FAQ: Frequently Asked Questions
What is a Blockchain ?
A blockchain is basically what it says. It is a chain of blocks where each block containing certain value transactions happening on the network. In order not to make an essay out of this question, we will simply refer you to the foundational paper that started this revolution. It was the paper based on which bitcoin network was created. In this paper, the anonymous person, called Satoshi Nakamoto mentioned: "We propose a solution to the double-spending problem using a peer-to-peer network." What this sentence means, is that the basic institutions that we have got used to like banks serve the single purpose of checking that a financial transaction is only counted once. So if I give 1 USD to another person, this transaction should happen once, otherwise I could repeat this for any number of times and become extremely rich. This is the function of the banks till now. What Bitcoin did, was to create a system where banks are no longer required for this, and a system where automation via the technology of blockchain can take over the TRUST intermediation. And the underlying technology driving this TRUST intermediation is called Blockchain.
And bitcoin became the beginning of the revolution based on which the next generation blockchain technology was born. It was called Ethereum (ETH). It now took this TRUST disintermediation and created a programmable technology, so we can now build complicated systems based on the basic building blocks. And CARDANO is called the third generation chains that tries to remove many problems ETH faced and make it better.
What is Cardano ?
Cardano is a third generation proof-of-stake (POS) blockchain, that is based on peer reviewed research papers. The project was conceived of in 2017 and led by Charles Hoskinson who was also one of the co-founders of the second generation smart contract platform Ethereum. It aims to replace many of the drawbacks of the first generation chain like Bitcoin and pave the way for a robust, scalable, secure, and maintainable infrastructure for peer-to-peer financial transaction of the future.
What is ADA ?
When we are dealing with cryptocurrency, their basic functionality is to enable peer-to-peer value transactions. And because of this, a unit of transaction needs to be defined. For Cardano, the base currency used for transactions is called ADA. It is also known as a token. For further discussion about what constitutes a token and what not, please refer to the article. Once a chain is launched to public, with future promises, it ends up being traded in crypto exchanges like Binance, Kraken, Coinbase, WazirX (India) and many others. From there on, the token (with its own set of initial constraint like max supply, initial holding and distribution among early adopters) becomes a tradable asset and one can exchange Fiat currency like USD, EUR, INR etc. for this token. From here on the value of this token is driven by perception, utility and future roadmap (driving expectations) of the leadership team. In case of ADA one of the key things is that it is being created to compete with Bitcoin in terms of utility and tokenomics. It means it also has a fixed supply of 45 Billion tokens. So it is an absolutely scarce asset. Hence, new supply of this token becomes more scarce as time goes by. We will later explore this topic of inflation / deflation as far as currency supply is concerned.
What is LKBH ?
For securing a blockchain network using Proof-of-Stake protocol (POS) like Cardano, there has to be a network of computers that needs to verify the blocks (containing transactions). Each computer is called a staking pool (because it is a pool of capital), and it commits certain capital, based on which a consensus algorithm (ouroborus for Cardano) selects the pool for mining a block. LKBH is one of such stake pool and acts in securing the network for Cardano. People who stake with this pool participates in this and hence gets rewarded for the same.
What is a crypto-currency wallet?
Crypto-currency wallet is an application, that fetches the content of blockchain and shows it to the user. Every user when they install this application is asked to choose certain 'mnemonic' 12-24 seed phrase. This phrase is a special set of words following a standard called bip-32 or bip-39. Using this seed phrase, the wallet generates a certain set of addresses. Just like a tree comes out of a seed, using a single seed phrase multiple addresses can be generated. What is also done sometimes, is to combine a password (to the wallet application) with a seed phrase to create different wallets, but we will ignore that complicated use case for now.
Once the user has chosen this 'mnemonic', a set of addresses will be generated particularly for this user. This set is unique and will never be replicable for any other user. Thus, a wallet is an application holding a collection of addresses. What most wallets do is that they communicate with the blockchain and provides these set of addresses as inputs. The blockchain is the one which contains all the data, and it sends back all the transactions related to this wallet addresses. And it is shown to the user.
Thus, to the normal user, it seems the wallet holds the transactions and amount of tokens, but in reality the wallet is just a medium of communication with the blockchain holding the actual data. What is most valuable to the user is the 'Mnemonic or seed phrase'. He/She should store this offline securely.
In some jargon, the above 'Mnemonic or seed phrase' is also called the private key of the wallet and as long as that is securely stored, restoration and retrieval of one's set of addresses is mathematically guaranteed.
Particularly for holding ADA, there are two wallets that is suited best for the purpose of not only storing, but also getting staking returns (sort of fixed deposit or savings interest). They are Daedalus and Yoroi.
Daedalus is so called on-chain wallet. It is usable mostly from a desktop as it requires some resource to run a full blockchain node of Cardano. And it requires some time for first time sync of the chain. Do not get annoyed. It is just a one time slow startup. But from there on, it actually is more efficient than other wallets as all the transactions can be performed via this local chain running in the computer. Also in the future when dApps are developed and deployed, it can be done via this wallet. It provides functionality for staking where the user can select a stake pool and delegate his stored ADA to that pool. And when rewards are generated from staking they appear automatically in the user's wallet. LKBH is the ticker symbol for our pool.
What if I accidentally uninstalled my wallet ?
Please read the earlier question about what a wallet is. Wallet is just a proxy program that holds on-chain addresses, and fetches the information to show to the user regarding the amount of tokens stored for which the user has the private keys.
It means this software program called wallet can be always be reinstalled and recovered using the mnemonic or seed phrase. In other words, using the seed phrase the new installation of a wallet can be restored to show the contents of the earlier wallet that was uninstalled.
For Cardano holders recommended wallets are Daedalus and Yoroi, simply because they allow individual users to not only store, but also stake their holdings of ADA tokens, to generate rewards (like savings account in banks) while maintaining a liquid supply of tokens.
What if I send ADA to a wrong address ? Are there any suggestions to do things right ?
Cryptocurrency assets puts the responsibility of owning one's asset to oneself. So one should always first take time to get trained in how to handle this. There is currently no regulations that protects one against mishandling of the assets (say insurance etc). In essence the ownership of coins comes down to owning the private keys/mnemonic that are associated to the address which holds the assets. So the address can be recovered when the mnemonic is available.
So if a person transfer the assets from one address to another (say from the exchange to one's own wallet), necessary precaution should be taken. For example exchanges (like Kraken), will have ways to maintain a withdrawal address list. Hence, this address list can be first created carefully. Then tested by transferring small amounts of currency and then if it works, transfer larger amounts. In this way mistakes can be avoided totally and enable one to have a professional setup in which transactions can be done with ease and confidence. It goes without saying, it needs time, effort and willingness to learn how to handle Crypto.
Coming back to the question, what happens when tokens are transferred to the wrong address. The answer is that unfortunately it is lost. Firstly if the address is a valid one, it means that there have to be a central agency to intermediate the ownership of that address, and then request information etc. But being a peer-to-peer currency this is currently not possible. And if the address is totally wrong, ideally the tokens cannot be transferred and in that case the token transfer will be cancelled.
What is staking and delegation and what are the differences ?
Cardano blockchain network uses something called Proof-of-Stake (POS) in order to arrive at a consensus regarding a particular value transaction being included in a block and then the block being committed to the blockchain. At any point of time, there are thousands of computer running the Blockchain network. Each of these computers is called a Stake pool.
Stake pool does the following. It runs a program called Cardano-node. Each pool has a set of address (payment address, stake Address). Precondition to running this program is that a certain amount of ADA needs to be locked into the above address. That is called a pledge amount. In addition, via Daedalus and Yoroi, each of the above pools can attract people who would want to stake some amount of their own ADA to a particular pool. That amount assigned by the normal ADA holders (Delegate) is called a delegation amount. Cardano does not lock the delegation amount, and it is free to be withdrawn by the person who owns that.
Thus, a stake pool (computer running a program which hosts the blockchain), has tokens (ADA) associated to it, in the form of Pledge amount (by stake pool operator) and Delegation amount (by as many ADA holders who choose to be delegators to this stake pool). The sum of pledge and delegation amounts is what is called a stake for a stake pool. It is the amount of money associated with a pool and gives it the right to participate in the consensus algorithm that governs the minting of blocks in the chain.
Finally, the algorithm selects stake pools for every epoch (5 days period) randomly based on the total stakes (pledge, delegations) and these pools mint blocks for which they are rewarded using the transaction fees. These rewards are then distributed automatically among the stakeholders proportional to the amount they delegated.
What are the requirements to buy ADA and where can I buy it ?
Currently, it depends on the country you reside and what the laws of possession and taxation of cryptocurrency. In general for EU and US anyone can invest in Cryptocurrency via exchanges such as Kraken.com, binance.com and a host of others. Cardano is working hard to work with coinbase.com (the largest crypto exchange in the USA) to get it listed later in 2021. In all the above exchanges one can convert FIAT currency to say cryptocurrency such as ADA.
In case the exchange does not offer ADA (such as Coinbase) another strategy would be to convert FIAT to BTC (bitcoin) which is the most common cryptocurrency as of date. And then convert from BTC to ADA on exchanges such as Kraken and Binance.
What are the things one should be aware of before investing in a cryptocurrency ?
Gain knowledge about Crypto
Before investing in any area, knowledge about that area is a key component. So firstly read a bit about why we are entering the age of cryptocurrency. Get all the doubts cleared. If you are not able to do that yourself, we are there to help you. We regularly write articles about it, to help in spreading the knowledge about crypto movements especially focussed around Cardano and Bitcoin. Here are some of the articles that may be relevant.
Learn about Cryptocurrency economic cycles
The Next step, if you are convinced that you want to invest in cryptocurrency, would be to learn how to do that. Firstly just like any investment instrument to learn about risk / reward ratio. Crypto is a new instrument started only 10-12 years back with bitcoin. And tokens such as Cardano are only getting started. And apart from the fundamentals of a particular token, one needs to be aware of the macro-economic cycles of investment as well. For example bitcoin is the leader in terms of valuation of the all the cryptocurrency, and every four years it undergoes cycles called 'halving' events, where the rate of production of bitcoin is reduced by half of the earlier value. Effectively the supply of new tokens are reduced by half. So as time goes by these events trigger a cycle of demand/supply shocks, mostly leading to a bull cycle followed by a bear cycle. The last bitcoin halving event happened in May 2020 and hence the current bull run follows this halving event.
During a bull run you may invest for fast returns but soon you will find out that it is very hard to time the market. So HODL(Crypto terms for holding long term) may be the best strategy for most people. Set aside a small amount of capital that you may spare and invest for a period of 5 + years.
You need to first convinced about why you would like to invest in cryptocurrency. It is a personal choice.
Learn how to manage the ownership of the cryptocurrency
Normally one would rely on banks to hold the money for them. And provide instruments such as debit or credit cards, to transact with the outside world using a digital version of the FIAT currency. So banks are responsible for providing security for the holdings. In return, we pay them a monthly price for the same. This is called banks acting as custodians.
For Crypto the standard phrase you might come across is called "Not your keys, not your coins". What it means is that as long as you hold the private keys (mnemonic 12-24 word phrase described in wallet section above), the crypto does not belong to you. Hence, almost all the crypto-exchanges mentions that they are not responsible for custodianship of the tokens that are transacted there. So crypto tokens should only be bought on exchanges, but then transferred to one's wallet for safe storage. And the way you would maintain the security of your wallet is up to oneself.
Learn about difference between software wallets and hardware wallets (Ledger or Trezor). If you want to hold for longer term it makes sense to hold them in a hardware wallet. Cardano Daedalus & Yoroi wallet is now compatible with the above hardware wallets. It means that the keys of the hardware wallet are never revealed and all transactions will have to be verified using hardware (both delegation and funding).
Disclaimer: We are not professional investment managers, hence refer to your investment advisors for proper investment advice.
Who is behind the running of this stake pool and what is the motivation of the team running this ?
This stake pool is now managed by a group of IT experts based in Berlin (Germany) with combined experience of more than 25 years of experience in managing cloud based infrastructure. We are active members of the Cardano community. This is a professionally managed stake pool, and we are now in the process of making a better community guidelines where we can attract larger investment from a broader community.
The motivation of running this stake pool, is mainly to liberate ourselves from the broken FIAT system of value transaction, which is almost at the point of breaking as a result of infinite FIAT money supply driven by extended Quantitative easing in EU and USA. Also combined with the leadership and stewardship of the Cardano community, we are able to create and run a new economic network on Cardano, that has the possibility to scale globally in the coming years. Staking as a concept is pretty new (1-2 years) and hence regulations governing this is still non-existent in most countries. Given that the stake pool is run by in Germany we are governed by this country's laws. And there will be maximum compliance to both legal and tax laws of the country.
We are actively working for setting in the legal framework for the same as operations grow.
As usual if you are interested in investing with us, please set up a meeting with us using the Calendly link in the home page.
Don’t you need a banking licence for running a stake pool as you are dealing with financial transactions ?
This is a very tricky question at this moment. Right now we are a small technology enterprise, that are running a Cardano stake pool. And given the novel way this technology is implemented, we do not own any of the funds that are delegated to this stake pool. Hence, we are just a technology infrastructure operational firm intermediating the automated transfer of rewards that are distributed by the blockchain itself. Thus unlike banks which actually owns the FIAT funds of the investors we are not in the business of fund ownership, hence the strict rules of raising funding from people and holding money of people does not apply to us. People who delegate have their funds totally liquid at all times and also have self ownership of the same.
Given that, we are keeping up with the new rules and regulations that may be introduced to govern stake pool operators and maybe stricter KYC requirements that may kick in for delegators to this pool. And we will become complaint with the same as time when need arises.
Where are the servers located and how eco-friendly are these servers ?
We cannot go into details about hosting locations, but server locations are in Germany and Finland. According to the leading hosting provider they are totally compliant with renewable energy efforts of its servers. This is quoted from them "energy from renewable sources to power the servers in its data centres".
Why is holding ADA more beneficial than holding any FIAT currency ?
There was an article written to reflect on this question. Please go through that in order to understand better, why FIAT system is breaking down.
Just to summarize: We are at an inflexion point of time in history. Due to COVID-19, we are at a unique position, where governments are printing FIAT at an alarming pace (Trillions in a matter of months which earlier in the 1990s used to take 10 years to do) thus devaluing the currency to zero at an exponential pace. Not only printing of money but giving this to the population without any productive output due to this pandemic scenario means that the entire printed capital is going into a black hole and cannot ever be recovered. Thus existing FIAT holders are being punished heavily.
Compared to that, we have for example Crypto currency like ADA that has a fixed supply of 45 Billions. Thus, an ADA bought now will be more valuable because of this scarcity. Cardano is also modelled to be the financial operating system for the world's unbanked using smart contract functionality. So over a period of time, the Cardano network will carry more and more transactions. In order to take advantage of this increasing utility of the network, one can participate in the staking (using our Pool LKBH) to get rewards. Thus, not only does one benefit from scarcity but also from increased network utility. One is the asset value of the token another is the utility based revenue / dividend generation using staking.
Thus, it is valuable to hold ADA over an inflationary FIAT currency
What are the advantages for holding ADA as against BTC (Bitcoin) ?
- Smart Contracts:
In the Q1-Q2 2021, the complete smart contract platform (Plutus) will be introduced on the main net in Cardano. Compared to that the same functionality on the BTC has no clear roadmap yet. Hence, utility wise, Cardano has a much better potential than BTC which acts as a store of value only.
- Average block time:
For BTC, it is 10 minutes versus 10-20 seconds for Cardano. Hence, Cardano is much faster than BTC. Hence, for real time applications Cardano fares better than BTC
- Governance and Chain evolution:
Cardano has on chain governance using Voltaire, while BTC has no such mechanism. This becomes critical as the number of users grow and the system complexity grows. In such cases in order to introduce changes, a voting system on chain is the only way to evolve the system. Currently, in addition to on-chain governance, Cardano has introduced a hard fork combinator which can deploy the changes of the chain in a seamless manner without the need of forking etc. This allows propagation of changes and evolution of the chain very easy. This is one of the hallmark of Cardano allowing scalability, security and high pace/quality of rollout.
- Consensus Algorithm:
Proof of work (POW) in BTC versus Proof of Stake (POS) in Cardano. POW leads to centralization and lots of attack vector like 51% attacks based on that. While POS of Cardano is based on Ouroboros consensus algorithm which is provably secure. And the latter (POS) is not only 1000 times more decentralized than POW, it is also more scalable. Currently, Cardano is run by more than 1400 independent stake pool operators and is planned to scale to more than a billion users in the coming years. In addition, the POS allows delegation based 5-7 percent staking returns as against much less controllable lending based returns using BTC lending platforms. Overall POS is also much better in terms of energy consumption, as Cardano node can be run on a very small computational footprint of Raspberry Pi in comparison to 120GW / second for BTC networks.
- Scalability Layers:
Cardano has plans to introduce layer 3 scalability layers called Hydra, which promises 1Million transactions per node. In addition, the working of this layer is quite different from the lightning network on BTC which does not allow large value transactions to be recorded on chain. Thus true scalability in terms of transactions per second is better for Cardano than BTC.
- Maturity / Market Cap:
BTC is currently the market leader and most recognized, mature cryptocurrency. BTC is valued at approx €420B compared to €4.8B for ADA. And right now the smart contract is not yet there. The technological maturity and research bases structure of ADA shows that the upside potential of ADA is much more than BTC. For ADA, it aims to replace the Defi tokens currently on ETH making it comparable. From this standpoint the upside potential of ADA is much more than BTC.
From the above arguments it is better to hold ADA compared with BTC.
What are the risks of holding ADA ?
These are the categories of risk in general for cryptocurrency:
There are several measures of volatility. We do not want to go into complications of calculating that, but best way to understand them is they are unlike stable currency like USD, EUR. Hence, this can be treated as a risk.
The possibility of hacks on these chains, is another risk. It may lead to tokens being lost as has happened several times in ETH. From that standpoint, Cardano has followed a bottom up approach in creating a provably secure algorithm for consensus (ledger layer) and then the smart contract platform (computation layer) on top. We know this structured approach is helping the ecosystem in learning from past mistakes. Till now the rollout of Shelley phase of the chain, and now transition to Allegra has been very smooth. We are hopeful this intensity of research and smooth way of releasing software of high quality (along with documentation and community support via Telegram) will continue on our path to scale utility to Billions of users.
Still now these tokens are not treated as security by SEC in the USA. And they are leading in terms of regulations imposed on these tokens. Currently, in the wake of the crackdown on XRP, there has been some discussion of the effect on this on other cryptocurrency. The community is aware of this. But Cardano, ETH, Polkadot, Tezos, EOS and other similar open source chains are fundamentally different that closed source XRP. The SEC has already declared ETH outside the security domain given it is distributed enough and controlled by the open source community. Thus, the same would be applicable for Cardano ADA as well. Thus risk of sudden intervention by legal authorities upon the operation of these chains, is minimal.
Sometimes changes are very hard to introduce into the distributed systems as they are run by thousands of different unrelated stake pool operators and a central chain changes (rolled out by a central organization like IOHK / Emurgo) are to be properly coordinated. This is also the problem with Bitcoin for example, where introduction of updates are super hard.
In order to solve this is, the crypto community is introducing a system of on-chain governance, where features to be rolled out has to be voted for by the community before being introduced. Cardano has Voltaire to support this. For chains like ETH and BTC lack of this governance feature will limit their utility in terms of constant changes required for evolution.
Also, Cardano has introduced a hard fork combinator, which can introduce dynamic changes to the chain without the requirement of the stake pool operators having to do hard forks etc. Thus, when big changes are implemented, this central rollout mechanism is revolutionary and helps in smooth, error free and faster update of this dynamic, distributed and scalable system.
What are the Use Cases of ADA ?
This is a very broad question because it basically asks something in the lines of "What are the use cases for Internet 2. 0 ?" at the birth of internet. We are at the cusp of a financial revolution where we are uprooting the financial backbone of the world and replacing entirely FIAT currency as we know it. All the legacy systems of the last 50 - 100 years are being challenged and the entire banking industry is at the edge of collapse in the coming decade. As this transition takes place, new ways to transact value will replace the current conventional ones. Few revolutionary things to be considered are:
Instant cross border peer-to-peer exchange of value either in form of FIAT or any other established token standard.
Every segment of business creates their own tokens which can be traded in international crypto exchanges.
Multiple blockchains interoperate across one another, serving specific purposes.
Banks are replaced by engineering organizations who are responsible for running services (such as stake pools) that gives the public, exposure to particular value transactions happening in web3.0. For example, farmers might be transacting value across a particular chain and this can be tapped by participating in POS for this chain and so on for other industries.
A particular community creates their own banking systems that benefits the societal values of the community. For example an agricultural community may form their own banking society by issuing their own token that will a unit of transaction for them. When value generation happens in this currency external participants contribute to this ecosystem by staking their wealth with this network. Thus, it becomes a mutually beneficial yet decentralized way to determine the financial fate of this community.
And the list can go on and on... Feel free to send suggestions for the same ...
P.S: Although the question was raised about use cases for ADA, we have not referred to the same in this answer. The Reason being that ADA is the base currency of Cardano blockchain. But this technology allows creation of other native tokens as first class citizen. So if a country wants to issue their currency on Cardano, they can easily do that. And then build the rest of their stuff based on their own token.
But one has to be aware of the difference between native token and ADA. The only differences between any token issued on Cardano and ADA are that the tokens can be destroyed and that only ADA can be used to service fees, rewards, and deposits.
Is it advisable to store all ADA to single wallet address (YOROI or Daedalus) or split into multiple address for less blast radius?
This is a personal choice and has no general answer. When we first deal with Crypto, we have to get used to handling our own money. So all that the banks were doing, we will now have to learn how to do that ourselves. In order to give an example to answer this question.
A person has a family and now has to manage his finance in crypto. So how should we go about it. Again it is a personal choice. We cannot suggest one way or the other. But here can be some questions to ask:
What are the different buckets that I would like to distribute my income into ? Choices may be: daily expenses, family savings, Emergency fund etc.
How should I structure the security of my crypto wallet ? Choices may be: Family account (multiple people should be aware of the security), personal account.
What should be the distribution of funds among the different accounts chosen above and why ?
By answering the above questions, you will find the proper risk assessment and wallet creation strategy.
How can I check if my delegation is already done to the stake Pool LKBH ?
Here are the steps for doing this:
First copy one of the address from the list of many, in the Daedalus 'Receive' section in your wallet where funds are stored.
Visit Cardanoscan.io and fill in this address and press 'Search'. The search result will give you a page with address details. You will see a section called "Controlled Stake Key". That is the address used for staking.
Then visit the following page to see the list of delegators : https://cardanoscan.io/pool/0ce16f30fdae49328160cb3d68e3fd109ca86b580f4f47882307f943?tab=delegators. And here you should find your staking address found in step 2 and see the amount that is delegated.
Firstly most people will be misguided into owning crypto as if it is equity or bonds. Nothing can be further from truth. Crypto is a movement meant to return power back to the people. The core of the crypto movement is 'peer-to-peer' transaction, without the need of any middleman institution. That requires whoever buys the tokens should have the right to take COMPLETE OWNERSHIP of the same. Proper crypto exchanges such as kraken.com, coinbase.com, binance.com allows one to NOT ONLY BUY, BUT TRANSFER THE TOKENS, to personal wallets of users. Description of what are crypto wallets are explained in earlier questions. For example one of the recommended wallets for ADA is Daedalus and Yoroi, because not only are these open source and safe, but also they allow easy integration with hardware such as ledger and Trezor, and allows one to stake the tokens with Stake pools such as ours (LKBH). For more on process of acquiring tokens and transferring to wallets please visit our page.
Some words about how the custodian websites such as eToro and PayPal works. Ideally they should not be touching your crypto without your permission. But guess what, none of the crypto exchanges guarantees you a single cent in case of loss of your crypto. So basically if there is a hack in the exchanges and the tokens get lost, they are not at all responsible for that. The buyers of the token loses their money, and they cannot do anything in that case. The reason behind this is, that the private keys of the wallets which holds the crypto the users bought belongs to the exchanges, and hence they kind of own the crypto. From this the term has come "NOT YOUR KEYS NOT YOUR CRYPTO". Also many of these exchanges uses the user funds to make more profits by trading on short term, and not giving any of that return to the users. So the users are not only at the risk of losing their crypto, but also making the exchanges earning more from their money.
So key takeaways:
Use proper crypto exchanges to buy crypto or exchange fiat to crypto.
After buying transfer them to your private wallet (Hot: exodus, Daedalus, Yoroi etc. or Cold: ledger, Trezor)
Properly manage your own wallet private keys or mnemonic by storing that in a separate place.
If followed one can earn returns, keep their crypto safe and also transfer their crypto to friends, families or business needs.