​ ​to​ ​store​ ​for​ ​eachtransaction.​ ​What​ ​elements​ ​of​ ​the​ ​story​ ​behind​ ​Alice​ ​and​ ​Bob’s​ ​transaction​ ​are​ ​relevant?​ ​Arethey​ ​relevant​ ​forever?​ ​When​ ​can​ ​we​ ​throw​ ​away​ ​some​ ​data?​ ​Does​ ​doing​ ​so​ ​violate​ ​the​ ​law​ ​insome​ ​countries?
Furthermore,​ ​some​ ​computation​ ​is​ ​private​ ​in​ ​nature.​ ​For​ ​example,​ ​when​ ​calculating​ ​the​ ​averagesalary​ ​of​ ​workers​ ​in​ ​an​ ​office,​ ​we​ ​would​ ​not​ ​necessarily​ ​want​ ​to​ ​leak​ ​how​ ​much​ ​each​ ​person
makes.​ ​But​ ​what​ ​if​ ​every​ ​computation​ ​is​ ​publicly​ ​known?​ ​What​ ​if​ ​this​ ​publicity​ ​biases​ ​execution
order​ ​to​ ​harm​ ​outcome​?
Thus,​ ​we​ ​have​ ​chosen​ ​the​ ​position​ ​that​ ​the​ ​accounting​ ​of​ ​value​ ​should​ ​be​ ​separated​ ​from​ ​thestory​ ​behind​ ​why​ ​the​ ​value​ ​was​ ​moved.​ ​In​ ​other​ ​words,​ ​separation​ ​of​ ​value​ ​from​ ​computation.
This​ ​separation​ ​does​ ​not​ ​mean​ ​that​ ​Cardano​ ​will​ ​not​ ​support​ ​smart​ ​contracts.​ ​On​ ​the​ ​contrary,by​ ​making​ ​the​ ​separation​ ​explicit,​ ​it​ ​permits​ ​significantly​ ​more​ ​flexibility​ ​in​ ​the​ ​design,​ ​use,
privacy​ ​and​ ​execution​ ​of​ ​smart​ ​contracts.

​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​8​ ​of​ ​44

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The​ ​value​ ​ledger​ ​is​ ​called​ ​the​ ​Cardano​ ​Settlement​ ​Layer​ ​(CSL).​ ​As​ ​the​ ​purpose​ ​is​ ​to​ ​account​ ​forvalue,​ ​the​ ​roadmap​ ​has​ ​the​ ​following​ ​goals:
1. Support​ ​two​ ​sets​ ​of​ ​scripting​ ​languages,​ ​one​ ​to​ ​move​ ​value​ ​and​ ​another​ ​to​ ​enhanceoverlay​ ​protocol​ ​support
2. Provide​ ​support​ ​for​ ​KMZ​ ​sidechains5​ ​to​ ​link​ ​to​ ​other​ ​ledgers
3. Support​ ​multiple​ ​types​ ​of​ ​signature​ ​including​ ​quantum​ ​resistant​ ​signatures​ ​for​ ​higher
security
4. Support​ ​multiple​ ​user​ ​issued​ ​assets
5. Achieve​ ​true​ ​scalability,​ ​meaning​ ​as​ ​more​ ​users​ ​join,​ ​the​ ​capabilities​ ​of​ ​the​ ​systemincrease

ScriptingStarting​ ​with​ ​the​ ​scripting​ ​language,​ ​transactions​ ​between​ ​addresses​ ​in​ ​a​ ​ledger​ ​require​ ​someform​ ​of​ ​a​ ​script​ ​to​ ​execute​ ​and​ ​be​ ​proven​ ​valid.​ ​Ideally,​ ​one​ ​would​ ​not​ ​want​ ​Eve​ ​to​ ​access
Alice’s​ ​money,​ ​nor​ ​would​ ​one​ ​want​ ​a​ ​poorly​ ​designed​ ​script​ ​to​ ​accidently​ ​send​ ​value​ ​to​ ​a​ ​deadaddress​ ​making​ ​the​ ​funds​ ​irretrievable.
Systems​ ​such​ ​as​ ​Bitcoin​ ​provide​ ​an​ ​extremely​ ​inflexible​ ​and​ ​draconian​ ​scripting​ ​language​ ​thatis​ ​difficult​ ​to​ ​program​ ​bespoke​ ​transactions​ ​in,​ ​and​ ​to​ ​read​ ​and​ ​understand.​ ​Yet​ ​the​ ​generalprogrammability​ ​of​ ​languages​ ​such​ ​as​ ​Solidity​ ​introduce​ ​an​ ​extraordinary​ ​amount​ ​of​ ​complexity
into​ ​the​ ​system​ ​and​ ​are​ ​useful​ ​to​ ​only​ ​a​ ​much​ ​smaller​ ​set​ ​of​ ​actors.
Therefore,​ ​we​ ​have​ ​chosen​ ​to​ ​design​ ​a​ ​new​ ​language​ ​called​ ​Simon6​ ​in​ ​honor​ ​of​ ​its​ ​creator
Simon​ ​Thompson​ ​and​ ​the​ ​creator​ ​of​ ​the​ ​concepts​ ​that​ ​inspired​ ​it,​ ​Simon​ ​Peyton​ ​Jones.​ ​Simon​ ​isa​ ​domain-specific​ ​language​ ​that​ ​is​ ​based​ ​upon​​ ​Composing​ ​contracts:​ ​an​ ​adventure​ ​in​ ​financial
engineering​.
The​ ​principal​ ​idea​ ​is​ ​that​ ​financial​ ​transactions​ ​are​ ​generally​ ​composed​ ​from​ ​a​ ​collection​ ​offoundational​ ​elements7.​ ​If​ ​one​ ​assembles​ ​a​ ​financial​ ​periodic​ ​table​ ​of​ ​elements,​ ​then​ ​one​ ​canprovide​ ​support​ ​for​ ​an​ ​arbitrarily​ ​large​ ​set​ ​of​ ​compound​ ​transactions​ ​that​ ​will​ ​cover​ ​most,​ ​if​ ​notall,​ ​common​ ​transaction​ ​types​ ​without​ ​requiring​ ​general​ ​programmability.

​ ​Coming​ ​soon​ ​in​ ​a​ ​paper​ ​from​ ​Kiayias,​ ​Zindros​ ​and​ ​Miller​ ​Specifics​ ​will​ ​be​ ​released​ ​in​ ​an​ ​upcoming​ ​specification.​ ​The​ ​full​ ​language​ ​will​ ​be​ ​supported​ ​in​ ​theShelley​ ​CSL​ ​release​ ​planned​ ​for​ ​Q4​ ​of​ ​20177​ ​Project​ ​ACTUS​​ ​has​ ​an​ ​in-depth​ ​elaboration
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The​ ​primary​ ​advantage​ ​is​ ​that​ ​security​ ​and​ ​execution​ ​can​ ​be​ ​extremely​ ​well​ ​understood.​ ​Proofs
can​ ​be​ ​written​ ​to​ ​show​ ​correctness​ ​of​ ​templates​ ​and​ ​exhaust​ ​the​ ​execution​ ​space​ ​ofproblematic​ ​transaction​ ​events,​ ​such​ ​as​ ​the​ ​creation​ ​of​ ​new​ ​money​ ​out​ ​of​ ​thin​ ​air​​ ​or​ t​ ransaction
malleability​.​ ​Second,​ ​one​ ​can​ ​leave​ ​in​ ​extensions​ ​to​ ​add​ ​more​ ​elements​ ​by​ ​way​ ​of​ ​soft​ ​forks​ ​ifnew​ ​functionality​ ​is​ ​required.
That​ ​said,​ ​there​ ​will​ ​always​ ​be​ ​a​ ​need​ ​to​ ​connect​ ​CSL​ ​to​ ​overlay​ ​protocols,​ ​legacy​ ​financial
systems,​ ​and​ ​special​ ​purpose​ ​servers.​ ​Thus​ ​we​ ​have​ ​developed​ P​ lutus​​ ​as​ ​both​ ​a​ ​general
purpose​ ​smart​ ​contract​ ​language​ ​and​ ​also​ ​a​ ​special​ ​purpose​ ​DSL​ ​for​ ​interoperability.
Plutus​ ​is​ ​a​ ​typed​ ​functional​ ​language​ ​based​ ​on​ ​concepts​ ​from​ ​Haskell,​ ​which​ ​can​ ​be​ ​used​ ​towrite​ ​custom​ ​transaction​ ​scripts.​ ​For​ ​CSL,​ ​it​ ​will​ ​be​ ​used​ ​for​ ​complex​ ​transactions​ ​required​ ​toadd​ ​support​ ​for​ ​other​ ​layers​ ​we​ ​need​ ​to​ ​connect,​ ​such​ ​as​ ​our​ ​sidechains​ ​scheme.

SidechainsWith​ ​respect​ ​to​ ​sidechains,​ ​Cardano​ ​will​ ​support​ ​a​ ​new​ ​protocol​ ​developed​ ​by​ ​Kiayias,​ ​Miller​ ​andZindros​ ​(KMZ​ ​sidechains)​ ​based​ ​upon​ ​prior​ ​results​ ​from​ ​proofs​ ​of​ ​proofs​ ​of​ ​work​.​ ​The​ ​particular
design​ ​is​ ​beyond​ ​the​ ​scope​ ​of​ ​this​ ​paper;​ ​however,​ ​the​ ​concept​ ​allows​ ​for​ ​the​ ​secure​ ​andnon-interactive​ ​movement​ ​of​ ​funds​ ​from​ ​CSL​ ​to​ ​any​ ​Cardano​ ​Computation​ ​Layer​ ​or​ ​otherblockchain​ ​supporting​ ​the​ ​protocol.
KMZ​ ​sidechains​ ​are​ ​the​ ​key​ ​to​ ​encapsulating​ ​complexity.​ ​Ledgers​ ​with​ ​regulatory​ ​requirements,
private​ ​operations,​ ​robust​ ​scripting​ ​languages​ ​and​ ​other​ ​special​ ​concerns​ ​are​ ​effectively​ ​blackboxes​ ​to​ ​CSL,​ ​yet​ ​the​ ​CSL​ ​user​ ​will​ ​gain​ ​certain​ ​guarantees​ ​about​ ​accounting​ ​and​ ​the​ ​ability​ ​torecall​ ​funds​ ​once​ ​computation​ ​is​ ​complete.

SignaturesIn​ ​order​ ​to​ ​securely​ ​move​ ​value​ ​from​ ​Alice​ ​to​ ​Bob,​ ​Alice​ ​needs​ ​to​ ​prove​ ​she​ ​has​ ​the​ ​right​ ​tomove​ ​the​ ​funds.​ ​The​ ​most​ ​direct​ ​and​ ​reliable​ ​way​ ​of​ ​accomplishing​ ​this​ ​task​ ​is​ ​to​ ​use​ ​a​ p​ ublic
key​ ​signature​ ​scheme​​ ​where​ ​funds​ ​are​ ​connected​ ​to​ ​a​ ​public​ ​key​ ​and​ ​Alice​ ​controls​ ​anassociated​ ​private​ ​key.
There​ ​are​ ​hundreds​ ​of​ ​possible​ ​schemes​ ​with​ ​different​ ​security​ ​parameters​ ​and​ ​assumptions.
Some​ ​rely​ ​upon​ ​mathematical​ ​problems​ ​connected​ ​to​ e​ lliptic​ ​curves​,​ ​whereas​ ​others​ ​areconnected​ ​to​ ​exotic​ ​concepts​ ​using​ l​ attices​.
​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​10​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

The​ ​abstract​ ​goal​ ​is​ ​always​ ​the​ ​same.​ ​There​ ​exists​ ​a​ ​hard​ ​problem​ ​that​ ​cannot​ ​be​ ​solved​ ​unlesssomeone​ ​has​ ​a​ ​secret​ ​piece​ ​of​ ​knowledge.​ ​The​ ​holder​ ​of​ ​this​ ​piece​ ​of​ ​knowledge​ ​is​ ​said​ ​to​ ​bethe​ ​owner​ ​of​ ​the​ ​keypair​ ​and​ ​should​ ​be​ ​the​ ​only​ ​entity​ ​that​ ​has​ ​the​ ​ability​ ​to​ ​use​ ​it.
There​ ​are​ ​two​ ​groups​ ​of​ ​concerns​ ​a​ ​cryptocurrency​ ​faces​ ​with​ ​choosing​ ​a​ ​signature​ ​scheme.
First,​ ​there​ ​is​ ​the​ ​long-term​ ​security​ ​durability​ ​of​ ​the​ ​scheme​ ​itself.​ ​Some​ ​cryptographic
schemes​ ​used​ ​in​ ​the​ ​1970s​ ​and​ ​1980s​ ​such​ ​as​ ​DES​ ​have​ ​been​ ​broken.​ ​The​ ​period​ ​over​ ​whichthe​ ​scheme​ ​should​ ​be​ ​expected​ ​to​ ​survive​ ​must​ ​be​ ​decided​ ​upon.
Second,​ ​there​ ​are​ ​many​ ​enterprises,​ ​governments​ ​and​ ​other​ ​institutions​ ​that​ ​have​ ​preferred,​ ​orin​ ​some​ ​cases,​ ​mandated​ ​the​ ​use​ ​of​ ​a​ ​particular​ ​scheme.​ ​For​ ​example,​ ​the​ ​NSA​ ​maintains​ ​theSuite​ ​B​ ​protocol​ ​set​.​ ​There​ ​are​ ​standards​ ​from​ I​ SO​​ ​and​ ​even​ ​W3C​ ​workgroups​ ​on​ ​cryptography​.
If​ ​a​ ​cryptocurrency​ ​chooses​ ​a​ ​single​ ​signature​ ​scheme,​ ​it​ ​is​ ​forced​ ​to​ ​accept​ ​that​ ​the​ ​scheme
could​ ​be​ ​broken​ ​at​ ​some​ ​point​ ​in​ ​the​ ​future​ ​and​ ​at​ ​least​ ​one​ ​entity​ ​cannot​ ​use​ ​thecryptocurrency​ ​due​ ​to​ ​legal​ ​or​ ​industry​ ​restrictions.​ ​Yet​ ​a​ ​cryptocurrency​ ​cannot​ ​support​ ​every
signature​ ​scheme​ ​as​ ​this​ ​would​ ​require​ ​every​ ​client​ ​to​ ​understand​ ​and​ ​validate​ ​each​ ​scheme.
For​ ​Cardano,​ ​we​ ​decided​ ​to​ ​start​ ​with​ ​using​ ​elliptic​ ​curve​ ​cryptography,​ ​the​ ​Ed25519​ ​curve​​ ​inparticular.​ ​We​ ​also​ ​decided​ ​to​ ​enhance​ ​the​ ​existing​ ​libraries​ ​by​ ​adding​ ​support​ ​for​ H​ D​ ​wallets
using​ D​ r​ ​Dmitry​ ​Khovratovich​ ​and​ ​Jason​ ​Law’s​ ​Specification8.
This​ ​said,​ ​Cardano​ ​will​ ​support​ ​more​ ​signature​ ​schemes​ ​in​ ​the​ ​future.​ ​In​ ​particular,​ ​we​ ​areinterested​ ​in​ ​integrating​ ​BLISS-B​​ ​to​ ​add​ ​quantum​ ​computer​ ​resistant​ ​signatures​​ ​to​ ​our​ ​system.
We​ ​are​ ​also​ ​interested​ ​in​ ​adding​ S​ ECP256k1​​ ​to​ ​enhance​ ​interoperability​ ​with​ ​legacy
cryptocurrencies​ ​such​ ​as​ ​Bitcoin.
Cardano​ ​has​ ​been​ ​designed​ ​with​ ​special​ ​extensions​ ​that​ ​will​ ​allow​ ​us​ ​to​ ​add​ ​more​ ​signatureschemes​ ​through​ ​a​ ​soft​ ​fork.​ ​They​ ​will​ ​be​ ​added​ ​as​ ​needed​ ​and​ ​during​ ​major​ ​updates​ ​planned​ ​inthe​ ​roadmap9.

User​ ​Issued​ ​Assets​ ​(UIAs)
Early​ ​in​ ​Bitcoin’s​ ​history,​ ​protocols​ ​were​ ​quickly​ ​developed​ ​to​ ​allow​ ​users​ ​to​ ​issue​ ​assets​ ​that
piggybacked​ ​on​ ​Bitcoin’s​ ​accounting​ ​system​ ​in​ ​order​ ​to​ ​track​ ​multiple​ ​currencies​ ​concurrently.
​ ​This​ ​is​ ​the​ ​documentation​​ ​for​ ​Cardano’s​ ​HD​ ​Wallet​ ​Implementation.​ ​We​ ​believe​ ​Cardano​ ​is​ ​the​ ​first
cryptocurrency​ ​to​ ​support​ ​Ed25519​ ​HD​ ​Wallets
9​ ​See​ ​cardanoroadmap.com
8​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​11​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

These​ ​protocols​ ​were​ ​not​ ​natively​ ​supported​ ​by​ ​the​ ​Bitcoin​ ​protocol,​ ​but​ ​implemented​ ​throughclever​ ​hacks.
In​ ​the​ ​case​ ​of​ ​Bitcoin​ ​overlays​ ​such​ ​as​ C​ olored​ ​Coins​​ ​and​ ​Mastercoin​ ​(now​ ​called​ ​Omni)​,​ ​lightclients​ ​are​ ​forced​ ​to​ ​rely​ ​on​ ​trusted​ ​servers.​ ​Also​ ​transaction​ ​fees​ ​still​ ​have​ ​to​ ​be​ ​paid​ ​inbitcoins.​ ​These​ ​properties​ ​combined​ ​with​ ​the​ ​single​ ​pipeline​ ​for​ ​transaction​ ​approval​ ​make
Bitcoin​ ​suboptimal​ ​for​ ​multi-asset​ ​accounting.
In​ ​the​ ​Ethereum​ ​case​ ​using​ ​the​ E​ RC20​ ​standard​,​ ​there​ ​is​ ​more​ ​feature​ ​richness.​ ​However,transaction​ ​fees​ ​still​ ​require​ ​ether.​ ​Furthermore,​ ​the​ ​Ethereum​ ​network​ ​is​ ​having​ ​difficulty
scaling​ ​to​ ​the​ ​needs​ ​of​ ​all​ ​the​ ​issued​ ​ERC20​ ​tokens​.
The​ ​fundamental​ ​problem​ ​can​ ​be​ ​broken​ ​into​ ​three​ ​parts:​ ​resources,​ ​incentives​ ​and​ ​concern.
With​ ​respect​ ​to​ ​resources,​ ​adding​ ​an​ ​entirely​ ​new​ ​currency​ ​to​ ​the​ ​same​ ​ledger​ ​means​ ​one​ ​hastwo​ ​independent​ ​UTXO​ ​(unspent​ ​transaction​ ​inputs)​ ​sets​ ​sharing​ ​the​ ​bandwidth,​ ​mempool​ ​andblock​ ​space.​ ​Consensus​ ​nodes​ ​responsible​ ​for​ ​embedding​ ​transactions​ ​of​ ​these​ ​currencies
need​ ​an​ ​incentive​ ​for​ ​doing​ ​so.​ ​And​ ​not​ ​every​ ​user​ ​of​ ​a​ ​cryptocurrency​ ​will​ ​or​ ​should​ ​care​ ​abouta​ ​particular​ ​entity’s​ ​currency.
Given​ ​these​ ​problems,​ ​the​ ​benefits​ ​are​ ​tremendous​ ​as​ ​the​ ​primary​ ​token​ ​of​ ​a​ ​multiasset​ ​ledgercan​ ​effectively​ ​serve​ ​as​ ​a​ ​bridge​ ​currency​ ​allowing​ ​for​ ​decentralized​ ​market​ ​making.​ ​Special
purpose​ ​assets​ ​could​ ​be​ ​issued​ ​to​ ​provide​ ​additional​ ​utility​ ​such​ ​as​ ​value​ ​stable​ ​assets​ ​like
Tether​​ ​or​ ​MakerDAO​​ ​that​ ​are​ ​useful​ ​for​ ​lending​ ​and​ ​remittance​ ​applications.
Given​ ​the​ ​challenges,​ ​Cardano​ ​has​ ​adopted​ ​a​ ​pragmatic​ ​approach​ ​to​ ​multiasset​ ​accounting.
Building​ ​in​ ​stages,​ ​the​ ​first​ ​challenge​ ​is​ ​designing​ ​the​ ​necessary​ ​infrastructure​ ​to​ ​support​ ​thedemands​ ​of​ ​thousands​ ​of​ ​UIAs.​ ​Namely​ ​the​ ​following​ ​advancements​ ​are​ ​necessary:
1. Special​ ​purpose​ ​authenticated​ ​data​ ​structures​ ​to​ ​permit​ ​the​ ​tracking​ ​of​ ​a​ ​very​ ​large
UTXO​ ​state
2. The​ ​ability​ ​to​ ​have​ ​a​ ​distributed​ ​mempool​ ​to​ ​hold​ ​a​ ​huge​ ​set​ ​of​ ​pending​ ​transactions
3. Blockchain​ ​partitioning​ ​and​ ​checkpoints​ ​to​ ​permit​ ​a​ ​huge​ ​global​ ​blockchain
4. An​ ​incentive​ ​scheme​ ​that​ ​rewards​ ​consensus​ ​nodes​ ​for​ ​including​ ​different​ ​sets​ ​oftransactions
5. A​ ​subscription​ ​mechanic​ ​that​ ​allows​ ​users​ ​to​ ​decide​ ​which​ ​currencies​ ​they​ ​want​ ​to​ ​track
6. Strong​ ​security​ ​guarantees​ ​that​ ​UIAs​ ​enjoy​ ​similar​ ​security​ ​as​ ​the​ ​native​ ​asset
7. Support​ ​for​ ​decentralized​ ​market​ ​making​ ​to​ ​improve​ ​liquidity​ ​between​ ​UIA​ ​and​ ​theprimary​ ​token​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​12​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Our​ ​preliminary​ ​efforts​ ​for​ ​finding​ ​the​ ​right​ ​authenticated​ ​data​ ​structure​ ​have​ ​resulted​ ​in​ ​a​ ​newtype​ ​of​ A​ VL+​ ​Tree​ ​jointly​ ​developed​ ​by​ ​Leo​ ​Reyzin,​ ​IOHK​ ​and​ ​Waves​.​ ​More​ ​research​ ​is​ ​required,but​ ​it​ ​is​ ​a​ ​foundational​ ​advancement​ ​that​ ​will​ ​be​ ​included​ ​in​ ​a​ ​later​ ​version​ ​of​ ​Cardano.
A​ ​distributed​ ​mempool​ ​could​ ​be​ ​implemented​ ​using​ ​Stanford​ ​University’s​ ​RAMCloud​ ​protocol​.
Experiments​ ​will​ ​begin​ ​in​ ​Q3​ ​of​ ​2017​ ​to​ ​study​ ​its​ ​integration​ ​into​ ​Cardano’s​ ​consensus​ ​layer.
The​ ​remaining​ ​topics​ ​are​ ​interconnected​ ​and​ ​covered​ ​by​ ​ongoing​ ​research.​ ​We​ ​expect​ ​—​ ​subject
to​ ​research​ ​results​ ​—​ ​to​ ​include​ ​a​ ​protocol​ ​into​ ​Cardano​ ​for​ ​UIAs​ ​during​ ​the​ ​Basho​ ​of​ ​CSL
release​ ​in​ ​2018.

Scalability
Distributed systems are composed of a set of computers (nodes) agreeing to run a protocol orsuite of protocols to accomplish a common goal. This goal could be sharing a file as defined bythe​ ​BitTorrent​ ​protocol​ ​or​ ​folding​ ​a​ ​protein​ ​using​ ​Folding@Home.
The most effective protocols gain resources as nodes join the network. A file hosted by
BitTorrent, for example, can be downloaded much faster on average if many peers areconcurrently downloading it. The speed increases because the peers provide resources while
also consuming them. This characteristic is what one typically means when stating a distributed
system​ ​scales.
The challenge with the design of all current cryptocurrencies is that they actually are notdesigned to be scalable. Blockchains, for example, are usually an append-only linked list of
blocks. The security and availability of a blockchain protocol relies upon many nodes
possessing a full copy of the blockchain data. Thus, a single byte of data must be replicatedamong​ ​N​ ​nodes.​ ​Additional​ ​nodes​ ​do​ ​not​ ​provide​ ​additional​ ​resources.
This result is the same for transaction processing and the gossiping of messages throughout
the system. Adding more nodes to the consensus system does not provide additionaltransaction processing power. It just means more resources have to be spent to do the samejob. More network relaying meaning more nodes have to pass the same messages to keep thewhole​ ​network​ ​in​ ​synchronization​ ​with​ ​the​ ​most​ ​current​ ​block.
Given this topology, cryptocurrencies cannot scale to a global network on par with legacy
financial systems. In contrast, legacy infrastructure is scalable and has orders of magnitude formore processing and storage power. Adding a specific point, Bitcoin is a very small network
relative​ ​to​ ​its​ ​payment​ ​peers,​ ​yet​ ​struggles​ ​to​ ​manage​ ​its​ ​current​ ​load.

​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​13​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Our scalability goals for Cardano are greatly aided by our consensus algorithm. Ouroboros
permits a decentralized way to elect a quorum of consensus nodes, which in turn can run more
traditional protocols developed over the last 20 years to accommodate the needs of large
infrastructure​ ​providers​ ​such​ ​as​ ​Google​ ​and​ ​Facebook10.
For example, the election of a quorum for an epoch means we have a trusted set of nodes tomaintain the ledger for a specific time period. It is trivial to elect multiple quorums concurrently
and​ ​partition​ ​transactions​ ​to​ ​different​ ​quorums.
Similar techniques could be applied for network propagation and also sharding the blockchain
itself into unique partitions. In our current roadmap, scaling methods will be applied to
Ouroboros​ ​starting​ ​in​ ​2018​ ​and​ ​continue​ ​to​ ​be​ ​a​ ​focus​ ​in​ ​2019​ ​and​ ​2020.

Cardano​ ​Computation​ ​LayerAs​ ​mentioned​ ​previously,​ ​there​ ​are​ ​two​ ​components​ ​of​ ​a​ ​transaction:​ ​the​ ​mechanism​ ​to​ ​sendand​ ​record​ ​the​ ​flow​ ​of​ ​tokens​ ​and​ ​the​ ​reasons​ ​as​ ​well​ ​as​ ​conditions​ ​behind​ ​moving​ ​tokens.​ ​The
latter​ ​can​ ​be​ ​arbitrarily​ ​complex​ ​and​ ​involve​ ​terabytes​ ​of​ ​data,​ ​multiple​ ​signatures​ ​and​ ​special
events​ ​occurring.​ ​The​ ​latter​ ​can​ ​also​ ​be​ ​remarkably​ ​simple​ ​with​ ​a​ ​single​ ​signature​ ​pushing​ ​valueto​ ​another​ ​address.
The​ ​challenge​ ​behind​ ​modeling​ ​the​ ​reasons​ ​and​ ​conditions​ ​of​ ​value​ ​flow​ ​is​ ​that​ ​they​ ​areimmensely​ ​personal​ ​to​ ​the​ ​entities​ ​involved​ ​in​ ​the​ ​most​ ​unpredictable​ ​of​ ​ways.​ ​Lessons​ ​fromcontract​ ​law​ ​paint​ ​an​ ​even​ ​more​ ​problematic​ ​picture​ ​where​ ​the​ ​actors​ ​themselves​ ​might​ ​noteven​ ​be​ ​aware​ ​that​ ​the​ t​ ransaction​ ​does​ ​not​ ​match​ ​commercial​ ​reality​.​ ​We​ ​generally​ ​call​ ​thisphenomenon​ ​“the​ ​semantic​ ​gap”11.
Why​ ​should​ ​one​ ​build​ ​a​ ​cryptocurrency​ ​chasing​ ​an​ ​endless​ ​layer​ ​of​ ​complexity​ ​and​ ​abstraction?
It​ ​seems​ ​Sisyphean​ ​in​ ​nature​ ​and​ ​naive​ ​in​ ​practice.​ ​Furthermore,​ ​each​ ​abstraction​ ​embraced
has​ ​both​ ​legal​ ​and​ ​security​ ​consequences.
For​ ​example,​ ​there​ ​are​ ​numerous​ ​activities​ ​online​ ​that​ ​are​ ​universally​ ​deemed​ ​illegal​ ​or​ ​scornedsuch​ ​as​ ​the​ ​trafficking​ ​of​ ​child​ ​pornography​ ​or​ ​the​ ​selling​ ​of​ ​state​ ​secrets.​ ​By​ ​deploying​ ​robust​ ​There​ ​are​ ​also​ ​other​ ​independently​ ​research​ ​protocols​ ​attempting​ ​to​ ​achieve​ ​the​ ​same​ ​end​ ​such​ ​as
Elastico​​ ​and​ ​Bitcoin-NG
11​ ​Loi​ ​Luu​ ​et​ ​al.​ ​discuss​ ​this​ ​gap​ ​in​ ​their​ ​recent​ ​paper​ ​on​ M​ aking​ ​Smart​ ​Contracts​ ​Smarter

10​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​14​ ​of​ ​44

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decentralized​ ​infrastructure,​ ​one​ ​is​ ​now​ ​providing​ ​a​ ​channel​ ​for​ ​this​ ​activity​ ​to​ ​occur​ ​with​ ​thesame​ ​censorship​ ​resistance​ ​that​ ​normal​ ​commercial​ ​transactions​ ​enjoy.​ ​It​ ​is​ ​legally​ ​unclear​ ​ifthe​ ​consensus​ ​nodes​ ​of​ ​the​ ​network​ ​—​ ​which​ ​have​ ​the​ ​incentive​ ​to​ ​become​ ​more​ ​federated​ ​overtime​ ​to​ ​promote​ ​efficiency​ ​—​ ​would​ ​be​ ​held​ ​accountable​ ​for​ ​the​ ​content​ ​they​ ​host.
Prosecution​ ​of​ ​Tor​ ​operators​,​ ​the​ ​brutal​ ​treatment​ ​of​ ​Silk​ ​Road’s​ ​operator​​ ​and​ ​the​ ​lack​ ​of​ ​overall
legal​ ​clarity​ ​behind​ ​legal​ ​protections​ ​of​ ​protocol​ ​participants​ ​leaves​ ​an​ ​uncertain​ ​road.​ ​There​ ​isno​ ​lack​ ​of​ ​imagination​ ​of​ ​what​ ​else​ ​a​ ​sufficiently​ ​advanced​ ​cryptocurrency​ ​could​ ​enable​ ​(s​ eethe​ ​Ring​ ​of​ ​Gyges​).​ ​Is​ ​it​ ​reasonable​ ​to​ ​force​ ​all​ ​users​ ​of​ ​a​ ​cryptocurrency​ ​to​ ​endorse​ ​or​ ​at​ ​least
enable​ ​the​ ​worst​ ​acts​ ​and​ ​conduct​ ​of​ ​the​ ​web?
Unfortunately,​ ​there​ ​are​ ​no​ ​clear​ ​answers​ ​that​ ​provide​ ​insight​ ​to​ ​a​ ​cryptocurrency​ ​designer.​ ​It​ ​ismore​ ​about​ ​picking​ ​a​ ​position​ ​and​ ​defending​ ​its​ ​merit.​ ​The​ ​advantage​ ​that​ ​both​ ​Cardano​ ​andBitcoin​ ​have​ ​is​ ​that​ ​we​ ​have​ ​chosen​ ​to​ ​separate​ ​concerns​ ​to​ ​layers.​ ​With​ ​Bitcoin,​ ​there​ ​isRootstock​.​ ​With​ ​Cardano,​ ​there​ ​is​ ​the​ ​Cardano​ ​Computation​ ​Layer.
The​ ​kinds​ ​of​ ​complex​ ​behavior​ ​that​ ​would​ ​enable​ ​the​ ​acts​ ​elaborated​ ​previously​ ​cannot​ ​run​ ​on
CSL.​ ​They​ ​require​ ​the​ ​ability​ ​to​ ​run​ ​programs​ ​written​ ​in​ ​a​ ​Turing​ ​complete​ ​language​ ​and​ ​someform​ ​of​ ​gas​ ​economics​ ​to​ ​meter​ ​computation.​ ​They​ ​also​ ​require​ ​consensus​ ​nodes​ ​willing​ ​toinclude​ ​the​ ​transactions​ ​in​ ​their​ ​blocks.
Thus,​ ​a​ ​functionality​ ​restriction​ ​could​ ​reasonably​ ​protect​ ​users.​ ​So​ ​far,​ ​most​ ​establishedgovernments​ ​have​ ​not​ ​taken​ ​the​ ​position​ ​that​ ​the​ ​use​ ​or​ ​maintenance​ ​of​ ​a​ ​cryptocurrency​ ​is​ ​anillegal​ ​act.​ ​Hence,​ ​the​ ​vast​ ​majority​ ​of​ ​users​ ​should​ ​be​ ​comfortable​ ​maintaining​ ​a​ ​ledger​ ​that​ ​iscomparable​ ​in​ ​capability​ ​with​ ​a​ ​digital​ ​payment​ ​system.
When​ ​one​ ​wants​ ​to​ ​extend​ ​capability,​ ​there​ ​are​ ​two​ ​possibilities.​ ​It​ ​is​ ​enabled​ ​by​ ​a​ ​private
collective​ ​of​ ​likeminded​ ​individuals​ ​and​ ​ephemeral​ ​in​ ​nature​ ​(for​ ​example,​ ​a​ ​poker​ ​game).​ ​Or,​ ​itis​ ​enabled​ ​by​ ​a​ ​ledger​ ​of​ ​comparable​ ​capabilities​ ​as​ ​Ethereum.​ ​In​ ​both​ ​cases,​ ​we​ ​have​ ​chosen
outsourcing​ ​the​ ​events​ ​to​ ​another​ ​protocol.
In​ ​the​ ​case​ ​of​ ​a​ ​private,​ ​ephemeral​ ​event,​ ​it​ ​is​ ​reasonable​ ​to​ ​avoid​ ​the​ ​blockchain​ ​paradigm
entirely,​ ​but​ ​rather​ ​restrict​ ​efforts​ ​towards​ ​a​ ​library​ ​of​ ​special​ ​purpose​ ​MPC​ ​protocols​ ​that​ ​canbe​ ​invoked​ ​when​ ​desired​ ​by​ ​a​ ​group​ ​of​ ​likeminded​ ​participants.​ ​The​ ​computations​ ​and​ ​activitiesare​ ​coordinated​ ​in​ ​a​ ​private​ ​network​ ​and​ ​reference​ ​CSL​ ​only​ ​as​ ​a​ ​trusted​ ​bulletin​ ​board​ ​and​ ​amessage​ ​passing​ ​channel​ ​when​ ​necessary.
The​ ​key​ ​insight​ ​in​ ​this​ ​case​ ​is​ ​that​ ​there​ ​is​ ​consent,​ ​encapsulation​ ​of​ ​liability​ ​and​ ​privacy.​ ​CSL​ ​isbeing​ ​used​ ​as​ ​a​ ​digital​ ​commons​ ​for​ ​users​ ​to​ ​meet​ ​and​ ​communicate​ ​—​ ​like​ ​a​ ​park​ ​would​ ​host​ ​aprivate​ ​event​ ​—​ ​but​ ​does​ ​not​ ​provide​ ​any​ ​special​ ​accommodations​ ​or​ ​facilitation.​ ​Furthermore,​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​15​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

the​ ​use​ ​of​ ​special​ ​purpose​ ​MPC​ ​will​ ​enable​ ​low​ ​latency​ ​interaction​ ​without​ ​the​ ​need​ ​forblockchain​ ​bloat.​ ​Thus,​ ​it​ ​improves​ ​the​ ​scale​ ​of​ ​the​ ​system.
Cardano’s​ ​research​ ​efforts​ ​towards​ ​this​ ​library​ ​are​ ​centralized​ ​at​ ​our​ ​Tokyo​ ​Tech​ ​laboratory​ ​withsome​ ​assistance​ ​from​ ​scientists​ ​abroad.​ ​We​ ​call​ ​the​ ​library​ ​“Tartaglia”​ ​after​ ​a​ ​fellow
mathematician​ ​as​ ​well​ ​as​ ​contemporary​ ​of​ ​Cardano​ ​and​ ​expect​ ​the​ ​first​ ​iteration​ ​to​ ​be​ ​availablein​ ​Q1​ ​of​ ​2018.
In​ ​the​ ​second​ ​case,​ ​one​ ​needs​ ​a​ ​blockchain​ ​with​ ​a​ ​virtual​ ​machine,​ ​a​ ​set​ ​of​ ​consensus​ ​nodes
and​ ​a​ ​mechanism​ ​to​ ​enable​ ​communication​ ​between​ ​the​ ​two​ ​chains.​ ​We​ ​have​ ​begun​ ​theprocess​ ​of​ ​rigorously​ ​formalizing​ ​the​ ​Ethereum​ ​Virtual​ ​Machine​ ​using​ ​the​ K​ -framework12​ ​inpartnership​ ​with​ ​a​ ​team​ ​from​ ​the​ ​University​ ​of​ ​Illinois.
The​ ​result​ ​of​ ​this​ ​analysis​ ​will​ ​inform​ ​the​ ​most​ ​optimal​ ​way​ ​to​ ​design​ ​a​ ​replicated​ ​and​ ​eventuallydistributed​ ​virtual​ ​machine13​ ​with​ ​clear​ ​operational​ ​semantics​ ​and​ ​strong​ ​guarantees​ ​of​ ​correct
implementation​ ​from​ ​the​ ​specification.​ ​In​ ​other​ ​words,​ ​the​ ​VM​ ​actually​ ​does​ ​what​ ​the​ ​code​ ​tellsit​ ​to​ ​do​ ​with​ ​the​ ​security​ ​risks​ ​minimized.
There​ ​are​ ​still​ ​unresolved​ ​questions​ ​about​ ​the​ ​gas​ ​economics​ ​proposed​ ​by​ ​Ethereum​ ​and​ ​how​ ​itrelates​ ​to​ ​work​ ​such​ ​as​ ​Jan​ ​Hoffmann​ ​et​ ​al’s​ ​resource​ ​aware​ ​ML​​ ​and​ ​the​ ​broader​ ​study​ ​ofresource​ ​estimation​ ​for​ ​computation.​ ​We​ ​are​ ​also​ ​curious​ ​about​ ​the​ ​level​ ​of​ ​language
independence​ ​of​ ​the​ ​virtual​ ​machine.​ ​For​ ​example,​ ​the​ ​Ethereum​ ​project​ ​has​ ​expressed​ ​desirefor​ ​transition​ ​from​ ​their​ ​current​ ​VM​ ​to​ ​Web​ ​Assembly.
The​ ​next​ ​effort​ ​is​ ​in​ ​developing​ ​a​ ​reasonable​ ​programming​ ​language​ ​to​ ​express​ ​statefulcontracts​ ​that​ ​will​ ​be​ ​called​ ​as​ ​services​ ​by​ ​decentralized​ ​applications.​ ​For​ ​this​ ​task,​ ​we​ ​havechosen​ ​both​ ​the​ ​approach​ ​of​ ​supporting​ ​the​ ​legacy​ ​smart​ ​contract​ ​language​ S​ olidity​​ ​for​ ​low
assurance​ ​applications​ ​and​ ​developing​ ​a​ ​new​ ​language​ ​called​ ​Plutus​​ ​for​ ​higher​ ​assurance
applications​ ​requiring​ ​formal​ ​verification.
Like​ ​the​ ​solidity​ ​based​ Z​ eppelin​ ​project​,​ ​IOHK​ ​will​ ​also​ ​develop​ ​a​ ​reference​ ​library​ ​of​ ​Plutus​ ​codefor​ ​application​ ​developers​ ​to​ ​use​ ​in​ ​their​ ​projects.​ ​We​ ​will​ ​also​ ​develop​ ​a​ ​specialized​ ​set​ ​of​ ​toolsfor​ ​formal​ ​verification​ ​inspired​ ​by​ ​work​ ​from​ ​UCSD’s​ ​Liquid​ ​Haskell​ ​project​.
In​ ​terms​ ​of​ ​consensus,​ ​Ouroboros​ ​was​ ​designed​ ​in​ ​a​ ​sufficiently​ ​modular​ ​fashion​ ​to​ ​support
smart​ ​contract​ ​evaluation.​ ​Hence,​ ​both​ ​CSL​ ​and​ ​CCL​ ​will​ ​share​ ​the​ ​same​ ​consensus​ ​algorithm.

​ ​Invented​ ​by​ ​Professor​ ​Grigore​ ​Rosu​ ​et.​ ​al.,​ ​K​ ​is​ ​a​ ​universal​ ​framework​ ​for​ ​language​ ​independentmachine​ ​executable​ ​semantics.​ ​Prior​ ​to​ ​our​ ​work,​ ​it​ ​has​ ​been​ ​used​ ​to​ ​model​ ​C,​ ​Java​ ​and​ ​JavaScript13​ ​Meaning​ ​that​ ​different​ ​consensus​ ​nodes​ ​run​ ​different​ ​smart​ ​contracts.​ ​Also​ ​known​ ​as​ ​state​ ​sharding12​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​16​ ​of​ ​44

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The​ ​difference​ ​is​ ​that​ ​Ouroboros​ ​can​ ​be​ ​confirmed​ ​to​ ​permit​ ​both​ ​permissioned​ ​andpermissionless​ ​ledgers​ ​via​ ​token​ ​distribution.
With​ ​CSL,​ ​Ada​ ​has​ ​been​ ​distributed​ ​by​ ​a​ ​token​ ​generating​ ​event​ ​to​ ​purchasers​ ​throughout​ ​Asia
who​ ​will​ ​eventually​ ​resell​ ​on​ ​a​ ​secondary​ ​market.​ ​This​ ​means​ ​that​ ​CSL’s​ ​consensus​ ​algorithm​ ​iscontrolled​ ​by​ ​a​ ​diverse​ ​and​ ​increasingly​ ​more​ ​decentralized​ ​set​ ​of​ ​actors​ ​or​ ​their​ ​delegatedassigns.​ ​With​ ​CCL,​ ​it​ ​is​ ​possible​ ​to​ ​create​ ​a​ ​special​ ​purpose​ ​token​ ​held​ ​by​ ​delegates​ ​of​ ​that
ledger​ ​who​ ​could​ ​be​ ​regulated​ ​entities,​ ​thereby​ ​creating​ ​a​ ​permissioned​ ​ledger.
The​ ​flexibility​ ​of​ ​this​ ​approach​ ​allows​ ​for​ ​different​ ​instances​ ​of​ ​CCL​ ​to​ ​materialize​ ​with​ ​different
rules​ ​about​ ​the​ ​evaluation​ ​of​ ​transactions.​ ​For​ ​example,​ ​gambling​ ​activities​ ​could​ ​be​ ​restricted
unless​ ​KYC/AML​ ​data​ ​is​ ​present​ ​simply​ ​by​ ​blacklisting​ ​non-attributed​ ​transactions.
Our​ ​final​ ​design​ ​focus​ ​is​ ​on​ ​adding​ ​trusted​ h​ ardware​ ​security​ ​modules​​ ​(HSM)​ ​to​ ​our​ ​protocol
stack.​ ​These​ ​are​ ​two​ ​enormous​ ​advantages​ ​when​ ​introducing​ ​these​ ​capabilities​ ​into​ ​theprotocol.​ ​First,​ ​HSMs​ ​provide​ ​massive​ ​boosts​ ​in​ ​performance14​ ​without​ ​introducing​ ​security
concerns​ ​beyond​ ​trusting​ ​the​ ​vendor.​ ​Second,​ ​through​ ​the​ ​use​ ​of​ ​Sealed​ ​Glass​ ​Proofs​​ ​(SGP),
HSMs​ ​can​ ​provide​ ​assurances​ ​that​ ​data​ ​can​ ​be​ ​verified​ ​and​ ​then​ ​destroyed​ ​without​ ​being
copied​ ​or​ ​leaked​ ​to​ ​malicious​ ​outsiders.
Focusing​ ​on​ ​the​ ​second​ ​point,​ ​SGPs​ ​could​ ​have​ ​a​ ​revolutionary​ ​impact​ ​upon​ ​compliance.
Ordinarily,​ ​when​ ​a​ ​consumer​ ​provides​ ​personally​ ​identifiable​ ​information​ ​(PII)​ ​to​ ​authenticate
identity​ ​or​ ​prove​ ​the​ ​right​ ​to​ ​participate,​ ​this​ ​information​ ​is​ ​handed​ ​to​ ​a​ ​trusted​ ​third​ ​party​ ​withthe​ ​hope​ ​it​ ​will​ ​not​ ​act​ ​maliciously.​ ​This​ ​activity​ ​is​ ​intrinsically​ ​centralized,​ ​the​ ​data​ ​provider
loses​ ​control​ ​over​ ​their​ ​PII​ ​and​ ​is​ ​also​ ​subject​ ​to​ ​various​ ​regulations​ ​based​ ​on​ ​jurisdiction.
The​ ​ability​ ​to​ ​select​ ​a​ ​set​ ​of​ ​trusted​ ​attestors​ ​and​ ​then​ ​warehouse​ ​PII​ ​in​ ​a​ ​hardware​ ​enclavemeans​ ​that​ ​any​ ​actor​ ​with​ ​a​ ​sufficiently​ ​capable​ ​HSM​ ​will​ ​be​ ​able​ ​to​ ​verify​ ​facts​ ​about​ ​an​ ​actorin​ ​an​ ​unforgeable​ ​way​ ​without​ ​the​ ​verifier​ ​knowing​ ​the​ ​identity​ ​of​ ​the​ ​actor.​ ​For​ ​example,​ ​Bob​ ​isnot​ ​an​ ​US​ ​citizen.​ ​Alice​ ​is​ ​an​ ​accredited​ ​investor.​ ​James​ ​is​ ​a​ ​US​ ​taxpayer​ ​and​ ​one​ ​should​ ​send
taxable​ ​profits​ ​to​ ​account​ ​X.
Cardano’s​ ​HSM​ ​strategy​ ​will​ ​be​ ​to​ ​attempt​ ​implemented​ ​specialized​ ​protocols​ ​over​ ​the​ ​next​ ​twoyears​ ​using​ I​ ntel​ ​SGX​​ ​and​ ​ARM​ ​Trustzone​.​ ​Both​ ​modules​ ​are​ ​built​ ​into​ ​billions​ ​of​ ​consumer
devices​ ​from​ ​laptops​ ​to​ ​cellphones​ ​and​ ​require​ ​no​ ​additional​ ​effort​ ​on​ ​the​ ​consumer​ ​side​ ​touse.​ ​Both​ ​are​ ​also​ ​heavily​ ​vetted,​ ​well​ ​designed​ ​and​ ​based​ ​upon​ ​years​ ​of​ ​iteration​ ​from​ ​some​ ​ofthe​ ​largest​ ​and​ ​best​ ​funded​ ​hardware​ ​security​ ​teams.
​ ​See​ h​ ttp://hackingdistributed.com/2016/12/22/scaling-bitcoin-with-secure-hardware/​​ ​from​ ​Cornell
University
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IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Regulation
The​ ​harsh​ ​reality​ ​of​ ​all​ ​modern​ ​financial​ ​systems​ ​is​ ​that​ ​as​ ​they​ ​scale,​ ​they​ ​accumulate​ ​a​ ​need,or​ ​at​ ​least​ ​a​ ​desire,​ ​for​ ​regulation.​ ​This​ ​outcome​ ​is​ ​generally​ ​the​ ​result​ ​of​ ​recurrent​ ​collapses
due​ ​to​ ​the​ ​negligence​ ​of​ ​some​ ​actor​ ​or​ ​cabal​ ​of​ ​actors​ ​in​ ​a​ ​marketplace.
For​ ​example,​ ​the​ ​Knickerbocker​ ​Crisis​ ​of​ ​1907​ ​resulted​ ​in​ ​the​ ​creation​ ​of​ ​the​ ​Federal​ ​Reserve
System​ ​in​ ​1913​ ​as​ ​a​ ​lender​ ​of​ ​last​ ​resort.​ ​Another​ ​example​ ​is​ ​the​ ​excesses​ ​of​ ​the​ ​1920s​ ​in​ ​theUnited​ ​States​ ​that​ ​resulted​ ​in​ ​a​ ​terrible​ ​financial​ ​collapse,​ ​the​ ​Great​ ​Depression.​ ​This​ ​collapse
yielded​ ​the​ ​creation​ ​of​ ​the​ ​Securities​ ​Exchange​ ​Commission​ ​in​ ​1934​ ​in​ ​order​ ​to​ ​prevent​ ​a​ ​similar
event​ ​or​ ​at​ ​least​ ​hold​ ​bad​ ​actors​ ​accountable.
One​ ​can​ ​reasonably​ ​debate​ ​the​ ​need​ ​for,​ ​scope​ ​and​ ​efficacy​ ​of​ ​regulation,​ ​but​ ​one​ ​cannot​ ​denyits​ ​existence​ ​and​ ​the​ ​zeal​ ​with​ ​which​ ​major​ ​governments​ ​have​ ​enforced​ ​it.​ ​However,​ ​thechallenge​ ​all​ ​regulators​ ​face​ ​as​ ​the​ ​world​ ​globalizes​ ​and​ ​cash​ ​becomes​ ​digital​ ​is​ ​two-pronged.
First,​ ​which​ ​set​ ​of​ ​regulations​ ​should​ ​be​ ​supreme​ ​when​ ​dealing​ ​with​ ​a​ ​collection​ ​ofjurisdictions?​ ​The​ ​antiquated​ ​notion​ ​of​ ​Westphalian​ ​sovereignty​ ​melts​ ​when​ ​a​ ​single​ ​transaction
can​ ​touch​ ​three​ ​dozen​ ​countries​ ​in​ ​under​ ​a​ ​minute.​ ​Should​ ​it​ ​simply​ ​be​ ​whomever​ ​wields​ ​themost​ ​geopolitical​ ​influence?
Second,​ ​improvements​ ​in​ ​privacy​ ​technology​ ​have​ ​created​ ​a​ ​digital​ ​arms​ ​race​ ​where​ ​it​ ​will
become​ ​increasingly​ ​more​ ​difficult​ ​to​ ​even​ ​understand​ ​who​ ​has​ ​participated​ ​in​ ​a​ ​transaction,much​ ​less​ ​who​ ​owns​ ​a​ ​particular​ ​store​ ​of​ ​value.​ ​In​ ​a​ ​world​ ​where​ ​millions​ ​of​ ​dollars​ ​of​ ​assets
can​ ​be​ ​controlled​ ​with​ ​nothing​ ​more​ ​than​ ​a​ ​secretly​ ​held​ ​12-word​ ​mnemonic15,​ ​how​ ​do​ ​you
enforce​ ​effective​ ​regulation?
Like​ ​all​ ​financial​ ​systems,​ ​the​ ​Cardano​ ​protocol​ ​must​ ​have​ ​an​ ​opinion​ ​in​ ​its​ ​design​ ​over​ ​what​ ​isfair​ ​and​ ​reasonable.​ ​We​ ​have​ ​chosen​ ​to​ ​divide​ ​between​ ​individual​ ​rights​ ​and​ ​the​ ​rights​ ​of​ ​amarketplace.
Individuals​ ​should​ ​always​ ​have​ ​sole​ ​access​ ​to​ ​their​ ​funds​ ​without​ ​coercion​ ​or​ ​civil​ ​asset
forfeiture.​ ​This​ ​right​ ​has​ ​to​ ​be​ ​enforced​ ​because​ ​not​ ​all​ ​governments​ ​can​ ​be​ ​trusted​ ​not​ ​toabuse​ ​their​ ​sovereign​ ​power​ ​for​ ​the​ ​personal​ ​gain​ ​of​ ​corrupt​ ​politicians,​ ​as​ ​seen​ ​in​ ​Venezuelaand​ ​Zimbabwe.​ ​Cryptocurrencies​ ​have​ ​to​ ​be​ ​engineered​ ​to​ ​the​ ​lowest​ ​common​ ​denominator.

​ ​See​ ​BIP39​ h​ ttps://github.com/bitcoin/bips/blob/master/bip-0039.mediawiki

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IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Second,​ ​history​ ​should​ ​never​ ​be​ ​tampered​ ​with.​ ​Blockchains​ ​provide​ ​a​ ​promise​ ​of​ ​immutability.
Introducing​ ​the​ ​power​ ​to​ ​roll​ ​back​ ​history​ ​or​ ​alter​ ​the​ ​official​ ​record​ ​introduces​ ​too​ ​much
temptation​ ​to​ ​change​ ​the​ ​past​ ​in​ ​order​ ​to​ ​benefit​ ​a​ ​particular​ ​actor​ ​or​ ​actors.
Third,​ ​the​ ​flow​ ​of​ ​value​ ​should​ ​be​ ​unrestricted.​ ​Capital​ ​controls​ ​and​ ​other​ ​artificial​ ​walls
diminish​ ​human​ ​rights.​ ​Outside​ ​of​ ​the​ ​futility​ ​of​ ​attempting​ ​to​ ​enforce​ ​them16,​ ​in​ ​a​ ​global
economy​ ​with​ ​many​ ​citizens​ ​in​ ​the​ ​least​ ​developed​ ​nations​ ​traveling​ ​outside​ ​of​ ​their​ ​jurisdictionto​ ​find​ ​a​ ​living​ ​wage,​ ​restricting​ ​capital​ ​flows​ ​usually​ ​ends​ ​up​ ​harming​ ​the​ ​poorest​ ​in​ ​the​ ​world.
These​ ​principles​ ​stated,​ ​markets​ ​are​ ​distinctly​ ​different​ ​from​ ​individuals.​ ​While​ ​the​ ​designers​ ​ofCardano​ ​believe​ ​in​ ​individual​ ​rights,​ ​we​ ​also​ ​believe​ ​that​ ​markets​ ​have​ ​the​ ​right​ ​to​ ​openly​ ​state
their​ ​terms​ ​and​ ​conditions,​ ​and​ ​if​ ​an​ ​individual​ ​agrees​ ​to​ ​do​ ​business​ ​within​ ​this​ ​market,​ ​then
they​ ​must​ ​be​ ​held​ ​to​ ​those​ ​standards​ ​for​ ​the​ ​sake​ ​of​ ​integrity​ ​of​ ​the​ ​entire​ ​system.
The​ ​challenge​ ​has​ ​always​ ​been​ ​cost​ ​and​ ​practicality​ ​of​ ​enforcement.​ ​Small,​ ​multijurisdictionaltransactions​ ​are​ ​simply​ ​too​ ​expensive​ ​in​ ​legacy​ ​systems​ ​to​ ​provide​ ​high​ ​assurance​ ​of​ ​recoursein​ ​the​ ​event​ ​of​ ​fraud​ ​or​ ​a​ ​commercial​ ​dispute.​ ​When​ ​one​ ​sends​ ​their​ ​wire​ ​transfer​ ​to​ ​theNigerian​ ​Prince17,​ ​it​ ​is​ ​usually​ ​too​ ​expensive​ ​to​ ​try​ ​to​ ​get​ ​one’s​ ​funds​ ​back.
For​ ​Cardano,​ ​we​ ​feel​ ​we​ ​can​ ​innovate​ ​on​ ​three​ ​levels.​ ​First,​ ​through​ ​the​ ​use​ ​of​ ​smart​ ​contractsthe​ ​terms​ ​and​ ​conditions​ ​of​ ​commercial​ ​relationships​ ​can​ ​be​ ​better​ ​controlled.​ ​If​ ​all​ ​assets​ ​aredigital​ ​and​ ​can​ ​be​ ​solely​ ​expressed​ ​on​ ​CSL,​ ​strong​ ​guarantees​ ​of​ ​fraud-free​ ​commerce​ ​can​ ​begained.
Second,​ ​the​ ​use​ ​of​ ​HSMs​ ​to​ ​provide​ ​an​ ​identity​ ​space​ ​where​ ​PII​ ​is​ ​not​ ​leaked​ ​but​ ​yet​ ​used​ ​toauthenticate​ ​and​ ​credential​ ​actors​ ​should​ ​provide​ ​a​ ​global​ ​reputation​ ​system​ ​and​ ​allow​ ​formuch​ ​lower​ ​cost​ ​regulated​ ​activities​ ​to​ ​be​ ​conducted,​ ​such​ ​as​ ​online​ ​gaming​ ​with​ ​automatedtax​ ​compliance​ ​or​ ​decentralized​ ​exchanges.
Finally,​ ​in​ ​Cardano’s​ ​roadmap​ ​is​ ​the​ ​creation​ ​of​ ​a​ ​modular​ ​regulation​ D​ AO​​ ​that​ ​can​ ​becustomized​ ​to​ ​interact​ ​with​ ​user​ ​written​ ​smart​ ​contracts​ ​in​ ​order​ ​to​ ​add​ ​mutability,​ ​consumer
protection​ ​and​ ​arbitration.​ ​The​ ​scope​ ​of​ ​this​ ​project​ ​will​ ​be​ ​outlined​ ​in​ ​a​ ​later​ ​paper.

​ ​As​ ​an​ ​example​ ​of​ ​a​ ​countermeasure​ ​to​ ​capital​ ​flow,​ ​see​ ​the​ ​Hawala​ ​Banking​ ​System​ ​See​ A​ dvance-fee​ ​Scam

16

17​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​19​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

What​ ​is​ ​the​ ​Point​ ​of​ ​All​ ​of​ ​It?
Cardano has been a marathon project involving feedback from hundreds of the brightest minds
inside and outside of the cryptocurrency industry. It involves tireless iteration, the active use ofpeer​ ​review,​ ​and​ ​shameless​ ​theft​ ​of​ ​great​ ​ideas​ ​when​ ​uncovered.
The remaining sections each cover a particular aspect of focus we have decided is a corecomponent of our project. Some were selected due to a desire to improve the overall bestpractices​ ​of​ ​the​ ​space​ ​whereas​ ​others​ ​are​ ​specific​ ​to​ ​Cardano’s​ ​evolution.
While no project can cover every goal or satisfy every user, our hope is to provide a vision forwhat a self-evolving financial stack should look like for jurisdictions that lack them. The ultimate
reality of cryptocurrencies is not that they will disrupt the existing legacy financial systems.
Legacy financial systems are always capable of absorbing change and maintaining their form
and​ ​function.
Rather one ought to look to places where it is simply too expensive to deploy the existingbanking system, where many live on less than a few dollars a day, have no stable identity andcredit​ ​is​ ​impossible​ ​to​ ​find.
In these places, the power to bundle a payment system, property rights, identity, credit and risk
protection into a single application running on a cell phone is not just useful, it is life changing.
The reason we are building Cardano is that we feel we have a legitimate shot at delivering — orat​ ​least​ ​advancing​ ​—​ ​this​ ​vision​ ​for​ ​the​ ​developing​ ​world.
Even in failure, if we can change the way cryptocurrencies are designed, evolved and funded,then​ ​there​ ​is​ ​a​ ​great​ ​accomplishment.

2.​ ​Science​ ​and​ ​Engineering
The​ ​Art​ ​of​ ​Iteration
Cryptocurrencies​ ​are​ ​protocols​ ​implemented​ ​as​ ​software.​ ​Protocols​ ​are​ ​simply​ ​intelligent
conversations​ ​between​ ​participants.​ ​Software​ ​is​ ​ultimately​ ​the​ ​manipulation​ ​of​ ​data​ ​given​ ​some​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​20​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

goal.​ ​Yet​ ​the​ ​difference​ ​between​ ​solid,​ ​reliable​ ​software​ ​as​ ​well​ ​as​ ​useful,​ ​secure​ ​protocols​ ​andtheir​ ​converse​ ​is​ ​completely​ ​human.
Good​ ​software​ ​needs​ ​accountability,​ ​clear​ ​business​ ​requirements,​ ​repeatable​ ​processes,
thorough​ ​testing​ ​and​ ​tireless​ ​iteration.​ ​Good​ ​software​ ​also​ ​needs​ ​reasonably​ ​talented
developers​ ​with​ ​enough​ ​domain​ ​specific​ ​knowledge​ ​to​ ​properly​ ​design​ ​a​ ​system​ ​that​ ​can​ ​fully
resolve​ ​whatever​ ​problem​ ​they​ ​are​ ​trying​ ​to​ ​solve.
As​ ​for​ ​useful​ ​and​ ​secure​ ​protocols,​ ​especially​ ​ones​ ​involving​ ​cryptography​ ​and​ ​distributed
systems,​ ​they​ ​start​ ​in​ ​a​ ​more​ ​academic​ ​and​ ​standards​ ​driven​ ​process.​ ​Peer​ ​review,​ ​endlessdebates​ ​and​ ​a​ ​firm​ ​concept​ ​of​ ​trade​ ​offs​ ​are​ ​necessary​ ​to​ ​ensure​ ​a​ ​protocol​ ​is​ ​useful.​ ​Yet​ ​thesealone​ ​are​ ​not​ ​sufficient,​ ​protocols​ ​need​ ​to​ ​be​ ​implemented​ ​and​ ​tested​ ​by​ ​real​ ​life​ ​use.
The​ ​unique​ ​challenge​ ​in​ ​the​ ​cryptocurrency​ ​industry​ ​is​ ​that​ ​two​ ​completely​ ​different
philosophies​ ​are​ ​mangled​ ​together​ ​without​ ​a​ ​proper​ ​Hegelian​ ​synthesis.​ ​Our​ ​thesis​ ​is​ ​a​ ​“movefast​ ​and​ ​break​ ​things”​ ​startup​ ​mentality​ ​driven​ ​by​ ​youth,​ ​greed​ ​and​ ​passion.​ ​The​ ​antithesis​ ​is​ ​aslow,​ ​methodical​ ​and​ ​academically​ ​oriented​ ​approach​ ​motivated​ ​by​ ​a​ ​desire​ ​to​ ​solidify​ ​theinnovations​ ​of​ ​our​ ​space​ ​into​ ​a​ ​nice​ ​niche​ ​enjoying​ ​ample​ ​funding​ ​and​ ​prestige.
The​ ​result​ ​is​ ​that​ ​many​ ​cryptocurrencies​ ​are​ ​either​ ​entirely​ ​specified​ ​on​ ​a​ ​white​ ​paper​ ​only
relevant​ ​to​ ​a​ ​CV​ ​or​ ​just​ ​by​ ​hastily​ ​written​ ​code.​ ​None​ ​of​ ​the​ ​current​ ​top​ ​ten18​ ​cryptocurrencies​ ​bymarket​ ​capitalization​ ​are​ ​based​ ​upon​ ​a​ ​peer​ ​reviewed​ ​protocol.​ ​None​ ​of​ ​the​ ​current​ ​ten​ ​top
cryptocurrencies​ ​were​ ​implemented​ ​from​ ​a​ ​formal​ ​specification19.
Yet billions of dollars of value are at stake. Once deployed, a cryptocurrency is exceedingly
difficult to change. How does a user know they are using a secure system? How does a user
know that the marketing claims are legitimate? What if the proposed protocol can never achievethe​ ​claims?
This lack of synthesis and respect for process is one of the primary reasons IOHK wanted tobuild Cardano. Our hope was to develop a reference project that would serve as an example ofhow​ ​to​ ​do​ ​things​ ​in​ ​a​ ​more​ ​effective,​ ​sane​ ​and​ ​honest​ ​way.
The goal is not to propose a totally new way of developing software and protocols, but rather toacknowledge that great software and protocols already exist and we can mimic the conditions
that led to their creation. Second, to make these conditions publicly known and open source if
possible​ ​so​ ​that​ ​they​ ​can​ ​be​ ​imitated​ ​for​ ​the​ ​benefit​ ​of​ ​the​ ​entire​ ​field.
​ ​See​ ​www.coinmarketcap.com​ ​for​ ​a​ ​comprehensive​ ​listing​ ​by​ ​market​ ​capitalization​ ​Ethereum​ ​has​ ​a​ ​semi-formal​ ​specification​ ​known​ ​as​ ​the​ ​Yellow​ ​Paper;​ ​however,​ ​the​ ​EVM​ ​semantics​ ​arenot​ ​fully​ ​specified​ ​nor​ ​are​ ​sufficient​ ​for​ ​a​ ​full​ ​implementation​ ​of​ ​the​ ​protocol.
1819​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​21​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Facts​ ​and​ ​Opinions
The other concern is over where facts end and opinion begins. There are hundreds ofprogramming languages, dozens of development paradigms and more than one philosophy on
project management. The academic world is riddled with its own challenges stemming from its
distance​ ​from​ ​business​ ​concerns​ ​and​ ​practicality.
For Cardano, we first attempted to capture obvious deficiencies that can be universally agreed
to be useful from an engineering perspective. For example, cryptography and distributed
systems are both extraordinarily involved topics with far ​too many examples of how naive hands
can make horrific mistakes. Therefore, any protocol requiring insight from these domains needsto​ ​be​ ​designed​ ​by​ ​an​ ​acknowledged​ ​expert​ ​and​ ​be​ ​submitted​ ​for​ ​review​ ​by​ ​other​ ​experts.
Ouroboros is our first case study of this area. It was designed by a team of cryptographers witha large, diverse and publicly verifiable publication history. It was built according to the standard
cryptography process, with security assumptions, an adversarial model and proofs. These
proofs were checked by s
​ ubmission to conferences20 and also independently by computer
proofs​ ​written​ ​in​ ​Isabelle​ ​by​ ​a​ ​team​ ​at​ ​the​ ​University​ ​of​ ​Cambridge21.
Yet this work alone provides no guarantees of usefulness — just a rigorous check of a security
model given some assumptions. For usefulness, one needs to implement and test the protocol.
Our developers have done so in both ​Haskell and also R​ ust​. This work revealed that more effort
needed to be focused on the synchronization model, which led to the creation of O
​ uroboros
Praos​.
This art of iteration is what produces great protocols, with each step leading to new lessons anda requirement to re-verify the correctness of prior step22. It is costly, time consuming, and attimes​ ​truly​ ​tedious,​ ​yet​ ​it​ ​is​ ​required​ ​to​ ​ensure​ ​a​ ​protocol​ ​is​ ​correctly​ ​designed.
Protocols — especially ones to be used by billions of people — are not short lived and rapidly
evolving. Rather they are intended to be followed for years to decades. It seems entirely
reasonable that, prior to burdening the world with a new financial system we all have to live withfor​ ​the​ ​next​ ​100​ ​years,​ ​we​ ​want​ ​to​ ​demand​ ​some​ ​tedium​ ​and​ ​rigor​ ​from​ ​its​ ​designers.

​ ​Accepted​ ​Paper​ ​Number​ ​71​ ​of​ ​the​ ​IACR’s​ ​Annual​ ​Crypto​ ​Conference​ ​in​ ​California​ ​By​ K​ awin​ ​Worrasangasilpa​​ ​under​ ​the​ ​supervision​ ​of​ ​Professor​ ​Lawrence​ ​Paulson22​ ​Following​ ​a​ ​tangent​ ​for​ ​a​ ​sake​ ​of​ ​levity,​ ​one​ ​should​ ​watch​ ​Professor​ ​Halmos’s​ ​discussion​ ​about​ ​how​ ​towrite​ ​a​ ​math​ ​textbook
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IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Functional​ ​Sins
Moving into more opinionated territory, the tools, languages and methodologies used insoftware development are more artifacts of religious providence than objective reality. Sourcecode is like written prose. Everyone has an opinion of what is good — and what is being
communicated​ ​is,​ ​at​ ​times,​ ​less​ ​important​ ​than​ ​how​ ​it​ ​is​ ​communicated.
We must commit the sin of choosing a side accepting that it will be wrong in at least one
person’s​ ​eyes.​ ​However,​ ​there​ ​is​ ​at​ ​least​ ​a​ ​large​ ​corpus​ ​of​ ​justification​ ​behind​ ​our​ ​choice.
The protocols making Cardano possible are being implemented in Haskell. The user interface
has been encapsulated in a fork of E
​ lectron that we are calling Daedalus. We have chosen to
use the web architectural model where possible, and for our database, we opted for a k​ ey-value
paradigm​​ ​using​ R​ ocksDB​.
From a component level, this abstraction means that maintenance is far simpler, better
technology can be substituted later with little effort, and that our stack is partly tied to thedevelopment​ ​efforts​ ​of​ ​Github​ ​and​ ​Facebook.
Using a WebGUI allows us to leverage React and develop front end features using tools
understood by hundreds of thousands of JavaScript developers. Using a web architecturemeans​ ​that​ ​components​ ​can​ ​be​ ​treated​ ​as​ ​services​ ​and​ ​the​ ​security​ ​model​ ​is​ ​sensible.
Choosing Haskell for protocol development was the most difficult choice. Even in the functional
world, there are ample choices. On the more flexible and impure side, there are languages like
Clojure, Scala and F#, which benefit from the enormous libraries of Java and the .Net
ecosystems​ ​while​ ​preserving​ ​some​ ​of​ ​the​ ​best​ ​aspects​ ​of​ ​functional​ ​programming.
There are more academically oriented languages such as A
​ gda and I​ dris that have a close
connection to techniques that would allow for strong verification of correctness. Yet they lackreasonable​ ​libraries​ ​and​ ​have​ ​a​ ​subpar​ ​development​ ​experience.
For Cardano, the choice came down to Ocaml and Haskell. Ocaml is a wonderful language witha great community, good tooling, reasonable development experience and a great legacy in theformal​ ​verification​ ​space​ ​through​ ​Coq23.​ ​So​ ​why​ ​did​ ​we​ ​choose​ ​Haskell?

​ ​Adding​ ​to​ ​this​ ​point,​ ​IOHK​ ​actually​ ​does​ ​have​ ​a​ ​project​ ​being​ ​implemented​ ​in​ ​Ocaml​ ​called​ Q​ editas​​ ​thatwe​ ​inherited​ ​from​ ​the​ ​pseudonymous​ ​Bill​ ​White23​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​23​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Why​ ​Haskell?
The protocols that compose Cardano are distributed, bundled with cryptography and require ahigh degree of fault tolerance. On the best days, there will still be ​Byzantine actors​, malformed
messages​ ​and​ ​faulty​ ​clients​ ​unintentionally​ ​causing​ ​some​ ​form​ ​of​ ​havok​ ​on​ ​the​ ​network.
First, we wanted a language that enjoys a strong type system where we could easily use tools
such as ​Quickcheck and more elaborate techniques such as ​Refinement Types while having areasonable expectation of fault tolerance. An Erlang style ​OTP model satisfies the latter
whereas​ ​languages​ ​like​ ​Haskell​ ​and​ ​Ocaml​ ​satisfy​ ​the​ ​former.
With the introduction of C
​ loud Haskell​, Haskell gained many of Erlang’s advantages while notsurrendering its own. Furthermore, Haskell’s modularity and composability has allowed us touse​ ​a​ ​lighter​ ​weight​ ​bespoke​ ​library​ ​called​ ​Time​ ​Warp​ ​for​ ​Cardano.
Second, Haskell’s libraries have evolved greatly over the last few years thanks to extensive workof commercial entities like ​Galois​, F​ P Complete and W​ ell-Typed​. As a consequence, Haskell can24be​ ​used​ ​to​ ​write​ ​production​ ​applications.
Third, ​PureScript​’s rapid evolution has provided a much needed bridge to the JavaScript world
akin to what Clojurescript has given Clojure. We expect PureScript will be especially importantwhen​ ​it​ ​comes​ ​to​ ​getting​ ​Cardano​ ​to​ ​work​ ​in​ ​a​ ​browser​ ​and​ ​developing​ ​mobile​ ​wallets.
Fourth, with respect to dependency resolution, Haskell in the last several years has enjoyed asignificant social and technological effort led by technologists like ​Michael Snoyman through aplatform​ ​called​ ​stackage​​ ​that​ ​is​ ​both​ ​easy​ ​to​ ​use​ ​and​ ​well​ ​supported​ ​by​ ​FP​ ​Complete.
Fifth, beyond adequate dependency resolution, we aim for our software builds to be
reproducible. In other words, with the same configuration values and dependency versions it
should produce exactly the same build artifacts. Through stackage, we have been using N​ ixOpsto​ ​achieve​ ​reproducibility​ ​with​ ​great​ ​success.
Finally, the talent pool of developers specializing in Haskell is reasonably large — compared toits peers — and quite well-trained with the right mix of academic and industry credentials. It also
acts as a competency filter as it is uncommon to find experienced Haskell developers without
detailed​ ​knowledge​ ​of​ ​computer​ ​science.
​ ​Bryan​ ​O'Sullivan​ ​provides​ ​a​ ​nice​ ​talk​ ​about​ ​Haskell’s​ ​industrial​ ​use​ h​ ere​.

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IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Formal​ ​Specification​ ​and​ ​VerificationA​ ​significant​ ​strength​ ​of​ ​developing​ ​a​ ​protocol​ ​using​ ​a​ ​provably​ ​correct​ ​security​ ​model​ ​is​ ​that​ ​itprovides​ ​a​ ​guaranteed​ ​limit​ ​of​ ​adversarial​ ​power.​ ​One​ ​is​ ​given​ ​a​ ​contract​ ​that​ ​as​ ​long​ ​as​ ​theprotocol​ ​is​ ​followed​ ​and​ ​the​ ​proofs​ ​are​ ​correct,​ ​the​ ​adversary​ ​cannot​ ​violate​ ​the​ ​security
properties​ ​claimed.
Deeper​ ​reflection​ ​makes​ ​the​ ​prior​ ​assertion​ ​even​ ​more​ ​significant.​ ​Adversaries​ ​can​ ​be​ ​arbitrarily
intelligent​ ​and​ ​capable.​ ​To​ ​say​ ​they​ ​are​ ​defeated​ ​solely​ ​through​ ​a​ ​mathematical​ ​model​ ​isextraordinary.​ ​And,​ ​of​ ​course,​ ​it​ ​is​ ​not​ ​entirely​ ​true.
Reality​ ​introduces​ ​factors​ ​and​ ​circumstances​ ​that​ ​prevent​ ​the​ ​utopia​ ​of​ ​pure​ ​security​ ​andcorrect​ ​behavior​ ​from​ ​existing.​ ​Implementations​ ​can​ ​be​ ​wrong.​ ​Hardware​ ​can​ ​introduce​ ​attack
vectors​ ​previously​ ​unconsidered.​ ​The​ ​security​ ​model​ ​might​ ​be​ ​insufficient​ ​and​ ​not​ ​conform​ ​toreal​ ​life​ ​use.
A​ ​judgement​ ​call​ ​is​ ​needed​ ​about​ ​how​ ​much​ ​specification,​ ​rigor​ ​and​ ​checking​ ​is​ ​demanded​ ​for​ ​aprotocol.​ ​For​ ​example,​ ​endeavors​ ​like​ ​the​ S​ eL4​ ​Microkernel​ ​project​​ ​are​ ​a​ ​prime​ ​example​ ​of​ ​an​ ​allout​ ​assault​ ​on​ ​ambiguity​ ​requiring​ ​almost​ ​200,000​ ​lines​ ​of​ ​Isabelle​ ​code​ ​to​ ​verify​ ​less​ ​than
10,000​ ​lines​ ​of​ ​C​ ​code.​ ​Yet​ ​an​ ​operating​ ​system​ ​kernel​ ​is​ ​critical​ ​infrastructure​ ​that​ ​could​ ​be​ ​aserious​ ​security​ ​vulnerability​ ​if​ ​not​ ​properly​ ​implemented.
Should​ ​all​ ​cryptographic​ ​software​ ​require​ ​the​ ​same​ ​Herculean​ ​effort?​ ​Or​ ​can​ ​one​ ​choose​ ​a​ ​lessvigorous​ ​path​ ​that​ ​produces​ ​equivalent​ ​outcomes?​ ​Also​ ​does​ ​it​ ​matter​ ​if​ ​the​ ​protocol​ ​isperfectly​ ​implemented​ ​if​ ​the​ ​environment​ ​it​ ​runs​ ​in​ ​is​ ​notoriously​ ​vulnerable​ ​such​ ​as​ ​on
Windows​ ​XP?
For​ ​Cardano,​ ​we​ ​have​ ​chosen​ ​the​ ​following​ ​compromise.​ ​First,​ ​due​ ​to​ ​the​ ​complex​ ​nature​ ​of​ ​thedomains​ ​of​ ​cryptography​ ​and​ ​distributed​ ​computing,​ ​proofs​ ​tend​ ​to​ ​be​ ​very​ ​subtle,​ ​long,complicated​ ​and​ ​sometimes​ ​quite​ ​technical.​ ​This​ ​implies​ ​that​ ​human​ ​driven​ ​checking​ ​can​ ​betedious​ ​and​ ​error-prone.​ ​Therefore,​ ​we​ ​believe​ ​that​ ​every​ ​significant​ ​proof​ ​presented​ ​in​ ​a​ ​white
paper​ ​written​ ​to​ ​cover​ ​core​ ​infrastructure​ ​needs​ ​to​ ​be​ ​machine​ ​checked.

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IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Second,​ ​to​ ​verify​ ​Haskell​ ​code​ ​so​ ​it​ ​correctly​ ​corresponds​ ​to​ ​our​ ​white​ ​papers,​ ​we​ ​can​ ​choose
between​ ​two​ ​popular​ ​options:​ ​interfacing​ ​with​ ​SMT​ ​provers​ ​via​ ​LiquidHaskell​​ ​and​ ​using
Isabelle/HOL.
SMT​ ​(satisfiability​ ​modulo​ ​theories)​ ​solvers​ ​deal​ ​with​ ​the​ ​problem​ ​of​ ​finding​ ​functionalparameters​ ​that​ ​satisfy​ ​an​ ​equation​ ​or​ ​inequation,​ ​or​ ​alternatively​ ​showing​ ​that​ ​such​ ​parametersdo​ ​not​ ​exist.​ ​As​ ​discussed​ ​by​ ​De​ ​Moura​ ​and​ ​Bjørner​,​ ​use​ ​cases​ ​of​ ​SMT​ ​are​ ​various,​ ​but​ ​the​ ​key
point​ ​is​ ​that​ ​these​ ​techniques​ ​are​ ​both​ ​powerful​ ​and​ ​can​ ​dramatically​ ​reduce​ ​bugs​ ​andsemantic​ ​errors.
Isabelle/HOL​, on the other hand, is a more expressive and diverse tool which can be used toboth specify and verify implementation. Isabelle is a generic theorem solver working withhigher-order logic constructs, capable of representing sets and other mathematical objects to
be used in proofs. Isabelle itself integrates with Z3 SMT prover to work with problems involving
such​ ​constraints.
Both approaches provide value and therefore we have decided to embrace them both in stages.
Human written proofs will be encoded in Isabelle to check their correctness thereby satisfying
our machine checking requirement. And we intend on gradually adding Liquid Haskell to all
production​ ​code​ ​in​ ​Cardano’s​ ​implementation​ ​throughout​ ​2017​ ​and​ ​2018.
As​ ​a​ ​final​ ​point,​ ​formal​ ​verification​ ​is​ ​only​ ​as​ ​good​ ​as​ ​the​ ​specification​ ​one​ ​is​ ​verifying​ ​from​ ​andthe​ ​toolsets​ ​available.​ ​One​ ​of​ ​the​ ​primary​ ​reasons​ ​for​ ​choosing​ ​Haskell​ ​is​ ​that​ ​it​ ​provides​ ​theright​ ​balance​ ​of​ ​practicality​ ​and​ ​theory.​ ​Specification​ ​derived​ ​from​ ​white​ ​papers​ ​looks​ ​a​ ​lot​ ​like
Haskell​ ​code,​ ​and​ ​connecting​ ​the​ ​two​ ​is​ ​considerably​ ​easier​ ​than​ ​doing​ ​so​ ​with​ ​an​ ​imperative
language.
There​ ​is​ ​still​ ​enormous​ ​difficulty​ ​in​ ​capturing​ ​a​ ​proper​ ​specification​ ​and​ ​also​ ​updating​ ​thespecification​ ​when​ ​changes​ ​such​ ​as​ ​upgrades,​ ​bug​ ​fixes​ ​and​ ​other​ ​concerns​ ​need​ ​to​ ​be​ ​made;however,​ ​this​ ​reality​ ​does​ ​not​ ​in​ ​any​ ​way​ ​diminish​ ​the​ ​overall​ ​value.​ ​If​ ​one​ ​is​ ​going​ ​to​ ​trouble​ ​ofbuilding​ ​a​ ​foundation​ ​upon​ ​provable​ ​security,​ ​then​ ​the​ ​implementation​ ​should​ ​be​ ​what​ ​wasactually​ ​proposed​ ​on​ ​paper.

TransparencyA​ ​final​ ​question​ ​when​ ​discussing​ ​the​ ​science​ ​and​ ​engineering​ ​of​ ​developing​ ​a​ ​cryptocurrency​ ​ishow​ ​to​ ​address​ ​transparency.​ ​Design​ ​decisions​ ​are​ ​not​ ​Boolean​ ​and​ ​ethereal,​ ​coming​ ​todevelopers​ ​in​ ​dreams​ ​and​ ​then​ ​suddenly​ ​becoming​ ​canon.​ ​They​ ​are​ ​derived​ ​from​ ​experience,
debate​ ​and​ ​lessons​ ​learned​ ​from​ ​earlier​ ​mistakes.

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IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

The​ ​challenge​ ​is​ ​that​ ​a​ ​totally​ ​transparent​ ​development​ ​process​ ​could​ ​influence​ ​discussion​ ​tobecome​ ​more​ ​theatrical​ ​than​ ​evidence​ ​based.​ ​Egos,​ ​attempts​ ​to​ ​win​ ​over​ ​a​ ​community,​ ​and​ ​fearof​ ​sounding​ ​stupid​ ​could​ ​force​ ​conversations​ ​to​ ​become​ ​sterile​ ​and​ ​counterproductive.
Furthermore,​ ​outsiders​ ​could​ ​attempt​ ​to​ ​co-opt​ ​the​ ​conversation​ ​in​ ​an​ ​effort​ ​to​ ​force​ ​their
particular​ ​tangent​ ​to​ ​become​ ​the​ ​only​ ​relevant​ ​topic.​ ​Everyone​ ​has​ ​a​ ​sacred​ ​cow.
So​ ​how​ ​does​ ​one​ ​balance​ ​the​ ​need​ ​for​ ​a​ ​transparent​ ​development​ ​process,​ ​which​ ​is​ ​owed​ ​to​ ​thecommunity​ ​that​ ​has​ ​entrusted​ ​progress​ ​to​ ​a​ ​set​ ​of​ ​core​ ​developers,​ ​with​ ​the​ ​need​ ​for​ ​freedomof​ ​expression​ ​without​ ​fear?
With​ ​Cardano,​ ​we​ ​have​ ​decided​ ​to​ ​embrace​ ​a​ ​standards​ ​driven​ ​process​ ​with​ ​directed​ ​oversight.
The​ ​community​ ​needs​ ​to​ ​know​ ​that​ ​the​ ​science​ ​and​ ​the​ ​code​ ​are​ ​well​ ​thought​ ​out,​ ​checked​ ​andactually​ ​solve​ ​the​ ​things​ ​that​ ​developers​ ​claim​ ​they​ ​do.​ ​To​ ​this​ ​end,​ ​peer​ ​review​ ​should
completely​ ​satisfy​ ​the​ ​science​ ​component​ ​as​ ​it​ ​has​ ​been​ ​designed​ ​specifically​ ​for​ ​this​ ​purpose
and​ ​has​ ​given​ ​us​ ​the​ ​modern​ ​world.
For​ ​code,​ ​this​ ​topic​ ​is​ ​a​ ​bit​ ​more​ ​opinionated.​ ​For​ ​Cardano,​ ​we​ ​have​ ​elected​ ​to​ ​entrust​ ​the
Cardano​ ​Foundation​ ​to​ ​serve​ ​as​ ​a​ ​final​ ​auditor​ ​of​ ​IOHK’s​ ​work.​ ​In​ ​particular,​ ​they​ ​are​ ​entrusted
with​ ​the​ ​following​ ​duties:
1. Regular​ ​review​ ​of​ ​the​ ​source​ ​code​ ​contained​ ​in​ ​the​ ​Cardano​ ​Github​ ​to​ ​check​ ​for​ ​quality,
test​ ​coverage,​ ​proper​ ​comments​ ​and​ ​completeness2. Review​ ​of​ ​all​ ​Cardano​ ​documentation​ ​for​ ​correctness​ ​and​ ​usefulness
3. Verifying​ ​the​ ​claims​ ​that​ ​the​ ​protocols​ ​produced​ ​by​ ​the​ ​scientists​ ​are​ ​fully​ ​implementedTo​ ​accomplish​ ​this​ ​task,​ ​IOHK​ ​will​ ​submit​ ​regular​ ​and​ ​timely​ ​reports​ ​to​ ​the​ ​Foundation​ ​–​ ​and​ ​its
assigns​ ​–​ ​to​ ​review.​ ​The​ ​Foundation​ ​in​ ​turn​ ​will​ ​release​ ​a​ ​development​ ​oversight​ ​report​ ​to​ ​the
Cardano​ ​community​ ​on​ ​at​ ​least​ ​a​ ​quarterly​ ​basis.
This​ ​first​ ​effort​ ​is​ ​intended​ ​to​ ​start​ ​a​ ​broader​ ​conversation​ ​about​ ​how​ ​a​ ​decentralized​ ​project
achieves​ ​accountability.​ ​Development​ ​oversight​ ​from​ ​a​ ​trusted​ ​third​ ​party​ ​is​ ​a​ ​powerful​ ​tool​ ​toensure​ ​that​ ​developers​ ​are​ ​on​ ​track,​ ​but​ ​it​ ​is​ ​not​ ​sufficient​ ​to​ ​completely​ ​guarantee​ ​that​ ​theproject​ ​will​ ​always​ ​deliver.
For​ ​this​ ​reason,​ ​after​ ​the​ ​treasury​ ​is​ ​integrated​ ​into​ ​CSL,​ ​the​ ​Foundation​ ​will​ ​encourage
additional​ ​development​ ​teams​ ​to​ ​construct​ ​alternative​ ​clients​ ​based​ ​upon​ ​the​ ​formal
specifications​ ​developed​ ​jointly​ ​with​ ​IOHK.​ ​Development​ ​diversity​ ​has​ ​been​ ​a​ ​great​ ​techniqueused​ ​by​ ​the​ ​Ethereum​ ​project​ ​to​ ​avoid​ ​a​ ​monoculture​ ​forming​ ​around​ ​a​ ​single​ ​set​ ​of​ ​ideas​ ​ordevelopers.

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IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

With​ ​respect​ ​to​ ​specifications,​ ​there​ ​is​ ​a​ ​wealth​ ​of​ ​knowledge​ ​to​ ​be​ ​gained​ ​from​ ​the​ ​standards
process​ ​followed​ ​by​ ​the​ ​WC3​​ ​and​ ​the​ I​ ETF​.​ ​Ultimately,​ ​each​ ​protocol​ ​Cardano​ ​integrates
requires​ ​a​ ​specification​ ​that​ ​is​ ​independent​ ​of​ ​academic​ ​work​ ​or​ ​source​ ​code.​ ​Rather​ ​it​ ​needs​ ​tobe​ ​in​ ​a​ ​suitable​ ​format​ ​such​ ​as​ ​an​ R​ FC​.
One​ ​of​ ​the​ ​Cardano​ ​Foundation’s​ ​core​ ​tenets​ ​is​ ​to​ ​act​ ​as​ ​standards​ ​body​ ​specifically​ ​for​ ​the
Cardano​ ​protocols​ ​and​ ​to​ ​host​ ​conversations​ ​to​ ​update,​ ​add​ ​or​ ​change​ ​standards​ ​relevant​ ​toCardano.​ ​If​ ​the​ ​internet​ ​(a​ ​product​ ​of​ ​standards)​ ​through​ ​IETF​ ​can​ ​reach​ ​consensus​ ​about​ ​whatcore​ ​protocols​ ​shall​ ​be​ ​used,​ ​then​ ​it​ ​is​ ​entirely​ ​reasonable​ ​to​ ​assume​ ​that​ ​a​ ​dedicated​ ​body
could​ ​facilitate​ ​the​ ​same​ ​outcome.
As​ ​a​ ​closing​ ​note,​ ​it​ ​is​ ​interesting​ ​to​ ​explore​ ​moving​ ​these​ ​discussions​ ​to​ ​a​ ​decentralized​ ​entity
hosted​ ​on​ ​a​ ​blockchain.​ ​This​ ​concept​ ​is​ ​called​ ​a​ ​decentralized​ ​autonomous​ ​organization​​ ​(DAO)and​ p​ reliminary​ ​work​​ ​is​ ​underway​ ​in​ ​this​ ​area.​ ​IOHK​ ​will​ ​develop​ ​a​ ​reference​ ​DAO​ ​model​ ​forentities​ ​interfacing​ ​with​ ​Cardano​ ​to​ ​use​ ​if​ ​desired​ ​and​ ​it​ ​is​ ​the​ ​Cardano​ ​Foundation’s​ ​prerogativeto​ ​decide​ ​whether​ ​to​ ​embrace​ ​it​ ​under​ ​their​ ​standards​ ​mandate.

3.​ ​Interoperability
The​ ​Grand​ ​Myopia
Finance​ ​and​ ​the​ ​broader​ ​idea​ ​of​ ​commerce​ ​is​ ​ultimately​ ​a​ ​human​ ​endeavor.​ ​There​ ​exist​ ​elegant
languages,​ ​extremely​ ​precise​ ​tools​ ​to​ ​capture​ ​intent,​ ​and​ ​endless​ ​mazes​ ​of​ ​techniques​ ​toachieve​ ​recourse​ ​in​ ​the​ ​event​ ​of​ ​bad​ ​outcomes​ ​as​ ​well​ ​as​ ​thousands​ ​of​ ​years​ ​of​ ​laws​ ​seeking
equity​ ​in​ ​trade.​ ​In​ ​fact​ ​some​ ​of​ ​the​ ​earliest​ ​forms​ ​of​ ​writing​ ​were​ ​commercial​ ​contracts​.
Yet​ ​the​ ​human​ ​element​ ​cannot​ ​be​ ​eschewed​ ​regardless​ ​of​ ​the​ ​disintermediation​ ​to​ ​logic,
machines​ ​or​ ​governmental​ ​sentinels​ ​entrusted​ ​with​ ​terrible​ ​powers.​ ​Therein​ ​lies​ ​the​ ​grandmyopia​ ​of​ ​cryptocurrencies.​ ​They​ ​are​ ​mostly​ ​divorced​ ​from​ ​human​ ​reality.
People​ ​make​ ​mistakes.​ ​People​ ​change​ ​their​ ​minds.​ ​People​ ​do​ ​not​ ​always​ ​fully​ ​understand​ ​thebusiness​ ​relationships​ ​they​ ​are​ ​agreeing​ ​to​ ​enter.​ ​People​ ​get​ ​misled​ ​and​ ​defrauded.
Circumstances​ ​change​ ​on​ ​an​ ​individual​ ​and​ ​state​ ​level​ ​that​ ​require​ ​unique​ ​solutions.​ ​Belaboringthis​ ​point,​ ​most​ ​contracts​ ​contain​ f​ orce​ ​majeure​ ​clauses​.

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However,​ ​cryptocurrencies​ ​seek​ ​to​ ​toss​ ​out​ ​human​ ​understanding,​ ​compassion​ ​and​ ​judgementin​ ​exchange​ ​for​ ​an​ ​uncaring​ ​digital​ ​judge​ ​perfectly​ ​bound​ ​to​ ​a​ ​constitution​ ​without​ ​considerationto​ ​fairness​ ​or​ ​outcome.​ ​Given​ ​that​ ​humans​ ​have​ ​always​ ​tried​ ​and​ ​will​ ​continue​ ​to​ ​attempt​ ​tochange​ ​rules​ ​to​ ​selfish​ ​ends,​ ​it​ ​is​ ​refreshing​ ​to​ ​actually​ ​have​ ​a​ ​system​ ​that​ ​cannot​ ​be​ ​corrupted.
But​ ​what​ ​happens​ ​when​ ​a​ ​user​ ​needs​ ​to​ ​blend​ ​these​ ​new​ ​systems​ ​with​ ​traditional​ ​financial
systems?​ ​What​ ​happens​ ​when​ ​one​ ​needs​ ​to​ ​live​ ​in​ ​the​ ​human​ ​world?​ ​For​ ​example,​ ​property
rights​ ​such​ ​as​ ​land​ ​registration​ ​live​ ​entirely​ ​in​ ​the​ ​physical​ ​world.​ ​Even​ ​tokenizing​ ​the​ ​land​ ​stillrequires​ ​some​ ​acknowledgement​ ​of​ ​the​ ​incumbent​ ​jurisdiction.
To​ ​provide​ ​another​ ​point,​ ​a​ ​bar​ ​of​ ​gold​ ​cannot​ ​move​ ​itself.​ ​The​ ​digital​ ​judge​ ​can​ ​command​ ​its
movement,​ ​but​ ​cannot​ ​force​ ​it​ ​without​ ​humans​ ​to​ ​accommodate.​ ​Hence​ ​a​ ​digital​ ​ledger​ ​candrift​ ​from​ ​reality.
Thus​ ​a​ ​protocol​ ​designer​ ​needs​ ​to​ ​decide​ ​how​ ​much​ ​human​ ​reality​ ​should​ ​be​ ​permitted​ ​in​ ​his
cryptocurrency.​ ​The​ ​more​ ​flexibility,​ ​the​ ​less​ ​fidelity​ ​to​ ​the​ ​absolute​ ​one​ ​should​ ​expect.​ ​The
more​ ​consumer​ ​protection,​ ​the​ ​more​ ​mechanisms​ ​have​ ​to​ ​exist​ ​to​ ​provide​ ​rollbacks,​ ​refunds
and​ ​editing​ ​of​ ​history.
This​ ​section​ ​and​ ​the​ ​next​ ​on​ ​regulation​ ​covers​ ​Cardano’s​ ​pragmatic​ ​approach​ ​to​ ​the​ ​topic.​ ​In
terms​ ​of​ ​interoperability,​ ​there​ ​are​ ​two​ ​broad​ ​groups​ ​to​ ​discuss.​ ​First,​ ​interoperability​ ​withlegacy​ ​financial​ ​systems​ ​(the​ ​non-cryptocurrency​ ​world).​ ​Second,​ ​interoperability​ ​with​ ​othercryptocurrencies.

LegacyFintech is not composed of a single standard or even a common language. There is tremendous
diversity in approaches, the entities responsible for settlement and clearing, businessprocesses, and other domains involved in the accounting, transformation and movement ofvalue.
It is unreasonable to suggest that, simply because one technology is superior, the rest of theecosystem will somehow admit defeat and upgrade. For example, many people still use
Windows XP 16 years after the initial release. This sad state of affairs is equivalent to someone
using​ ​the​ ​original​ ​Macintosh​ ​released​ ​in​ ​1984​ ​in​ ​the​ ​year​ ​2000.
Consumer behavior aside, businesses are generally even slower in their upgrade cycle. Manybanks still use back ends written in Cobol. Once infrastructure is known to work and meetsbusiness requirements, there is usually little incentive to upgrade or refine software andprotocols​ ​for​ ​a​ ​consumer’s​ ​benefit​ ​outside​ ​of​ ​compliance​ ​or​ ​security​ ​concerns.

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For Cardano, we first have to establish what would a legacy bridge even entail? What systems,
standards, entities and protocols should we target to ensure there is a reasonable certainty ofinteroperability? Can these bridges be federated or decentralized? Or like exchanges will they
become​ ​central​ ​points​ ​of​ ​failure​ ​for​ ​hackers,​ ​malicious​ ​owners​ ​or​ ​overzealous​ ​regulators?
There are three concerns that have to be addressed. First, the representation of information andbelief in its accuracy. Second, representation of value and its associated ownership. Third,
representation of entities and, a particular user’s alongside the aggregate level of trust in such
entities.
To be useful, information and value need to freely flow between the legacy financial world andCardano. Then outcomes need to be established and recorded to build reputation and grounds
for recourse. Yet such things are mostly scoped in nature to the actors involved. To encodethem​ ​on​ ​a​ ​blockchain​ ​would​ ​make​ ​them​ ​global​ ​and​ ​permanent.
Furthermore, value cannot always freely flow in the legacy world. Embargos, sanctions, capital
controls and judicial action could freeze assets. To be interoperable, one cannot create analways​ ​open​ ​escape​ ​valve​ ​for​ ​value​ ​to​ ​leak.
Finally,​ ​the​ ​brand​ ​and​ ​reputation​ ​of​ ​entities​ ​is​ ​one​ ​of​ ​the​ ​cornerstones​ ​of​ ​commercial
relationships.​ ​Billions​ ​of​ ​dollars​ ​are​ ​spent​ ​yearly​ ​on​ ​marketing​ ​campaigns​ ​to​ ​establish,​ ​maintainand​ ​repair​ ​brands.​ ​If​ ​libelous,​ ​false​ ​or​ ​misleading​ ​claims​ ​are​ ​made​ ​about​ ​a​ ​person​ ​or​ ​entity,​ ​then
they​ ​have​ ​the​ ​right​ ​to​ ​seek​ ​legal​ ​recourse.​ ​Yet​ ​blockchains​ ​attempt​ ​to​ ​permanently​ ​preserve
history.
Like​ ​our​ ​choice​ ​of​ ​programming​ ​language,​ ​there​ ​is​ ​no​ ​ideal​ ​solution​ ​for​ ​Cardano​ ​to​ ​resolvethese​ ​concerns​ ​in​ ​a​ ​ubiquitously​ ​correct​ ​way.​ ​Rather,​ ​we​ ​have​ ​to​ ​yield​ ​to​ ​supported​ ​opinion
again.
With​ ​respect​ ​to​ ​the​ ​flow​ ​of​ ​information,​ ​this​ ​flow​ ​is​ ​known​ ​as​ ​a​ ​trusted​ ​data​ ​feed.​ ​It​ ​has​ ​a​ ​sourceand​ ​content.​ ​Sources​ ​have​ ​some​ ​notion​ ​of​ ​credibility​ ​and​ ​incentive​ ​to​ ​deceive​ ​or​ ​maintainhonesty.​ ​Content​ ​can​ ​be​ ​arbitrarily​ ​encoded.
Given​ ​that​ ​we​ ​intend​ ​on​ ​supporting​ ​trusted​ ​hardware​ ​in​ ​our​ ​protocol​ ​stack,​ ​we​ ​have​ ​chosen​ ​toexplore​ ​adding​ ​support​ ​for​ ​Professor​ ​Ari​ ​Juel​ ​et​ ​al.’s​ ​Town​ ​Crier​ ​Protocol​.​ ​Assuming​ ​theexistence​ ​of​ ​a​ ​credible​ ​set​ ​of​ ​data​ ​sources,​ ​Town​ ​Crier​ ​permits​ ​the​ ​secure​ ​scraping​ ​of​ ​webcontent​ ​for​ ​use​ ​in​ ​smart​ ​contracts​ ​and​ ​other​ ​applications.

​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​30​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017A​ ​bootstrap​ ​list​ ​of​ ​sources​ ​will​ ​be​ ​provided​ ​by​ ​Emurgo,​ ​IOHK​ ​and​ ​the​ ​Cardano​ ​Foundation.​ ​Laterthis​ ​list​ ​will​ ​be​ ​replaced​ ​by​ ​a​ ​community​ ​curated​ ​list​ ​using​ ​mechanics​ ​derived​ ​from​ ​Cardano’s
treasury​ ​system.​ ​Our​ ​hope​ ​is​ ​that​ ​a​ ​reputation​ ​system​ ​can​ ​materialize​ ​around​ ​good​ ​data​ ​feeds,
thereby​ ​creating​ ​a​ ​positive​ ​feedback​ ​loop​ ​to​ ​gradually​ ​improve​ ​reliability​ ​and​ ​fidelity.
The​ ​representation​ ​of​ ​value​ ​is​ ​a​ ​more​ ​complex​ ​topic.​ ​Unlike​ ​information​ ​—​ ​where​ ​once​ ​theveracity,​ ​timeliness​ ​and​ ​completeness​ ​are​ ​established,​ ​protocols​ ​can​ ​behave​ ​in​ ​a​ ​reliable​ ​anddeterministic​ ​way​ ​—​ ​value​ ​is​ ​more​ ​delicate.
Once​ ​tokenized,​ ​value​ ​should​ ​behave​ ​like​ ​a​ ​unique​ ​object.​ ​Information​ ​can​ ​be​ ​copied​ ​andpassed​ ​around,​ ​but​ ​a​ ​token​ ​representing​ ​ownership​ ​of​ ​something​ ​(say​ ​a​ ​vehicle​ ​title)​ ​cannot​ ​becloned​ ​and​ ​traded​ ​on​ ​two​ ​different​ ​ledgers.​ ​This​ ​act​ ​would​ ​effectively​ ​destroy​ ​the​ ​integrity​ ​of​ ​thesystem.
The​ ​challenge​ ​in​ ​legacy​ ​interoperability​ ​when​ ​dealing​ ​with​ ​tokenized​ ​value​ ​is​ ​that​ ​trust
assumptions,​ ​reliability​ ​and​ ​auditability​ ​change​ ​as​ ​tokens​ ​flow​ ​between​ ​ledgers.​ ​For​ ​example,​ ​if
Bob​ ​owns​ ​some​ ​Bitcoin​ ​and​ ​then​ ​deposits​ ​them​ ​on​ ​an​ ​exchange,​ ​then​ ​Bob​ ​now​ ​has​ ​theexchange’s​ ​representation​ ​of​ ​his​ ​Bitcoin​ ​on​ ​their​ ​ledger.​ ​In​ ​the​ ​case​ ​of​ ​MtGOX,​ ​their​ ​ledger​ ​didnot​ ​conform​ ​to​ ​reality,​ ​causing​ ​the​ ​users​ ​to​ ​lose​ ​everything.
The​ ​problem​ ​is​ ​further​ ​complicated​ ​by​ ​the​ ​need​ ​for​ ​legacy​ ​systems​ ​to​ ​recognize​ ​tokens​ ​living​ ​ina​ ​cryptocurrency.​ ​As​ ​mentioned​ ​previously,​ ​businesses​ ​are​ ​historically​ ​resistant​ ​to​ ​upgrading
their​ ​software​ ​and​ ​supporting​ ​new​ ​protocols.​ ​This​ ​situation​ ​makes​ ​it​ ​difficult​ ​to​ ​see​ ​a​ ​clear
solution.
For​ ​Cardano,​ ​our​ ​best​ ​hope​ ​is​ ​to​ ​provide​ ​an​ ​option​ ​for​ ​users​ ​to​ ​attach​ ​a​ ​rich​ ​supply​ ​of​ ​metadatato​ ​their​ ​transactions​ ​and​ ​then​ ​wait​ ​for​ ​industry​ ​standards​ ​to​ ​emerge​ ​to​ ​hook​ ​into.​ ​Some
progress​ ​has​ ​been​ ​made​ ​with​ ​the​ I​ nterledger​ ​workgroup​,​ ​efforts​ ​like​ ​R3Cev​​ ​and​ ​international
mandates​ ​to​ ​upgrade​ ​old​ ​financial​ ​protocols.
However,​ ​the​ ​larger​ ​challenge​ ​remains​ ​of​ ​quantifying​ ​and​ ​qualifying​ ​value​ ​sent​ ​from​ ​a​ ​legacy
system​ ​to​ ​a​ ​cryptocurrency​ ​ledger.​ ​For​ ​example​ ​if​ ​Bob​ ​is​ ​a​ ​bank​ ​owner​ ​and​ ​issues​ ​a​ ​dollar
backed​ ​token,​ ​then​ ​he​ ​can​ ​always​ ​build​ ​a​ ​bridge​ ​to​ ​send​ ​his​ ​tokens​ ​to​ ​a​ ​ledger​ ​like​ ​Cardano​ ​as​ ​auser​ ​issued​ ​asset.
While​ ​Cardano​ ​would​ ​track​ ​ownership​ ​precisely​ ​and​ ​provide​ ​all​ ​the​ ​features​ ​we​ ​have​ ​come​ ​tolove​ ​such​ ​as​ ​timestamping​ ​and​ ​auditability,​ ​no​ ​cryptocurrency​ ​can​ ​make​ ​Bob​ ​an​ ​honest​ ​banker.
He​ ​always​ ​has​ ​the​ ​option​ ​of​ ​running​ ​a​ ​fractional​ ​reserve​ ​bank​ ​by​ ​not​ ​backing​ ​all​ ​of​ ​his​ ​dollar​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​31​ ​of​ ​44

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tokens​ ​with​ ​real​ ​dollars.​ ​This​ ​fraud​ ​cannot​ ​be​ ​detected​ ​by​ ​a​ ​cryptocurrency​ ​unless​ ​the​ ​dollar
itself​ ​was​ ​a​ ​token​ ​accounted​ ​by​ ​a​ ​digital​ ​ledger25.
Finally,​ ​the​ ​representation​ ​of​ ​entities​ ​online​ ​is​ ​a​ ​classical​ ​network​ ​problem​ ​dating​ ​back​ ​to​ ​earlydays​ ​of​ ​the​ ​internet.​ ​Universities,​ ​businesses,​ ​government​ ​departments​ ​and​ ​any​ ​arbitrary​ ​users
need​ ​to​ ​establish​ ​their​ ​identity​ ​at​ ​some​ ​point.
To​ ​this​ ​end,​ ​pragmatic​ ​yet​ ​centralized​ ​solutions​ ​like​ ​the​ ​web’s​ P​ ublic​ ​Key​ ​Infrastructure​​ ​andICANN’s​ ​DNS​ ​system​​ ​have​ ​been​ ​implemented.​ ​Given​ ​that​ ​we​ ​enjoy​ ​the​ ​modern​ ​web,​ ​thesesolutions​ ​are​ ​both​ ​scalable​ ​and​ ​practical.​ ​But​ ​they​ ​do​ ​not​ ​answer​ ​a​ ​more​ ​commercially​ ​oriented
question​ ​of​ ​reliability,​ ​trustworthiness​ ​and​ ​other​ ​meta​ ​characteristics​ ​necessary​ ​for​ ​determiningif​ ​one​ ​wants​ ​to​ ​do​ ​business​ ​with​ ​the​ ​entity.
Multi-sided​ ​marketplace​ ​hosts​ ​like​ ​eBay​ ​have​ ​constructed​ ​a​ ​business​ ​model​ ​on​ ​providing​ ​someof​ ​this​ ​metadata​ ​alongside​ ​a​ ​framework​ ​to​ ​complete​ ​transactions.​ ​Judgements​ ​about​ ​thequality​ ​of​ ​content,​ ​events​ ​and​ ​businesses​ ​are​ ​often​ ​deeply​ ​influenced​ ​solely​ ​by​ ​online​ ​ratingsfrom​ ​trusted​ ​sources26.
The​ ​part​ ​of​ ​this​ ​point​ ​relevant​ ​to​ ​Cardano​ ​is​ ​a​ ​question​ ​of​ ​centralization​ ​of​ ​reputation.​ ​One​ ​ofour​ ​goals​ ​for​ ​Cardano​ ​is​ ​to​ ​provide​ ​a​ ​financial​ ​stack​ ​for​ ​the​ ​developing​ ​world.​ ​A​ ​key​ ​to​ ​this​ ​effortis​ ​the​ ​ability​ ​to​ ​establish​ ​trust​ ​with​ ​actors​ ​one​ ​has​ ​never​ ​met.
If​ ​a​ ​single​ ​entity​ ​or​ ​a​ ​consortium​ ​of​ ​entities​ ​control​ ​who​ ​is​ ​labeled​ ​good​ ​or​ ​bad,​ ​not​ ​an​ ​organic
process​ ​derived​ ​from​ ​actual​ ​interactions​ ​in​ ​the​ ​community​ ​as​ ​a​ ​whole,​ ​then​ ​these​ ​entities​ ​could
arbitrarily​ ​blacklist​ ​anyone​ ​for​ ​any​ ​perceived​ ​sin.​ ​This​ ​power​ ​is​ ​against​ ​our​ ​values​ ​as​ ​a​ ​projectand​ ​defeats​ ​the​ ​broader​ ​point​ ​of​ ​using​ ​a​ ​cryptocurrency.
Fortunately,​ ​the​ ​same​ ​mechanisms​ ​used​ ​in​ ​voting​ ​for​ ​treasury​ ​ballots,​ ​adding​ ​sources​ ​to​ ​a​ ​list​ ​oftrusted​ ​data​ ​feeds​ ​and​ ​forking​ ​a​ ​protocol​ ​can​ ​be​ ​reused​ ​to​ ​establish​ ​a​ ​reputation​ ​space.​ ​It​ ​is​ ​anopen​ ​area​ ​of​ ​research​ ​and​ ​our​ ​hope​ ​is​ ​to​ ​provide​ ​an​ ​overlay​ ​protocol​ ​for​ ​a​ ​decentralized
reputation​ ​web​ ​of​ ​trust​ ​in​ ​2018-2019​ ​after​ ​more​ ​foundational​ ​elements​ ​have​ ​been​ ​settled.

Cryptocurrency​ ​Interoperability​ ​For​ ​digital​ ​ledgers​ ​on​ ​the​ ​other​ ​hand,​ p​ roof​ ​of​ ​reserve​​ ​has​ ​been​ ​proposed​ ​as​ ​a​ ​clever​ ​way​ ​of​ ​keeping
cryptocurrency​ ​only​ ​exchanges​ ​honest.
26​ ​These​ ​rates​ ​even​ ​impact​ ​the​ ​creation​ ​of​ ​content​ ​itself.​ ​See​ ​this​ ​interest​ ​story​ ​on​ ​how​ ​Rotten​ ​Tomatoes
has​ ​impacted​ ​the​ ​movie​ ​industry.
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Moving​ ​from​ ​the​ ​legacy​ ​world​ ​to​ ​distributed​ ​digital​ ​ledgers,​ ​interoperability​ ​becomes​ ​far​ ​simpler.
Each​ ​ledger​ ​has​ ​a​ ​network​ ​protocol,​ ​standards​ ​of​ ​communication​ ​and​ ​security​ ​assumptions
about​ ​its​ ​respective​ ​consensus​ ​algorithm.​ ​These​ ​in​ ​turn​ ​can​ ​be​ ​easily​ ​quantified.
Movement​ ​of​ ​information​ ​is​ ​established​ ​by​ ​connecting​ ​to​ ​the​ ​foreign​ ​network​ ​and​ ​translating​ ​its
messages.​ ​Movement​ ​of​ ​value​ ​can​ ​be​ ​done​ ​through​ ​a​ ​relay​ ​system​,​ ​atomic​ ​cross​ ​chain​ ​tradingor​ ​through​ ​a​ ​clever​ ​sidechains​ ​scheme​.​ ​As​ ​there​ ​is​ ​not​ ​a​ ​centralized​ ​operator,​ ​one
representation​ ​of​ ​entities​ ​restricts​ ​more​ ​to​ ​a​ ​metadiscussion​ ​of​ ​trust​ ​in​ ​developers,​ ​miners​ ​orsome​ ​other​ ​powerbroker.
For​ ​Cardano,​ ​we​ ​are​ ​integrating​ ​a​ ​new​ ​sidechain​ ​protocol​ ​developed​ ​by​ ​Kiayias,​ ​Miller​ ​andZindros.​ ​It​ ​provides​ ​a​ ​non-interactive​ ​way​ ​of​ ​safely​ ​moving​ ​value​ ​between​ ​two​ ​chains​ ​that
support​ ​the​ ​protocol.​ ​This​ ​mechanism​ ​will​ ​be​ ​the​ ​primary​ ​way​ ​value​ ​will​ ​flow​ ​between​ ​CSL​ ​and​ ​a
CCL​ ​layer.
For​ ​other​ ​cryptocurrencies,​ ​federated​ ​bridges​ ​should​ ​form​ ​as​ ​Cardano​ ​grows​ ​in​ ​value​ ​and​ ​userbase.​ ​To​ ​help​ ​accelerate​ ​this​ ​growth,​ ​Cardano​ ​SL​ ​supports​ ​a​ ​restricted​ ​version​ ​of​ ​Plutus​ ​forinteroperability​ ​scripts.​ ​New​ ​transactions​ ​will​ ​be​ ​added​ ​in​ ​the​ ​Shelley​ ​and​ ​later​ ​releases​ ​of​ ​CSL
specifically​ ​to​ ​address​ ​these​ ​needs.

The​ ​Maze​ ​of​ ​Daedalus
The points on interoperability come from a global perspective. Specialized protocols, newtransaction types, systems to assess credibility and the flow of information cannot be scoped tojust a single gatekeeper or user. Rather they must be readily available to anyone without
censorship​ ​or​ ​tolls.
Yet what happens when Cardano does not support a protocol, transaction or application that auser cannot live without? Should we just be out of scope? The web faced a similar concern
during​ ​the​ ​1990s.
Ironically, the web provides two different solutions that can be replicated with cryptocurrencies.
The introduction of JavaScript provided programmability to any website to add arbitrary
features. The introduction of browser plugins and extensions added custom capabilities forusers willing to install them. Both approaches gave us the modern web alongside all its security
horrors.

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IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Ethereum adopted the former approach by allowing users to embed subprotocols on the
Ethereum blockchain as smart contracts. Cardano supports this feature through the CCL
paradigm.​ ​But​ ​what​ ​about​ ​custom​ ​extensions?
An elucidating example would be a cryptocurrency trader. Imagine a decentralized marketplace,called DM, that supports a set of different cryptocurrencies. A trader wants to automate his
strategies​ ​acting​ ​on​ ​DM.
In a fragmented ecosystem, the trader would have to install dozens of clients for each
cryptocurrency and then write custom software to talk to each client in order to coordinate
automated trades. If one client updates, then it could break the bespoke software. Furthermore,what​ ​if​ ​the​ ​trader​ ​wants​ ​to​ ​sell​ ​the​ ​software?
Inspired from the web model of extensions, if the interface to various cryptocurrencies can bepulled into a web stack, then the trader’s task becomes dramatically easier. A universal
interface can be established. Installation is one click. Distribution of software can be modeled
after​ ​the​ ​Chrome​ ​web​ ​store.
For Cardano, we have decided to experiment with this paradigm by deploying our reference
wallet’s front end on Electron. It is an open source project maintained by Github that combines
both​ ​Node​ ​and​ ​Chrome​ ​together.​ ​Cardano’s​ ​build​ ​of​ ​Electron​ ​is​ ​called​ ​Daedalus.
The first generation of Daedalus27 will act as an HD wallet with support for many of the expectedaccounting and security features that are industry standards, such as spending passwords andBIP39. In later generations Daedalus will develop into an application framework with a store,
universal​ ​integration​ ​APIs​ ​and​ ​an​ ​SDK.
The key innovations are ease of development by allowing programmers to use JavaScript,
HTML5 and CSS3 to build their applications and a unified bridge for cross application
communication. Complex behavior such as cryptography, managing a distributed network anddatabase mechanics can be abstracted away thereby letting the developer focus solely on user
experience​ ​and​ ​their​ ​application’s​ ​core​ ​logic.
As Daedalus is intended to be a universal framework, its roadmap and evolution is somewhat
independent of Cardano’s. During 2017 they are tightly coupled, but later Cardano will be justanother application for a Daedalus user. We also intend on exploring extremely unique featuressuch​ ​as​ ​a​ ​universal​ ​key​ ​management​ ​service​ ​running​ ​solely​ ​in​ ​Intel​ ​SGX.

​ ​Which​ ​is​ ​already​ ​available​ ​at​ d​ aedaluswallet.io27​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​34​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017

Ultimately, as protocol designers, we cannot support all needs. Our hope is that the flexibility
that Daedalus will provide combined with stateful smart contracts running on CCL will satisfy
those left out by our design decisions. We also hope that better standards can emerge toencourage​ ​all​ ​cryptocurrencies​ ​to​ ​enjoy​ ​better​ ​interoperability​ ​and​ ​security.

4.​ ​Regulation
The​ ​False​ ​DichotomyAs​ ​mercurial​ ​and​ ​arcane​ ​as​ ​regulation​ ​can​ ​often​ ​be,​ ​one​ ​can​ ​metaphorically​ ​infer​ ​an​ ​elegant
narrative​ ​loop​ ​of​ ​the​ ​corrupt​ ​and​ ​their​ ​prosecutors​ ​seeking​ ​justice.​ ​Regulations​ ​are​ ​the​ ​toolkit​ ​ofthe​ ​lawbringer.​ ​But​ ​like​ ​all​ ​tools,​ ​they​ ​might​ ​be​ ​crude,​ ​old​ ​or​ ​simply​ ​misused.
Cryptocurrencies​ ​have​ ​not​ ​changed​ ​the​ ​human​ ​condition​ ​or​ ​the​ ​narrative​ ​loop.​ ​There​ ​will​ ​alwaysbe​ ​scams,​ ​bad​ ​actors​ ​and​ ​terrible​ ​outcomes​ ​despite​ ​the​ ​best​ ​of​ ​intentions.​ ​While
cryptocurrencies​ ​can​ ​remove​ ​human​ ​judgement,​ ​they​ ​cannot​ ​remove​ ​human​ ​behavior.
A​ ​cryptocurrency​ ​designer​ ​has​ ​to​ ​take​ ​a​ ​position​ ​on​ ​what​ ​toolkit​ ​he​ ​will​ ​offer​ ​the​ ​regulator​ ​tocorrect​ ​bad​ ​events.​ ​The​ ​unique​ ​challenge​ ​cryptocurrencies​ ​face​ ​is​ ​that​ ​they​ ​are​ ​a​ ​product​ ​ofregulatory​ ​and​ ​monetary​ ​failure28.
Culturally,​ ​many​ ​in​ ​cryptocurrencies​ ​consider​ ​government​ ​action​ ​to​ ​be​ ​corrupt,​ ​inept​ ​orineffective.​ ​Therefore,​ ​they​ ​have​ ​little​ ​respect,​ ​patience​ ​or​ ​desire​ ​to​ ​endorse​ ​a​ ​special​ ​backdoor
for​ ​a​ ​regulator​ ​or​ ​lawman​ ​to​ ​right​ ​wrongs.​ ​This​ ​act​ ​would​ ​be​ ​anathema​ ​to​ ​the​ ​entire​ ​purpose​ ​ofcryptocurrencies.
On​ ​the​ ​other​ ​hand,​ ​counting​ ​exchange​ ​failures​ ​and​ ​historic​ ​events,​ ​more​ ​than​ ​10​ ​percent​ ​ofBitcoin​ ​has​ ​been​ ​lost​ ​or​ ​stolen​ ​since​ ​the​ ​protocol​ ​started​ ​on​ ​January​ ​3rd,​ ​2009.​ ​As​ ​of​ ​June​ ​30th,
2017,​ ​the​ ​value​ ​lost​ ​or​ ​stolen​ ​comes​ ​to​ ​a​ ​little​ ​over​ ​$4​ ​billion.​ ​And​ ​this​ ​figure​ ​does​ ​not​ ​accountfor​ ​Bitcoin​ ​and​ ​other​ ​tokens​ ​lost​ ​to​ ​scams​ ​and​ ​poorly​ ​formed​ ​ICOs.

​ ​In​ ​fact​ ​Satoshi​ ​embedded​ ​in​ t​ he​ ​Bitcoin​ ​Genesis​ ​Block​​ ​the​ ​following​ ​headline​ ​taken​ ​from​ ​The​ ​Times:
The​ ​Times​ ​03/Jan/2009​ ​Chancellor​ ​on​ ​brink​ ​of​ ​second​ ​bailout​ ​for​ ​banks
28​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​35​ ​of​ ​44

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Then​ ​there​ ​is​ ​the​ ​issue​ ​of​ ​privacy.​ ​On​ ​a​ ​macro​ ​scale,​ ​value​ ​flows​ ​through​ ​specialized​ ​channels
that​ ​are​ ​regulated,​ ​rich​ ​in​ ​metadata​ ​and​ ​actively​ ​monitored​ ​by​ ​law​ ​enforcement,​ ​governmentsand​ ​international​ ​regulators.​ ​It​ ​is​ ​a​ ​well​ ​understood​ ​game​ ​with​ ​leakage​ ​occurring​ ​only​ ​on​ ​thecash​ ​side​ ​of​ ​affairs,​ ​which​ ​has​ ​been​ ​gradually​ ​diminishing​ ​as​ ​the​ ​world​ ​moves​ ​to​ ​digital​ ​money.
29

The​ ​paradigm​ ​if​ ​cryptocurrencies​ ​did​ ​not​ ​exist​ ​would​ ​seem​ ​to​ ​be​ ​a​ ​world​ ​that​ ​increasingly​ ​treatsfinancial​ ​privacy​ ​like​ ​social​ ​media​ ​content.​ ​There​ ​is​ ​none​ ​and​ ​one​ ​cannot​ ​opt​ ​out.​ ​Hence​ ​wehave​ ​a​ ​dilemma​ ​yielding​ ​an​ ​apparent​ ​dichotomy.
A​ ​cryptocurrency​ ​designer​ ​can​ ​surrender​ ​principles​ ​and​ ​yield​ ​to​ ​whatever​ ​demands​ ​their​ ​local
jurisdiction​ ​places​ ​upon​ ​their​ ​code,​ ​thereby​ ​compromising​ ​the​ ​privacy​ ​and​ ​integrity​ ​of​ ​theirusers.​ ​Or​ ​he​ ​can​ ​adopt​ ​a​ ​more​ ​principled,​ ​but​ ​anarchistic,​ ​philosophy​ ​that​ ​divorces​ ​itself​ ​fromcurrent​ ​best​ ​practices​ ​and​ ​laws.
For​ ​Cardano,​ ​we​ ​feel​ ​this​ ​narrative​ ​is​ ​a​ ​false​ ​dichotomy​ ​brought​ ​on​ ​by​ ​a​ ​lack​ ​of​ ​imagination.​ ​The
reality​ ​is​ ​that​ ​most​ ​users​ ​are​ ​not​ ​concerned​ ​about​ ​rules​ ​existing​ ​for​ ​markets.​ ​They​ ​are​ ​usuallyconcerned​ ​about​ ​sudden​ ​changes​ ​in​ ​the​ ​rules​ ​to​ ​benefit​ ​one​ ​or​ ​more​ ​actors.​ ​They​ ​are​ ​worried
about​ ​a​ ​lack​ ​of​ ​transparency​ ​over​ ​who​ ​gets​ ​special​ ​privileges.
We​ ​need​ ​to​ ​distinguish​ ​between​ ​individual​ ​and​ ​market​ ​rights.​ ​Given​ ​that​ ​cryptocurrencies​ ​have​ ​aglobal​ ​reach,​ ​rights​ ​needs​ ​to​ ​be​ ​as​ ​user​ ​oriented​ ​as​ ​possible.
Privacy​ ​should​ ​be​ ​reasonable​ ​and​ ​at​ ​the​ ​user’s​ ​control,​ ​not​ ​a​ ​gatekeeper.​ ​The​ ​flow​ ​of​ ​value
should​ ​be​ ​unrestricted.​ ​Value​ ​should​ ​not​ ​be​ ​subject​ ​to​ ​sudden​ ​forfeiture​ ​without​ ​consent.
From​ ​a​ ​market​ ​perspective,​ ​the​ ​marketplace​ ​needs​ ​to​ ​be​ ​transparent​ ​about​ ​the​ ​use​ ​of​ ​data,​ ​howfunds​ ​will​ ​be​ ​handled​ ​within​ ​and​ ​everyone​ ​needs​ ​to​ ​play​ ​by​ ​the​ ​same​ ​set​ ​of​ ​rules.​ ​Furthermore,once​ ​the​ ​user​ ​has​ ​consented,​ ​then​ ​they​ ​cannot​ ​suddenly​ ​change​ ​their​ ​mind​ ​due​ ​toinconvenience.​ ​Counterparties​ ​need​ ​certainty​ ​as​ ​well.
But​ ​how​ ​exactly​ ​does​ ​one​ ​move​ ​from​ ​the​ ​abstract​ ​to​ ​an​ ​actual​ ​system?​ ​What​ ​should​ ​somethingpractical​ ​and​ ​legal​ ​look​ ​like?​ ​We​ ​have​ ​broken​ ​our​ ​solution​ ​into​ ​three​ ​categories:​ ​metadata,authentication​ ​and​ ​compliance​ ​as​ ​well​ ​as​ ​marketplace​ ​DAOs.

​ ​The​ ​reader​ ​should​ ​consider​ ​picking​ ​up​ ​a​ ​copy​ ​of​ ​David​ ​Wolman’s​ ​The​ ​End​ ​of​ ​Money​.​ ​It​ ​covers​ ​theinternational​ ​movement​ ​towards​ ​cash​ ​disappearing.

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Metadata
The​ ​act​ ​of​ ​something​ ​can​ ​often​ ​be​ ​less​ ​interesting​ ​than​ ​the​ ​metadata​ ​surrounding​ ​it.​ ​For
example,​ ​driving​ ​from​ ​Denver​ ​to​ ​Boulder​ ​is​ ​an​ ​act.​ ​Driving​ ​from​ ​Denver​ ​to​ ​Boulder​ ​in​ ​a​ ​Ferrari
488​ ​at​ ​an​ ​average​ ​of​ ​120​ ​MPH​ ​is​ ​metadata.​ ​Certainly​ ​this​ ​infers​ ​a​ ​different​ ​experience​ ​than​ ​in​ ​aToyota​ ​Prius​ ​at​ ​an​ ​average​ ​of​ ​30​ ​MPH.
Financial​ ​transactions​ ​are​ ​no​ ​different.​ ​The​ ​context​ ​surrounding​ ​them​ ​is​ ​extraordinarily
important​ ​to​ ​economists,​ ​tax​ ​authorities,​ ​law​ ​enforcement,​ ​businesses​ ​and​ ​other​ ​entities.​ ​Sadlyin​ ​our​ ​current​ ​fiat​ ​based​ ​system,​ ​most​ ​consumers​ ​never​ ​see​ ​how​ ​rich​ ​in​ ​metadata​ ​theirtransactions​ ​are​ ​or​ ​who​ ​they​ ​are​ ​shared​ ​with30.
For​ ​Cardano,​ ​we​ ​acknowledge​ ​that​ ​users​ ​could​ ​need​ ​or​ ​are​ ​legally​ ​required​ ​to​ ​sharetransactional​ ​metadata​ ​with​ ​certain​ ​actors​ ​like​ ​tax​ ​authorities.​ ​But​ ​we​ ​believe​ ​this​ ​sharing​ ​has​ ​tobe​ ​at​ ​the​ ​user’s​ ​consent.
We​ ​also​ ​believe​ ​that​ ​blockchain​ ​systems​ ​have​ ​tremendous​ ​power​ ​to​ ​eliminate​ ​fraud,​ ​waste​ ​andabuse​ ​by​ ​providing​ ​auditability,​ ​timestamping​ ​and​ ​immutability.​ ​Thus​ ​some​ ​metadata​ ​should​ ​beposted​ ​to​ ​the​ ​Cardano​ ​blockchain.
The​ ​hard​ ​part​ ​is​ ​finding​ ​a​ ​correct​ ​balance​ ​that​ ​does​ ​not​ ​condemn​ ​our​ ​blockchain​ ​to​ ​substantial
bloat.​ ​Given​ ​this​ ​concern,​ ​we​ ​have​ ​chosen​ ​a​ ​pragmatic​ ​approach.
First,​ ​Daedalus​ ​will​ ​support​ ​over​ ​the​ ​next​ ​12​ ​months​ ​a​ ​large​ ​array​ ​of​ ​features​ ​to​ ​labeltransactions​ ​and​ ​financial​ ​activity.​ ​These​ ​metadata​ ​can​ ​be​ ​exported​ ​and​ ​shared​ ​on​ ​demand​ ​with
whoever​ ​the​ ​user​ ​deems​ ​necessary.​ ​Furthermore,​ ​the​ ​data​ ​can​ ​be​ ​operated​ ​on​ ​by​ ​three​ ​party
applications​ ​for​ ​domain​ ​specific​ ​purposes​ ​(for​ ​example,​ ​tax​ ​accounting).
Second,​ ​we​ ​are​ ​exploring​ ​adding​ ​support​ ​for​ ​special​ ​addresses​ ​that​ ​can​ ​include​ ​hashes​ ​andencrypted​ ​fields.​ ​This​ ​structure​ ​would​ ​permit​ ​a​ ​user​ ​to​ ​post​ ​metadata​ ​on​ ​our​ ​blockchain​ ​without
publicly​ ​revealing​ ​it.​ ​But​ ​if​ ​she​ ​wants​ ​to​ ​share​ ​the​ ​data,​ ​it​ ​would​ ​carry​ ​all​ ​the​ ​auditability,
immutability​ ​and​ ​timestamp​ ​surety​ ​that​ ​a​ ​transaction​ ​enjoys.

​ ​On​ ​a​ ​more​ ​macro​ ​scale,​ ​author​ ​Juan​ ​Zarate​ ​writes​ ​about​ ​how​ ​this​ ​data​ ​is​ ​used​ ​by​ ​the​ ​US​ ​Treasury
Department​ ​in​ ​the​ ​war​ ​on​ ​terrorism​ ​in​ T​ reasury’s​ ​War​.​ ​It​ ​provides​ ​a​ ​comprehensive​ ​view​ ​into​ ​how​ ​thecurrent​ ​structure​ ​of​ ​global​ ​financial​ ​markets​ ​can​ ​be​ ​used​ ​for​ ​geopolitical​ ​ends.
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We​ ​have​ ​already​ ​deployed​ ​an​ ​address​ ​structure​ ​that​ ​contains​ ​an​ ​attribute​ ​field.​ ​It​ ​is​ ​currently
being​ ​used​ ​to​ ​store​ ​an​ ​encrypted​ ​copy​ ​of​ ​HD​ ​wallet​ ​trees​ ​structure​ ​for​ ​fast​ ​wallet​ ​recovery​ ​(seeHD​ ​Wallet​ ​documentation).​ ​Later​ ​versions​ ​will​ ​generalize​ ​this​ ​construction.

Authentication​ ​and​ ​Compliance
Closely​ ​connected​ ​to​ ​transactions​ ​are​ ​the​ ​topics​ ​of​ ​the​ ​right​ ​to​ ​make​ ​transactions​ ​and​ ​theownership​ ​of​ ​funds.​ ​For​ ​example,​ ​while​ ​there​ ​might​ ​be​ ​sufficient​ ​funds​ ​to​ ​buy​ ​something​ ​(forexample​ ​alcohol),​ ​there​ ​could​ ​be​ ​restrictions​ ​on​ ​its​ ​purchase​ ​(age​ ​requirements).
Ownership​ ​and​ ​origin​ ​of​ ​funds​ ​are​ ​typically​ ​providence​ ​of​ ​know​ ​your​ ​customer​ ​regulations.
When​ ​a​ ​money​ ​service​ ​business​ ​like​ ​a​ ​bank​ ​or​ ​exchange​ ​opens​ ​an​ ​account​ ​for​ ​a​ ​new​ ​customer,it​ ​is​ ​usually​ ​required​ ​to​ ​collect​ ​basic​ ​facts​ ​about​ ​the​ ​customer​ ​and​ ​where​ ​he​ ​acquired​ ​his​ ​funds
from.
The​ ​technological​ ​challenge​ ​is​ ​that​ ​in​ ​the​ ​process​ ​of​ ​submitting​ ​this​ ​legally​ ​required
information,​ ​the​ ​user​ ​sending​ ​it​ ​has​ ​no​ ​guarantee​ ​how​ ​it​ ​will​ ​be​ ​used,​ ​stored​ ​and​ ​if​ ​it​ ​will​ ​ever​ ​bedestroyed.​ ​Compliance​ ​information​ ​is​ ​commercially​ ​valuable.​ ​It​ ​could​ ​be​ ​stolen​ ​for​ ​identity​ ​theftor​ ​resold​ ​where​ ​regulations​ ​permit.
For​ ​Cardano,​ ​we​ ​want​ ​to​ ​innovate​ ​as​ ​much​ ​as​ ​possible.​ ​On​ ​the​ ​software​ ​side​ ​of​ ​protocols,​ ​thereis​ ​little​ ​to​ ​provide​ ​a​ ​guarantee​ ​that​ ​the​ ​receiver​ ​of​ ​compliance​ ​information​ ​will​ ​behave​ ​within​ ​ascope​ ​of​ ​conduct.​ ​However,​ ​on​ ​the​ ​hardware​ ​side​ ​of​ ​protocols,​ ​using​ ​trusted​ ​hardware,​ ​one​ ​canleverage​ ​Intel​ ​SGX​ ​and​ ​other​ ​HSMs​ ​to​ ​enforce​ ​certain​ ​policies.
Thus​ ​we​ ​are​ ​exploring​ ​using​ ​Sealed​ ​Glass​ ​Proofs​ ​alongside​ ​a​ ​sharing​ ​policy​ ​to​ ​permit​ ​the​ ​safe
transmission​ ​of​ ​compliance​ ​information​ ​to​ ​a​ ​verifier​ ​who​ ​in​ ​turn​ ​is​ ​forced​ ​to​ ​comply​ ​with​ ​thepolicies​ ​it​ ​was​ ​transmitted​ ​under.​ ​We​ ​believe​ ​that​ ​both​ ​uniform​ ​standards​ ​could​ ​emerge​ ​andalso​ ​that​ ​this​ ​method​ ​will​ ​reduce​ ​risk​ ​to​ ​verifiers​ ​by​ ​preventing​ ​the​ ​loss​ ​of​ ​customer​ ​data​ ​fromhackers.
As​ ​a​ ​corollary​ ​to​ ​this​ ​effort,​ ​the​ ​layered​ ​model​ ​we​ ​propose​ ​for​ ​Cardano​ ​separating​ ​value​ ​fromcomputation​ ​also​ ​can​ ​benefit​ ​from​ ​this​ ​approach.​ ​If​ ​the​ ​computation​ ​layer​ ​is​ ​run​ ​by​ ​regulated
entities​ ​(say​ ​exchanges​ ​or​ ​casinos),​ ​then​ ​they​ ​would​ ​need​ ​to​ ​conduct​ ​compliance​ ​checks​ ​andpotentially​ ​enforce​ ​tax​ ​policy​ ​on​ ​users.
Using​ ​SGPs,​ ​the​ ​user​ ​can​ ​send​ ​funds​ ​alongside​ ​personally​ ​identifiable​ ​information​ ​without
concern​ ​that​ ​it​ ​will​ ​leak​ ​into​ ​the​ ​broader​ ​internet​ ​or​ ​be​ ​preserved​ ​by​ ​the​ ​consensus​ ​nodes​ ​of​ ​the​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​38​ ​of​ ​44

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computation​ ​layer.​ ​Furthermore,​ ​the​ ​computation​ ​layer​ ​would​ ​gain​ ​certainty​ ​that​ ​all​ ​users
transacting​ ​are​ ​authenticated​ ​and​ ​legitimate.
This​ ​paradigm​ ​also​ ​allows​ ​for​ ​customer​ ​portability​ ​between​ ​regulated​ ​entities.​ ​Exchanges​ ​could
transfer​ ​balances​ ​and​ ​accounts​ ​for​ ​customers​ ​instantly​ ​through​ ​these​ ​safe​ ​channels​ ​and​ ​also​ ​—where​ ​policies​ ​permit​ ​—​ ​share​ ​data​ ​with​ ​regulators.
We​ ​expect​ ​our​ ​first​ ​beta​ ​test​ ​of​ ​this​ ​technology​ ​to​ ​be​ ​conducted​ ​in​ ​mid-2018​ ​with​ ​an​ ​aim
towards​ ​Cardano​ ​integration​ ​in​ ​late-2018​ ​to​ ​early​ ​2019​ ​pending​ ​research​ ​results.​ ​This​ ​timelinealso​ ​assumes​ ​the​ ​ability​ ​to​ ​collaborate​ ​with​ ​ARM​ ​and​ ​Intel​ ​in​ ​order​ ​to​ ​get​ ​code​ ​signed​ ​to​ ​run​ ​ontheir​ ​hardware31.

Marketplace​ ​DAOs
The​ ​two​ ​previous​ ​sections​ ​covered​ ​the​ ​generation​ ​and​ ​movement​ ​of​ ​information​ ​assuming​ ​theexistence​ ​of​ ​some​ ​external​ ​system.​ ​To​ ​ensure​ ​legacy​ ​interoperability,​ ​these​ ​features​ ​will​ ​alwaysbe​ ​necessary,​ ​but​ ​they​ ​do​ ​not​ ​address​ ​blockchain​ ​based​ ​regulation.
Smart​ ​contracts​ ​enable​ ​a​ ​completely​ ​new​ ​kind​ ​of​ ​commercial​ ​system​ ​where​ ​relationships​ ​aredeterministic,​ ​self-enforcing​ ​and​ ​free​ ​of​ ​ambiguity.​ ​They​ ​can​ ​in​ ​turn​ ​be​ ​used​ ​to​ ​create​ ​rules​ ​formarketplaces​ ​including​ ​arbitrarily​ ​complex​ ​structures​ ​such​ ​as​ ​arbitration,​ ​event​ ​driven​ ​refunds,
and​ ​revelation​ ​of​ ​facts​ ​given​ ​special​ ​conditions.
We​ ​call​ ​these​ ​smart​ ​contract​ ​enforced​ ​structures​ ​Marketplace​ ​DAOs.​ ​They​ ​do​ ​not​ ​require
special​ ​protocol​ ​support​ ​nor​ ​mutability​ ​to​ ​be​ ​embedded​ ​in​ ​the​ ​ledger.​ ​In​ ​fact,​ ​they​ ​can​ ​be​ ​totally
constructed​ ​using​ ​a​ ​collection​ ​of​ ​interdependent​ ​smart​ ​contracts.
The​ ​architectural​ ​concept​ ​is​ ​to​ ​design​ ​a​ ​collection​ ​of​ ​commercial​ ​templates​ ​inspired​ ​fromcontract​ ​law​ ​and​ ​business​ ​best​ ​practices.​ ​These​ ​templates​ ​can​ ​be​ ​wired​ ​into​ ​a​ ​developer’s
smart​ ​contract​ ​to​ ​enforce​ ​specific​ ​standards​ ​upon​ ​the​ ​marketplace.
For​ ​example,​ ​say​ ​a​ ​developer​ ​wants​ ​to​ ​issue​ ​an​ ​ERC20​ ​token​ ​on​ ​CCL​ ​to​ ​conduct​ ​a​ ​crowdsale.​ ​A
Marketplace​ ​DAO​ ​could​ ​be​ ​established​ ​specifically​ ​for​ ​crowdsales​ ​and​ ​its​ ​terms​ ​and​ ​conditions
parameterized​ ​or​ ​even​ ​enforced​ ​by​ ​volunteer​ ​or​ ​legal​ ​standards.​ ​Things​ ​such​ ​as​ ​refunds,
reallocation​ ​of​ ​funds​ ​or​ ​freezing​ ​of​ ​payment​ ​could​ ​be​ ​inherited​ ​in​ ​the​ ​developer’s​ ​ERC20
contract.

​ ​See​ ​Intel​ ​SGX​ ​Commercial​ ​License​ ​Policy

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This​ ​effort​ ​allows​ ​us​ ​to​ ​have​ ​a​ ​macro​ ​discussion​ ​about​ ​how​ ​a​ ​marketplace​ ​should​ ​be​ ​controlledin​ ​order​ ​to​ ​ensure​ ​consumer​ ​protection.​ ​Second,​ ​we​ ​can​ ​discuss​ ​how​ ​to​ ​model​ ​transactions​ ​in​ ​away​ ​to​ ​automatically​ ​ensure​ ​legal​ ​protection​ ​and​ ​rights​ ​within​ ​specific​ ​jurisdictions,​ ​such​ ​asNew​ ​Hampshire.
Working​ ​with​ ​the​ ​Cardano​ ​Foundation,​ ​IOHK​ ​and​ ​other​ ​entities,​ ​the​ ​Cardano​ ​project​ ​will​ ​create​ ​areference​ ​library​ ​of​ ​Marketplace​ ​DAOs​ ​for​ ​smart​ ​contract​ ​developers​ ​to​ ​use.​ ​Our​ ​hope​ ​is​ ​that
insurance​ ​and​ ​regulatory​ ​markets​ ​can​ ​form​ ​around​ ​these​ ​DAOs​ ​and​ ​that​ ​they​ ​will​ ​beself-evolving​ ​based​ ​upon​ ​outcomes.

5.​ ​Sustainability
An immersion into the cryptocurrency area yields many conceptual contradictions.
Cryptocurrencies are designed to be difficult to change, but, like all technology, they need tochange to address design flaws and advancements. Blockchains are intended to prevent
centralization,​ ​yet​ ​require​ ​strong​ ​actors​ ​to​ ​lead​ ​changes​ ​or​ ​maintain​ ​the​ ​code.
Perhaps the most frustrating experience comes when there are clear deficiencies that moststakeholders​ ​agree​ ​need​ ​to​ ​be​ ​corrected,​ ​yet​ ​consensus​ ​cannot​ ​emerge​ ​on​ ​the​ ​path​ ​forwards.
Bitcoin’s block size debate has now been an active issue for more than two years. Daily,transactions​ ​totalling​ ​over​ ​a​ ​billion​ ​dollars​ ​are​ ​pending​​ ​because​ ​the​ ​network​ ​is​ ​at​ ​peak​ ​capacity.
If changing a simple parameter — even in the presence of temporary solutions — cannot becoordinated, then how can enterprises and governments feel comfortable investing billions ofdollars into building infrastructure on top of these systems? For that matter, how can any
business gamble on the strategic risk of integrating accountability-free protocols that cannot
make​ ​rational​ ​design​ ​upgrades?
Looking back into history, the evolution of the internet has followed a similar pattern with evensimple changes like the transition from ​IPv4 to ​IPv6 taking decades to realize. Yet there is astrong contrast between blockchain technology and the internet in that they follow a very
different​ ​style​ ​of​ ​custodianship.
The internet was a military project that grew out of DARPA into academic circles with strong
government backing and a well-defined set of initial custodians. The internet grew under
non-commercial conditions without the machinations of corporate influence attempting to​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​40​ ​of​ ​44

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monopolize the network. In fact, e-commerce violated the ​NSF AUP until it was repealed in
1992​.
By the time businesses had the luxury of commercializing the internet, there was already astrong set of standards, principles and evangelistic adherents. This did not stop companies like
AOL and Microsoft from trying to build w​ all gardens and creating proprietary technology like
ActiveX​. This foundation has not stopped next generation actors such as Google from ​pushing
their​ ​own​ ​agendas​​ ​given​ ​their​ ​enormous​ ​user​ ​bases​ ​and​ ​capitalizations.
With swarms of rent seeking32 actors from traders to miners, cryptocurrencies are the ultimate
commercially motivated ecosystems. Given this foundation, evolution of the custodianship ofcryptocurrencies​ ​has​ ​resulted​ ​in​ ​optimization​ ​around​ ​self-interest.
For example, validationless mining is starting to occur more frequently as it improves a miner’s
profit margin, yet this completely disregards the entire purpose and utility of mining. Mining
centralization has already occurred with just a handful of actors in control of the majority of
Bitcoin’s​ ​hash​ ​power.
Like the internet, cryptocurrencies require consensus to change. But when such rapid
centralization of power to a handful of brokers occurs, what happens when change is notconvenient​ ​to​ ​them?
Unlike the internet, the bootstrapping of most cryptocurrencies is not done through altruistically
non-commercial or academic means. From inception, some group seeks to make gains andthere​ ​are​ ​power​ ​brokers​ ​assigned​ ​to​ ​help​ ​ensure​ ​those​ ​gains.
Founding centralization is a reality that each cryptocurrency must face in its evolution. We
cannot​ ​fully​ ​escape​ ​it,​ ​but​ ​should​ ​at​ ​least​ ​try​ ​to​ ​design​ ​around​ ​gradual​ ​decentralization.
For Cardano, we thought carefully about what factors promote centralization and what
techniques could be applied to encourage our protocol to gradually become public
infrastructure​ ​like​ ​the​ ​web.
We fully admit that total decentralization is both impossible and perhaps evencounterproductive.​ ​Yet​ ​certain​ ​factors​ ​can​ ​be​ ​encouraged​ ​to​ ​produce​ ​a​ ​more​ ​balanced​ ​system.
First, while centralized custodianship of crowdsale funds allows for agile and rapid developmentof the protocol during the early days, eventually funding has to diversify and the speed of​ ​See​ ​link​​ ​for​ ​more​ ​information​ ​on​ ​this​ ​term

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development needs to retire to a more systematic and deliberate pace. Following this point,
funding​ ​needs​ ​to​ ​avoid​ ​cultural,​ ​linguistic​ ​and​ ​geographic​ ​bias.
Second, as the community becomes more informed about the underlying nature of thecryptocurrency’s technology, decisions about the roadmap cannot be centralized to a set ofcore developers or foundation. There needs to be a blockchain based method for proposing,vetting,​ ​and​ ​enacting​ ​changes​ ​to​ ​the​ ​protocol.
Third, the incentives behind maintaining the Cardano SL blockchain have to be directly alignedwith the aggregate desires of all users. We cannot permit a cabal of specialized actors to
emerge​ ​who​ ​are​ ​independent​ ​of​ ​the​ ​will​ ​of​ ​the​ ​greater​ ​community.
For the first principle, we have chosen to integrate a treasury system into Cardano. For thesecond, we will deploy a formal process to propose Cardano Improvement Proposals through asystem coordinated by CSL itself. For the third, we believe Ouroboros provides an elegant
solution.
More detail could be provided on the above topics, but they are extensive in their own right andbeyond the scope of a survey paper. Mechanism design is one of the most intricate andinterdependent academic fields with incomplete theory and no solid canonical model to standon.
Rather our science driven approach described in s
​ ection two serves us well here. IOHK’s Veritas
team is working in partnership with a group of researchers from Lancaster University under the
direction of ​Professor Bingsheng Zhang to develop Cardano’s reference treasury model. With
the aim of integration in 2018, we expect a dedicated peer reviewed publication by the end of2017.
For formal description and vetting of changes to a cryptocurrency protocol, this topic is theleast understood as it requires both ontological notions as well as a mechanism to incentivize
broad participation. Perhaps some form of representative democratic process could emerge oruse​ ​of​ ​liquid​ ​feedback​ ​to​ ​provide​ ​more​ ​rational​ ​voting.
We expect research in this direction to consume most of IOHK’s formal involvement in thedevelopment of Cardano33. As a starting point, we will deploy alongside the reference treasury
model several mechanisms to capture consent. Further study is required for a definitive
solution.

​ ​IOHK​ ​is​ ​retained​ ​to​ ​build​ ​Cardano​ ​until​ ​the​ ​end​ ​of​ ​2020

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Finally, work to improve incentives for Ouroboros is being supervised by P
​ rofessor Elias
Koutsoupias of the University of Oxford. After the cryptographic foundations of Ouroboros are
solidified alongside all required scalability work, a broader study of bonds, penalties and exotic
incentives​ ​will​ ​be​ ​added​ ​to​ ​the​ ​reference​ ​protocol.

6.​ ​ConclusionA​ ​cryptocurrency​ ​is​ ​more​ ​than​ ​the​ ​sum​ ​of​ ​its​ ​protocols,​ ​source​ ​code​ ​and​ ​utility.​ ​It​ ​is​ ​ultimately​ ​asocial​ ​system​ ​that​ ​inspires,​ ​enables​ ​and​ ​connects​ ​people.​ ​Frustrated​ ​by​ ​the​ ​many​ ​half
measures,​ ​failures​ ​and​ ​broken​ ​promises​ ​of​ ​past​ ​protocols,​ ​we​ ​set​ ​out​ ​to​ ​build​ ​something​ ​better.
This​ ​process​ ​is​ ​not​ ​simple​ ​nor​ ​have​ ​we​ ​ever​ ​believed​ ​it​ ​can​ ​finish.​ ​Social​ ​protocols​ ​continue
indefinitely​ ​changing​ ​as​ ​people​ ​and​ ​society​ ​change.​ ​To​ ​be​ ​useful,​ ​we​ ​want​ ​to​ ​trap​ ​the​ ​power​ ​ofevolution​ ​and​ ​port​ ​it​ ​into​ ​Cardano.
Evolution​ ​is​ ​not​ ​guided​ ​by​ ​a​ ​single​ ​hand​ ​or​ ​a​ ​grand​ ​design.​ ​It​ ​is​ ​a​ ​process​ ​of​ ​serendipity​ ​inspiredby​ ​endless​ ​mistakes​ ​and​ ​problems.​ ​Cardano​ ​seeks​ ​to​ ​be​ ​the​ ​digital​ ​embodiment​ ​of​ ​this​ ​process—​ ​fit​ ​enough​ ​to​ ​be​ ​able​ ​to​ ​survive​ ​the​ ​markets​ ​of​ ​today​ ​and​ ​adaptive​ ​enough​ ​to​ ​evolve​ ​to​ ​meetthe​ ​needs​ ​of​ ​the​ ​future.
The​ ​previous​ ​sections​ ​capture​ ​a​ ​brief​ ​view​ ​into​ ​how​ ​we​ ​have​ ​been​ ​approaching​ ​this​ ​goal.​ ​We
have​ ​diligently​ ​tried​ ​to​ ​recognize​ ​cognitive​ ​biases,​ ​learn​ ​from​ ​history​ ​and​ ​follow​ ​a​ ​rigorous
process.​ ​We​ ​have​ ​tried​ ​to​ ​balance​ ​the​ ​need​ ​for​ ​rapid​ ​development​ ​with​ ​formal​ ​methods​ ​that
traditionally​ ​cannot​ ​move​ ​quickly.
It​ ​has​ ​been​ ​an​ ​extraordinary​ ​privilege​ ​to​ ​embark​ ​on​ ​this​ ​journey.​ ​In​ ​the​ ​past​ ​two​ ​years,​ ​we​ ​havealready​ ​developed​ ​a​ ​provably​ ​secure​ ​proof-of-stake​ ​protocol,​ ​recruited​ ​a​ ​small​ ​army​ ​of​ ​Haskell
developers​ ​and​ ​made​ ​Cardano’s​ ​development​ ​the​ ​concern​ ​of​ ​many​ ​talented​ ​scientists.
As​ ​we​ ​move​ ​from​ ​the​ ​laboratory​ ​to​ ​a​ ​deployed​ ​system​ ​in​ ​the​ ​wild,​ ​there​ ​will​ ​be​ ​growing​ ​pains,but​ ​our​ ​hope​ ​is​ ​that​ ​Cardano’s​ ​future​ ​could​ ​be​ ​summarized​ ​in​ ​a​ ​single​ ​anthropomorphized
sentence.​ ​Cardano​ ​is​ ​a​ ​pragmatic​ ​dreamer​ ​that​ ​learns​ ​from​ ​its​ ​elders,​ ​is​ ​a​ ​good​ ​citizen​ ​in​ ​its
community,​ ​and​ ​always​ ​finds​ ​a​ ​way​ ​to​ ​pay​ ​its​ ​bills.

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We​ ​cannot​ ​know​ ​the​ ​future,​ ​but​ ​we​ ​are​ ​glad​ ​to​ ​be​ ​trying​ ​to​ ​make​ ​it​ ​a​ ​better​ ​one​ ​for​ ​everyone.
Thanks​ ​for​ ​reading.

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