Cardano Whitepaper

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IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO A​ ​Subjective​ ​Approach CHARLES​ ​HOSKINSON <​[email protected]​> <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 Scripting Sidechains 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 Legacy Cryptocurrency​ ​Interoperability The​ ​Maze​ ​of​ ​Daedalus 4.​ ​Regulation The​ ​False​ ​Dichotomy Metadata Authentication​ ​and​ ​Compliance Marketplace​ ​DAOs 5.​ ​Sustainability 6.​ ​Conclusion 1.​ ​Introduction Motivation Cardano is a project that began in 2015 as an effort to change the way cryptocurrencies are designed and developed. The overall focus beyond a particular set of innovations is to provide a more 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 design principles,​ ​engineering​ ​best​ ​practices​ ​and​ ​avenues​ ​for​ ​exploration.​ ​These​ ​include​ ​the​ ​following: ● 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​ ​to correct​ ​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

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 ● A​ ​long-term​ ​view​ ​on​ ​improving​ ​the​ ​design​ ​of​ ​cryptocurrencies​ ​so​ ​they​ ​can​ ​work​ ​on mobile​ ​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​ ​the needs​ ​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​ ​using a​ ​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​ ​without compromising​ ​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 of cryptocurrencies. There has been a desire to preserve a single notion of consensus around facts​ ​and​ ​events​ ​recorded​ ​in​ ​a​ ​single​ ​ledger,​ ​regardless​ ​of​ ​whether​ ​it​ ​makes​ ​sense. For example, Ethereum has encumbered enormous complexity attempting to become a universal world computer, but s ​ uffers from trivial concerns potentially destroying the system’s ability 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 since the​ ​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 pivotal to​ ​the​ ​long-term​ ​success​ ​of​ ​any​ ​cryptocurrency. As a corollary, enterprise users cannot commit millions of dollars worth of resources to protocols 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

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 needs to be an efficient process through which social consensus can form around a vision for evolving 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 and disintermediate central actors, Bitcoin and its contemporaries have also discarded the need for stable 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 in transactional 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 adoption and​ ​consumer​ ​protection. Sojourn's​ ​End The aggregation of our principled exploration of the cryptocurrency space is two collections of protocols. 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 of regulators 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

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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 secure using a ​rigorous cryptographic model is a modular and flexible design that allows for the composition​ ​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 even different synchronization assumptions. As a network develops from having thousands to millions and even billions of users, the requirements of its consensus algorithm will also change. 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 even less 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 to engage​ ​their​ ​community​ ​in​ ​deciding​ ​what​ ​should​ ​be​ ​a​ ​priority​ ​to​ ​develop​ ​and​ ​fund. 2 ​ ​University​ ​of​ ​Connecticut,​ ​University​ ​of​ ​Athens,​ ​University​ ​of​ ​Edinburgh,​ ​Aarhus​ ​University,​ ​Tokyo Institute​ ​of​ ​Technology ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​5​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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 of superpowers tend to survive political shifts and local disagreements without a currency crisis or mass​ ​exodus. Therefore, it seems that there are elements of legacy systems that are missing from the cryptocurrency industry. We argue — and have inculcated into the Cardano roadmap – that users of a protocol need incentives to understand the social contract behind their protocol and have 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 require some​ ​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 the needs​ ​of​ ​its​ ​users. First, regardless of the success of a crowdsale to bootstrap development, funds will eventually dissipate. Hence, Cardano will include a decentralized trust3 funded from monotonically decreasing​ ​inflation​ ​and​ ​transaction​ ​fees. Any user should be eligible to request funds from the trust by a ballot system and the stakeholders 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​, by starting​ ​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 conversation means 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 to propose 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 the community that results when action is taken, are a direct result of a lack of formal processes for debating​ ​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

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 Where does one go to convince Bitcoin users to adopt Segregated Witness? How should the core developers of Ethereum measure community sentiment for bailing out the DAO? If the community​ ​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 the community. Furthermore, if a large portion of the community is inaccessible or disengaged due to​ ​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 a cryptocurrency 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 change a​ ​cryptocurrency​ ​with​ ​a​ ​formal​ ​language. The use of formal methods, ​machine understandable specifications and merging a treasury with this 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 cannot be​ ​designed. Designing​ ​in​ ​Layers​ – ​ ​ ​Cardano​ ​Settlement​ ​Layer When​ ​designing​ ​great​ ​protocols​ ​and​ ​languages,​ ​one​ ​should​ ​not​ ​look​ ​to​ ​the​ ​future,​ ​but​ ​rather​ ​to the​ ​past.​ ​History​ ​provides​ ​a​ ​litany​ ​of​ ​examples​ ​of​ ​great​ ​ideas​ ​that​ ​are​ ​perfect​ ​on​ ​paper,​ ​yet somehow​ ​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. You​ ​cannot​ ​predict​ ​the​ ​future​ ​so​ ​build​ ​in​ ​wiggle​ ​room 2. Complexity​ ​is​ ​nice​ ​on​ ​paper,​ ​but​ ​simplicity​ ​usually​ ​wins 3. Too​ ​many​ ​cooks​ ​spoil​ ​the​ ​broth 4. Once​ ​a​ ​standard​ ​is​ ​set​ ​it​ ​will​ ​probably​ ​stick​ ​around,​ ​regardless​ ​of​ ​whether​ ​it​ ​is suboptimal 4 ​ ​See​ r​ ational​ ​ignorance ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​7​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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​ ​need for​ ​flexibility​ ​and​ ​the​ ​ability​ ​to​ ​address​ ​arbitrary​ ​complexity​ ​in​ ​a​ ​particular​ ​user’s​ ​transaction.​ ​If successful,​ ​there​ ​will​ ​be​ ​a​ ​need​ ​for​ ​tremendous​ ​computational,​ ​storage​ ​and​ ​network​ ​resources to​ ​accommodate​ ​millions​ ​of​ ​concurrent​ ​transactions. Yet​ ​we​ ​do​ ​not​ ​have​ ​a​ ​digital,​ ​decentralized​ ​Robin​ ​Hood​ ​to​ ​take​ ​from​ ​the​ ​rich​ ​nodes​ ​and​ ​give​ ​to the​ ​poor​ ​ones​ ​in​ ​order​ ​to​ ​achieve​ ​a​ ​fair​ ​network.​ ​Nor​ ​do​ ​we​ ​have​ ​the​ ​luxury​ ​of​ ​trusting​ ​human beneficence​ ​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​ ​want to​ ​know​ ​how​ ​much​ ​value​ ​went​ ​from​ ​Alice​ ​to​ ​Bob,​ ​or​ ​do​ ​we​ ​want​ ​to​ ​get​ ​involved​ ​in​ ​figuring​ ​out the​ ​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​ ​protocol has​ ​to​ ​be​ ​able​ ​to​ ​understand​ ​arbitrary​ ​events,​ ​script​ ​arbitrary​ ​transactions,​ ​permit​ ​arbitration​ ​in cases​ ​of​ ​fraud​ ​and​ ​even​ ​potentially​ ​reverse​ ​transactions​ ​when​ ​new​ ​information​ ​is​ ​made available. Then​ ​one​ ​has​ ​to​ ​make​ ​difficult​ ​design​ ​decisions​ ​about​ ​what​ ​metadata​ ​to​ ​store​ ​for​ ​each transaction.​ ​What​ ​elements​ ​of​ ​the​ ​story​ ​behind​ ​Alice​ ​and​ ​Bob’s​ ​transaction​ ​are​ ​relevant?​ ​Are they​ ​relevant​ ​forever?​ ​When​ ​can​ ​we​ ​throw​ ​away​ ​some​ ​data?​ ​Does​ ​doing​ ​so​ ​violate​ ​the​ ​law​ ​in some​ ​countries? Furthermore,​ ​some​ ​computation​ ​is​ ​private​ ​in​ ​nature.​ ​For​ ​example,​ ​when​ ​calculating​ ​the​ ​average salary​ ​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​ ​the story​ ​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

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 The​ ​value​ ​ledger​ ​is​ ​called​ ​the​ ​Cardano​ ​Settlement​ ​Layer​ ​(CSL).​ ​As​ ​the​ ​purpose​ ​is​ ​to​ ​account​ ​for value,​ ​the​ ​roadmap​ ​has​ ​the​ ​following​ ​goals: 1. Support​ ​two​ ​sets​ ​of​ ​scripting​ ​languages,​ ​one​ ​to​ ​move​ ​value​ ​and​ ​another​ ​to​ ​enhance overlay​ ​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​ ​system increase Scripting Starting​ ​with​ ​the​ ​scripting​ ​language,​ ​transactions​ ​between​ ​addresses​ ​in​ ​a​ ​ledger​ ​require​ ​some form​ ​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​ ​dead address​ ​making​ ​the​ ​funds​ ​irretrievable. Systems​ ​such​ ​as​ ​Bitcoin​ ​provide​ ​an​ ​extremely​ ​inflexible​ ​and​ ​draconian​ ​scripting​ ​language​ ​that is​ ​difficult​ ​to​ ​program​ ​bespoke​ ​transactions​ ​in,​ ​and​ ​to​ ​read​ ​and​ ​understand.​ ​Yet​ ​the​ ​general programmability​ ​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​ ​is a​ ​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​ ​of foundational​ ​elements7.​ ​If​ ​one​ ​assembles​ ​a​ ​financial​ ​periodic​ ​table​ ​of​ ​elements,​ ​then​ ​one​ ​can provide​ ​support​ ​for​ ​an​ ​arbitrarily​ ​large​ ​set​ ​of​ ​compound​ ​transactions​ ​that​ ​will​ ​cover​ ​most,​ ​if​ ​not all,​ ​common​ ​transaction​ ​types​ ​without​ ​requiring​ ​general​ ​programmability. 5 ​ ​Coming​ ​soon​ ​in​ ​a​ ​paper​ ​from​ ​Kiayias,​ ​Zindros​ ​and​ ​Miller 6 ​ ​Specifics​ ​will​ ​be​ ​released​ ​in​ ​an​ ​upcoming​ ​specification.​ ​The​ ​full​ ​language​ ​will​ ​be​ ​supported​ ​in​ ​the Shelley​ ​CSL​ ​release​ ​planned​ ​for​ ​Q4​ ​of​ ​2017 7 ​ ​Project​ ​ACTUS​​ ​has​ ​an​ ​in-depth​ ​elaboration ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​9​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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​ ​of problematic​ ​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​ ​if new​ ​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​ ​to write​ ​custom​ ​transaction​ ​scripts.​ ​For​ ​CSL,​ ​it​ ​will​ ​be​ ​used​ ​for​ ​complex​ ​transactions​ ​required​ ​to add​ ​support​ ​for​ ​other​ ​layers​ ​we​ ​need​ ​to​ ​connect,​ ​such​ ​as​ ​our​ ​sidechains​ ​scheme. Sidechains With​ ​respect​ ​to​ ​sidechains,​ ​Cardano​ ​will​ ​support​ ​a​ ​new​ ​protocol​ ​developed​ ​by​ ​Kiayias,​ ​Miller​ ​and Zindros​ ​(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​ ​and non-interactive​ ​movement​ ​of​ ​funds​ ​from​ ​CSL​ ​to​ ​any​ ​Cardano​ ​Computation​ ​Layer​ ​or​ ​other blockchain​ ​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​ ​black boxes​ ​to​ ​CSL,​ ​yet​ ​the​ ​CSL​ ​user​ ​will​ ​gain​ ​certain​ ​guarantees​ ​about​ ​accounting​ ​and​ ​the​ ​ability​ ​to recall​ ​funds​ ​once​ ​computation​ ​is​ ​complete. Signatures In​ ​order​ ​to​ ​securely​ ​move​ ​value​ ​from​ ​Alice​ ​to​ ​Bob,​ ​Alice​ ​needs​ ​to​ ​prove​ ​she​ ​has​ ​the​ ​right​ ​to move​ ​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​ ​an associated​ ​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​ ​are connected​ ​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​ ​unless someone​ ​has​ ​a​ ​secret​ ​piece​ ​of​ ​knowledge.​ ​The​ ​holder​ ​of​ ​this​ ​piece​ ​of​ ​knowledge​ ​is​ ​said​ ​to​ ​be the​ ​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​ ​which the​ ​scheme​ ​should​ ​be​ ​expected​ ​to​ ​survive​ ​must​ ​be​ ​decided​ ​upon. Second,​ ​there​ ​are​ ​many​ ​enterprises,​ ​governments​ ​and​ ​other​ ​institutions​ ​that​ ​have​ ​preferred,​ ​or in​ ​some​ ​cases,​ ​mandated​ ​the​ ​use​ ​of​ ​a​ ​particular​ ​scheme.​ ​For​ ​example,​ ​the​ ​NSA​ ​maintains​ ​the Suite​ ​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​ ​the cryptocurrency​ ​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​​ ​in particular.​ ​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​ ​are interested​ ​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​ ​signature schemes​ ​through​ ​a​ ​soft​ ​fork.​ ​They​ ​will​ ​be​ ​added​ ​as​ ​needed​ ​and​ ​during​ ​major​ ​updates​ ​planned​ ​in the​ ​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. 8 ​ ​This​ ​is​ ​the​ ​documentation​​ ​for​ ​Cardano’s​ ​HD​ ​Wallet​ ​Implementation.​ ​We​ ​believe​ ​Cardano​ ​is​ ​the​ ​first cryptocurrency​ ​to​ ​support​ ​Ed25519​ ​HD​ ​Wallets 9 ​ ​See​ ​ ​ ​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​ ​through clever​ ​hacks. In​ ​the​ ​case​ ​of​ ​Bitcoin​ ​overlays​ ​such​ ​as​ C ​ olored​ ​Coins​​ ​and​ ​Mastercoin​ ​(now​ ​called​ ​Omni)​,​ ​light clients​ ​are​ ​forced​ ​to​ ​rely​ ​on​ ​trusted​ ​servers.​ ​Also​ ​transaction​ ​fees​ ​still​ ​have​ ​to​ ​be​ ​paid​ ​in bitcoins.​ ​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​ ​has two​ ​independent​ ​UTXO​ ​(unspent​ ​transaction​ ​inputs)​ ​sets​ ​sharing​ ​the​ ​bandwidth,​ ​mempool​ ​and block​ ​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​ ​about a​ ​particular​ ​entity’s​ ​currency. Given​ ​these​ ​problems,​ ​the​ ​benefits​ ​are​ ​tremendous​ ​as​ ​the​ ​primary​ ​token​ ​of​ ​a​ ​multiasset​ ​ledger can​ ​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​ ​the demands​ ​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​ ​of transactions 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​ ​the primary​ ​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​ ​new type​ ​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 or suite of protocols to accomplish a common goal. This goal could be sharing a file as defined by the​ ​BitTorrent​ ​protocol​ ​or​ ​folding​ ​a​ ​protein​ ​using​ ​[email protected] 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 are concurrently 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 not designed 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 replicated among​ ​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 additional transaction processing power. It just means more resources have to be spent to do the same job. More network relaying meaning more nodes have to pass the same messages to keep the whole​ ​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 for more 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 to maintain 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​ ​Layer As​ ​mentioned​ ​previously,​ ​there​ ​are​ ​two​ ​components​ ​of​ ​a​ ​transaction:​ ​the​ ​mechanism​ ​to​ ​send and​ ​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​ ​value to​ ​another​ ​address. The​ ​challenge​ ​behind​ ​modeling​ ​the​ ​reasons​ ​and​ ​conditions​ ​of​ ​value​ ​flow​ ​is​ ​that​ ​they​ ​are immensely​ ​personal​ ​to​ ​the​ ​entities​ ​involved​ ​in​ ​the​ ​most​ ​unpredictable​ ​of​ ​ways.​ ​Lessons​ ​from contract​ ​law​ ​paint​ ​an​ ​even​ ​more​ ​problematic​ ​picture​ ​where​ ​the​ ​actors​ ​themselves​ ​might​ ​not even​ ​be​ ​aware​ ​that​ ​the​ t​ ransaction​ ​does​ ​not​ ​match​ ​commercial​ ​reality​.​ ​We​ ​generally​ ​call​ ​this phenomenon​ ​“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​ ​scorned such​ ​as​ ​the​ ​trafficking​ ​of​ ​child​ ​pornography​ ​or​ ​the​ ​selling​ ​of​ ​state​ ​secrets.​ ​By​ ​deploying​ ​robust 10 ​ ​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 ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​14​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 decentralized​ ​infrastructure,​ ​one​ ​is​ ​now​ ​providing​ ​a​ ​channel​ ​for​ ​this​ ​activity​ ​to​ ​occur​ ​with​ ​the same​ ​censorship​ ​resistance​ ​that​ ​normal​ ​commercial​ ​transactions​ ​enjoy.​ ​It​ ​is​ ​legally​ ​unclear​ ​if the​ ​consensus​ ​nodes​ ​of​ ​the​ ​network​ ​—​ ​which​ ​have​ ​the​ ​incentive​ ​to​ ​become​ ​more​ ​federated​ ​over time​ ​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​ ​is no​ ​lack​ ​of​ ​imagination​ ​of​ ​what​ ​else​ ​a​ ​sufficiently​ ​advanced​ ​cryptocurrency​ ​could​ ​enable​ ​(s ​ ee the​ ​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​ ​is more​ ​about​ ​picking​ ​a​ ​position​ ​and​ ​defending​ ​its​ ​merit.​ ​The​ ​advantage​ ​that​ ​both​ ​Cardano​ ​and Bitcoin​ ​have​ ​is​ ​that​ ​we​ ​have​ ​chosen​ ​to​ ​separate​ ​concerns​ ​to​ ​layers.​ ​With​ ​Bitcoin,​ ​there​ ​is Rootstock​.​ ​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​ ​some form​ ​of​ ​gas​ ​economics​ ​to​ ​meter​ ​computation.​ ​They​ ​also​ ​require​ ​consensus​ ​nodes​ ​willing​ ​to include​ ​the​ ​transactions​ ​in​ ​their​ ​blocks. Thus,​ ​a​ ​functionality​ ​restriction​ ​could​ ​reasonably​ ​protect​ ​users.​ ​So​ ​far,​ ​most​ ​established governments​ ​have​ ​not​ ​taken​ ​the​ ​position​ ​that​ ​the​ ​use​ ​or​ ​maintenance​ ​of​ ​a​ ​cryptocurrency​ ​is​ ​an illegal​ ​act.​ ​Hence,​ ​the​ ​vast​ ​majority​ ​of​ ​users​ ​should​ ​be​ ​comfortable​ ​maintaining​ ​a​ ​ledger​ ​that​ ​is comparable​ ​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,​ ​it is​ ​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​ ​can be​ ​invoked​ ​when​ ​desired​ ​by​ ​a​ ​group​ ​of​ ​likeminded​ ​participants.​ ​The​ ​computations​ ​and​ ​activities are​ ​coordinated​ ​in​ ​a​ ​private​ ​network​ ​and​ ​reference​ ​CSL​ ​only​ ​as​ ​a​ ​trusted​ ​bulletin​ ​board​ ​and​ ​a message​ ​passing​ ​channel​ ​when​ ​necessary. The​ ​key​ ​insight​ ​in​ ​this​ ​case​ ​is​ ​that​ ​there​ ​is​ ​consent,​ ​encapsulation​ ​of​ ​liability​ ​and​ ​privacy.​ ​CSL​ ​is being​ ​used​ ​as​ ​a​ ​digital​ ​commons​ ​for​ ​users​ ​to​ ​meet​ ​and​ ​communicate​ ​—​ ​like​ ​a​ ​park​ ​would​ ​host​ ​a private​ ​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​ ​for blockchain​ ​bloat.​ ​Thus,​ ​it​ ​improves​ ​the​ ​scale​ ​of​ ​the​ ​system. Cardano’s​ ​research​ ​efforts​ ​towards​ ​this​ ​library​ ​are​ ​centralized​ ​at​ ​our​ ​Tokyo​ ​Tech​ ​laboratory​ ​with some​ ​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​ ​available in​ ​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​ ​the process​ ​of​ ​rigorously​ ​formalizing​ ​the​ ​Ethereum​ ​Virtual​ ​Machine​ ​using​ ​the​ K ​ -framework12​ ​in partnership​ ​with​ ​a​ ​team​ ​from​ ​the​ ​University​ ​of​ ​Illinois. The​ ​result​ ​of​ ​this​ ​analysis​ ​will​ ​inform​ ​the​ ​most​ ​optimal​ ​way​ ​to​ ​design​ ​a​ ​replicated​ ​and​ ​eventually distributed​ ​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​ ​tells it​ ​to​ ​do​ ​with​ ​the​ ​security​ ​risks​ ​minimized. There​ ​are​ ​still​ ​unresolved​ ​questions​ ​about​ ​the​ ​gas​ ​economics​ ​proposed​ ​by​ ​Ethereum​ ​and​ ​how​ ​it relates​ ​to​ ​work​ ​such​ ​as​ ​Jan​ ​Hoffmann​ ​et​ ​al’s​ ​resource​ ​aware​ ​ML​​ ​and​ ​the​ ​broader​ ​study​ ​of resource​ ​estimation​ ​for​ ​computation.​ ​We​ ​are​ ​also​ ​curious​ ​about​ ​the​ ​level​ ​of​ ​language independence​ ​of​ ​the​ ​virtual​ ​machine.​ ​For​ ​example,​ ​the​ ​Ethereum​ ​project​ ​has​ ​expressed​ ​desire for​ ​transition​ ​from​ ​their​ ​current​ ​VM​ ​to​ ​Web​ ​Assembly. The​ ​next​ ​effort​ ​is​ ​in​ ​developing​ ​a​ ​reasonable​ ​programming​ ​language​ ​to​ ​express​ ​stateful contracts​ ​that​ ​will​ ​be​ ​called​ ​as​ ​services​ ​by​ ​decentralized​ ​applications.​ ​For​ ​this​ ​task,​ ​we​ ​have chosen​ ​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​ ​code for​ ​application​ ​developers​ ​to​ ​use​ ​in​ ​their​ ​projects.​ ​We​ ​will​ ​also​ ​develop​ ​a​ ​specialized​ ​set​ ​of​ ​tools for​ ​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. 12 ​ ​Invented​ ​by​ ​Professor​ ​Grigore​ ​Rosu​ ​et.​ ​al.,​ ​K​ ​is​ ​a​ ​universal​ ​framework​ ​for​ ​language​ ​independent machine​ ​executable​ ​semantics.​ ​Prior​ ​to​ ​our​ ​work,​ ​it​ ​has​ ​been​ ​used​ ​to​ ​model​ ​C,​ ​Java​ ​and​ ​JavaScript 13 ​ ​Meaning​ ​that​ ​different​ ​consensus​ ​nodes​ ​run​ ​different​ ​smart​ ​contracts.​ ​Also​ ​known​ ​as​ ​state​ ​sharding ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​16​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 The​ ​difference​ ​is​ ​that​ ​Ouroboros​ ​can​ ​be​ ​confirmed​ ​to​ ​permit​ ​both​ ​permissioned​ ​and permissionless​ ​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​ ​is controlled​ ​by​ ​a​ ​diverse​ ​and​ ​increasingly​ ​more​ ​decentralized​ ​set​ ​of​ ​actors​ ​or​ ​their​ ​delegated assigns.​ ​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​ ​the protocol.​ ​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​ ​with the​ ​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​ ​enclave means​ ​that​ ​any​ ​actor​ ​with​ ​a​ ​sufficiently​ ​capable​ ​HSM​ ​will​ ​be​ ​able​ ​to​ ​verify​ ​facts​ ​about​ ​an​ ​actor in​ ​an​ ​unforgeable​ ​way​ ​without​ ​the​ ​verifier​ ​knowing​ ​the​ ​identity​ ​of​ ​the​ ​actor.​ ​For​ ​example,​ ​Bob​ ​is not​ ​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​ ​two years​ ​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​ ​to use.​ ​Both​ ​are​ ​also​ ​heavily​ ​vetted,​ ​well​ ​designed​ ​and​ ​based​ ​upon​ ​years​ ​of​ ​iteration​ ​from​ ​some​ ​of the​ ​largest​ ​and​ ​best​ ​funded​ ​hardware​ ​security​ ​teams. ​ ​See​ h 14 ​ ttp://​​ ​from​ ​Cornell University ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​17​ ​of​ ​44

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​ ​the United​ ​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​ ​deny its​ ​existence​ ​and​ ​the​ ​zeal​ ​with​ ​which​ ​major​ ​governments​ ​have​ ​enforced​ ​it.​ ​However,​ ​the challenge​ ​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​ ​of jurisdictions?​ ​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​ ​the most​ ​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​ ​is fair​ ​and​ ​reasonable.​ ​We​ ​have​ ​chosen​ ​to​ ​divide​ ​between​ ​individual​ ​rights​ ​and​ ​the​ ​rights​ ​of​ ​a marketplace. 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​ ​to abuse​ ​their​ ​sovereign​ ​power​ ​for​ ​the​ ​personal​ ​gain​ ​of​ ​corrupt​ ​politicians,​ ​as​ ​seen​ ​in​ ​Venezuela and​ ​Zimbabwe.​ ​Cryptocurrencies​ ​have​ ​to​ ​be​ ​engineered​ ​to​ ​the​ ​lowest​ ​common​ ​denominator. 15 ​ ​See​ ​BIP39​ h ​ ttps:// ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​18​ ​of​ ​44

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​ ​jurisdiction to​ ​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​ ​of Cardano​ ​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,​ ​multijurisdictional transactions​ ​are​ ​simply​ ​too​ ​expensive​ ​in​ ​legacy​ ​systems​ ​to​ ​provide​ ​high​ ​assurance​ ​of​ ​recourse in​ ​the​ ​event​ ​of​ ​fraud​ ​or​ ​a​ ​commercial​ ​dispute.​ ​When​ ​one​ ​sends​ ​their​ ​wire​ ​transfer​ ​to​ ​the Nigerian​ ​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​ ​contracts the​ ​terms​ ​and​ ​conditions​ ​of​ ​commercial​ ​relationships​ ​can​ ​be​ ​better​ ​controlled.​ ​If​ ​all​ ​assets​ ​are digital​ ​and​ ​can​ ​be​ ​solely​ ​expressed​ ​on​ ​CSL,​ ​strong​ ​guarantees​ ​of​ ​fraud-free​ ​commerce​ ​can​ ​be gained. Second,​ ​the​ ​use​ ​of​ ​HSMs​ ​to​ ​provide​ ​an​ ​identity​ ​space​ ​where​ ​PII​ ​is​ ​not​ ​leaked​ ​but​ ​yet​ ​used​ ​to authenticate​ ​and​ ​credential​ ​actors​ ​should​ ​provide​ ​a​ ​global​ ​reputation​ ​system​ ​and​ ​allow​ ​for much​ ​lower​ ​cost​ ​regulated​ ​activities​ ​to​ ​be​ ​conducted,​ ​such​ ​as​ ​online​ ​gaming​ ​with​ ​automated tax​ ​compliance​ ​or​ ​decentralized​ ​exchanges. Finally,​ ​in​ ​Cardano’s​ ​roadmap​ ​is​ ​the​ ​creation​ ​of​ ​a​ ​modular​ ​regulation​ D ​ AO​​ ​that​ ​can​ ​be customized​ ​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. 16 ​ ​As​ ​an​ ​example​ ​of​ ​a​ ​countermeasure​ ​to​ ​capital​ ​flow,​ ​see​ ​the​ ​Hawala​ ​Banking​ ​System 17 ​ ​See​ A ​ dvance-fee​ ​Scam ​ ​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 of peer​ ​review,​ ​and​ ​shameless​ ​theft​ ​of​ ​great​ ​ideas​ ​when​ ​uncovered. The remaining sections each cover a particular aspect of focus we have decided is a core component of our project. Some were selected due to a desire to improve the overall best practices​ ​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 for what 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 existing banking system, where many live on less than a few dollars a day, have no stable identity and credit​ ​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 — or at​ ​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​ ​and their​ ​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,​ ​endless debates​ ​and​ ​a​ ​firm​ ​concept​ ​of​ ​trade​ ​offs​ ​are​ ​necessary​ ​to​ ​ensure​ ​a​ ​protocol​ ​is​ ​useful.​ ​Yet​ ​these alone​ ​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​ ​“move fast​ ​and​ ​break​ ​things”​ ​startup​ ​mentality​ ​driven​ ​by​ ​youth,​ ​greed​ ​and​ ​passion.​ ​The​ ​antithesis​ ​is​ ​a slow,​ ​methodical​ ​and​ ​academically​ ​oriented​ ​approach​ ​motivated​ ​by​ ​a​ ​desire​ ​to​ ​solidify​ ​the innovations​ ​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​ ​by market​ ​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 achieve the​ ​claims? This lack of synthesis and respect for process is one of the primary reasons IOHK wanted to build Cardano. Our hope was to develop a reference project that would serve as an example of how​ ​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 to acknowledge 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​ ​​ ​for​ ​a​ ​comprehensive​ ​listing​ ​by​ ​market​ ​capitalization 18 19 ​ ​Ethereum​ ​has​ ​a​ ​semi-formal​ ​specification​ ​known​ ​as​ ​the​ ​Yellow​ ​Paper;​ ​however,​ ​the​ ​EVM​ ​semantics​ ​are not​ ​fully​ ​specified​ ​nor​ ​are​ ​sufficient​ ​for​ ​a​ ​full​ ​implementation​ ​of​ ​the​ ​protocol. ​ ​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 of programming 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 needs to​ ​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 with a 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 and a requirement to re-verify the correctness of prior step22. It is costly, time consuming, and at times​ ​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 with for​ ​the​ ​next​ ​100​ ​years,​ ​we​ ​want​ ​to​ ​demand​ ​some​ ​tedium​ ​and​ ​rigor​ ​from​ ​its​ ​designers. 20 ​ ​Accepted​ ​Paper​ ​Number​ ​71​ ​of​ ​the​ ​IACR’s​ ​Annual​ ​Crypto​ ​Conference​ ​in​ ​California 21 ​ ​By​ K ​ awin​ ​Worrasangasilpa​​ ​under​ ​the​ ​supervision​ ​of​ ​Professor​ ​Lawrence​ ​Paulson 22 ​ ​Following​ ​a​ ​tangent​ ​for​ ​a​ ​sake​ ​of​ ​levity,​ ​one​ ​should​ ​watch​ ​Professor​ ​Halmos’s​ ​discussion​ ​about​ ​how​ ​to write​ ​a​ ​math​ ​textbook ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​22​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 Functional​ ​Sins Moving into more opinionated territory, the tools, languages and methodologies used in software development are more artifacts of religious providence than objective reality. Source code 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 ​ lectron that we are calling Daedalus. We have chosen to has been encapsulated in a fork of E ​ ey-value use the web architectural model where possible, and for our database, we opted for a k 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 the development​ ​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 architecture means​ ​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 lack reasonable​ ​libraries​ ​and​ ​have​ ​a​ ​subpar​ ​development​ ​experience. For Cardano, the choice came down to Ocaml and Haskell. Ocaml is a wonderful language with a great community, good tooling, reasonable development experience and a great legacy in the formal​ ​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 23 ​ editas​​ ​that we​ ​inherited​ ​from​ ​the​ ​pseudonymous​ ​Bill​ ​White ​ ​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 a high 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 a reasonable 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 not surrendering its own. Furthermore, Haskell’s modularity and composability has allowed us to use​ ​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 work of commercial entities like ​Galois​, F ​ P Complete and W ​ ell-Typed​. As a consequence, Haskell can be​ ​used​ ​to​ ​write​ ​production​ ​applications. 24 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 important when​ ​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 a significant social and technological effort led by technologists like ​Michael Snoyman through a platform​ ​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 ​ ixOps should produce exactly the same build artifacts. Through stackage, we have been using N to​ ​achieve​ ​reproducibility​ ​with​ ​great​ ​success. Finally, the talent pool of developers specializing in Haskell is reasonably large — compared to its 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. 24 ​ ​Bryan​ ​O'Sullivan​ ​provides​ ​a​ ​nice​ ​talk​ ​about​ ​Haskell’s​ ​industrial​ ​use​ h ​ ere​. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​24​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 Formal​ ​Specification​ ​and​ ​Verification A​ ​significant​ ​strength​ ​of​ ​developing​ ​a​ ​protocol​ ​using​ ​a​ ​provably​ ​correct​ ​security​ ​model​ ​is​ ​that​ ​it provides​ ​a​ ​guaranteed​ ​limit​ ​of​ ​adversarial​ ​power.​ ​One​ ​is​ ​given​ ​a​ ​contract​ ​that​ ​as​ ​long​ ​as​ ​the protocol​ ​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​ ​is extraordinary.​ ​And,​ ​of​ ​course,​ ​it​ ​is​ ​not​ ​entirely​ ​true. Reality​ ​introduces​ ​factors​ ​and​ ​circumstances​ ​that​ ​prevent​ ​the​ ​utopia​ ​of​ ​pure​ ​security​ ​and correct​ ​behavior​ ​from​ ​existing.​ ​Implementations​ ​can​ ​be​ ​wrong.​ ​Hardware​ ​can​ ​introduce​ ​attack vectors​ ​previously​ ​unconsidered.​ ​The​ ​security​ ​model​ ​might​ ​be​ ​insufficient​ ​and​ ​not​ ​conform​ ​to real​ ​life​ ​use. A​ ​judgement​ ​call​ ​is​ ​needed​ ​about​ ​how​ ​much​ ​specification,​ ​rigor​ ​and​ ​checking​ ​is​ ​demanded​ ​for​ ​a protocol.​ ​For​ ​example,​ ​endeavors​ ​like​ ​the​ S ​ eL4​ ​Microkernel​ ​project​​ ​are​ ​a​ ​prime​ ​example​ ​of​ ​an​ ​all out​ ​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​ ​a serious​ ​security​ ​vulnerability​ ​if​ ​not​ ​properly​ ​implemented. Should​ ​all​ ​cryptographic​ ​software​ ​require​ ​the​ ​same​ ​Herculean​ ​effort?​ ​Or​ ​can​ ​one​ ​choose​ ​a​ ​less vigorous​ ​path​ ​that​ ​produces​ ​equivalent​ ​outcomes?​ ​Also​ ​does​ ​it​ ​matter​ ​if​ ​the​ ​protocol​ ​is perfectly​ ​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​ ​the domains​ ​of​ ​cryptography​ ​and​ ​distributed​ ​computing,​ ​proofs​ ​tend​ ​to​ ​be​ ​very​ ​subtle,​ ​long, complicated​ ​and​ ​sometimes​ ​quite​ ​technical.​ ​This​ ​implies​ ​that​ ​human​ ​driven​ ​checking​ ​can​ ​be tedious​ ​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. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​25​ ​of​ ​44

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​ ​functional parameters​ ​that​ ​satisfy​ ​an​ ​equation​ ​or​ ​inequation,​ ​or​ ​alternatively​ ​showing​ ​that​ ​such​ ​parameters do​ ​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​ ​and semantic​ ​errors. Isabelle/HOL​, on the other hand, is a more expressive and diverse tool which can be used to both specify and verify implementation. Isabelle is a generic theorem solver working with higher-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​ ​and the​ ​toolsets​ ​available.​ ​One​ ​of​ ​the​ ​primary​ ​reasons​ ​for​ ​choosing​ ​Haskell​ ​is​ ​that​ ​it​ ​provides​ ​the right​ ​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​ ​the specification​ ​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​ ​of building​ ​a​ ​foundation​ ​upon​ ​provable​ ​security,​ ​then​ ​the​ ​implementation​ ​should​ ​be​ ​what​ ​was actually​ ​proposed​ ​on​ ​paper. Transparency A​ ​final​ ​question​ ​when​ ​discussing​ ​the​ ​science​ ​and​ ​engineering​ ​of​ ​developing​ ​a​ ​cryptocurrency​ ​is how​ ​to​ ​address​ ​transparency.​ ​Design​ ​decisions​ ​are​ ​not​ ​Boolean​ ​and​ ​ethereal,​ ​coming​ ​to developers​ ​in​ ​dreams​ ​and​ ​then​ ​suddenly​ ​becoming​ ​canon.​ ​They​ ​are​ ​derived​ ​from​ ​experience, debate​ ​and​ ​lessons​ ​learned​ ​from​ ​earlier​ ​mistakes. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​26​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 The​ ​challenge​ ​is​ ​that​ ​a​ ​totally​ ​transparent​ ​development​ ​process​ ​could​ ​influence​ ​discussion​ ​to become​ ​more​ ​theatrical​ ​than​ ​evidence​ ​based.​ ​Egos,​ ​attempts​ ​to​ ​win​ ​over​ ​a​ ​community,​ ​and​ ​fear of​ ​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​ ​the community​ ​that​ ​has​ ​entrusted​ ​progress​ ​to​ ​a​ ​set​ ​of​ ​core​ ​developers,​ ​with​ ​the​ ​need​ ​for​ ​freedom of​ ​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​ ​and actually​ ​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​ ​completeness 2. Review​ ​of​ ​all​ ​Cardano​ ​documentation​ ​for​ ​correctness​ ​and​ ​usefulness 3. Verifying​ ​the​ ​claims​ ​that​ ​the​ ​protocols​ ​produced​ ​by​ ​the​ ​scientists​ ​are​ ​fully​ ​implemented To​ ​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​ ​to ensure​ ​that​ ​developers​ ​are​ ​on​ ​track,​ ​but​ ​it​ ​is​ ​not​ ​sufficient​ ​to​ ​completely​ ​guarantee​ ​that​ ​the project​ ​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​ ​technique used​ ​by​ ​the​ ​Ethereum​ ​project​ ​to​ ​avoid​ ​a​ ​monoculture​ ​forming​ ​around​ ​a​ ​single​ ​set​ ​of​ ​ideas​ ​or developers. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​27​ ​of​ ​44

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​ ​to be​ ​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​ ​to Cardano.​ ​If​ ​the​ ​internet​ ​(a​ ​product​ ​of​ ​standards)​ ​through​ ​IETF​ ​can​ ​reach​ ​consensus​ ​about​ ​what core​ ​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​ ​for entities​ ​interfacing​ ​with​ ​Cardano​ ​to​ ​use​ ​if​ ​desired​ ​and​ ​it​ ​is​ ​the​ ​Cardano​ ​Foundation’s​ ​prerogative to​ ​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​ ​to achieve​ ​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​ ​grand myopia​ ​of​ ​cryptocurrencies.​ ​They​ ​are​ ​mostly​ ​divorced​ ​from​ ​human​ ​reality. People​ ​make​ ​mistakes.​ ​People​ ​change​ ​their​ ​minds.​ ​People​ ​do​ ​not​ ​always​ ​fully​ ​understand​ ​the business​ ​relationships​ ​they​ ​are​ ​agreeing​ ​to​ ​enter.​ ​People​ ​get​ ​misled​ ​and​ ​defrauded. Circumstances​ ​change​ ​on​ ​an​ ​individual​ ​and​ ​state​ ​level​ ​that​ ​require​ ​unique​ ​solutions.​ ​Belaboring this​ ​point,​ ​most​ ​contracts​ ​contain​ f​ orce​ ​majeure​ ​clauses​. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​28​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 However,​ ​cryptocurrencies​ ​seek​ ​to​ ​toss​ ​out​ ​human​ ​understanding,​ ​compassion​ ​and​ ​judgement in​ ​exchange​ ​for​ ​an​ ​uncaring​ ​digital​ ​judge​ ​perfectly​ ​bound​ ​to​ ​a​ ​constitution​ ​without​ ​consideration to​ ​fairness​ ​or​ ​outcome.​ ​Given​ ​that​ ​humans​ ​have​ ​always​ ​tried​ ​and​ ​will​ ​continue​ ​to​ ​attempt​ ​to change​ ​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​ ​still requires​ ​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​ ​can drift​ ​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​ ​with legacy​ ​financial​ ​systems​ ​(the​ ​non-cryptocurrency​ ​world).​ ​Second,​ ​interoperability​ ​with​ ​other cryptocurrencies. Legacy Fintech 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, business processes, and other domains involved in the accounting, transformation and movement of value. It is unreasonable to suggest that, simply because one technology is superior, the rest of the ecosystem 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. Many banks still use back ends written in Cobol. Once infrastructure is known to work and meets business requirements, there is usually little incentive to upgrade or refine software and protocols​ ​for​ ​a​ ​consumer’s​ ​benefit​ ​outside​ ​of​ ​compliance​ ​or​ ​security​ ​concerns. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​29​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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 of interoperability? 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 and belief 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 and Cardano. 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 encode them​ ​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 an always​ ​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,​ ​maintain and​ ​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​ ​resolve these​ ​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​ ​source and​ ​content.​ ​Sources​ ​have​ ​some​ ​notion​ ​of​ ​credibility​ ​and​ ​incentive​ ​to​ ​deceive​ ​or​ ​maintain honesty.​ ​Content​ ​can​ ​be​ ​arbitrarily​ ​encoded. Given​ ​that​ ​we​ ​intend​ ​on​ ​supporting​ ​trusted​ ​hardware​ ​in​ ​our​ ​protocol​ ​stack,​ ​we​ ​have​ ​chosen​ ​to explore​ ​adding​ ​support​ ​for​ ​Professor​ ​Ari​ ​Juel​ ​et​ ​al.’s​ ​Town​ ​Crier​ ​Protocol​.​ ​Assuming​ ​the existence​ ​of​ ​a​ ​credible​ ​set​ ​of​ ​data​ ​sources,​ ​Town​ ​Crier​ ​permits​ ​the​ ​secure​ ​scraping​ ​of​ ​web content​ ​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​ ​|​ ​06/28/2017 A​ ​bootstrap​ ​list​ ​of​ ​sources​ ​will​ ​be​ ​provided​ ​by​ ​Emurgo,​ ​IOHK​ ​and​ ​the​ ​Cardano​ ​Foundation.​ ​Later this​ ​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​ ​the veracity,​ ​timeliness​ ​and​ ​completeness​ ​are​ ​established,​ ​protocols​ ​can​ ​behave​ ​in​ ​a​ ​reliable​ ​and deterministic​ ​way​ ​—​ ​value​ ​is​ ​more​ ​delicate. Once​ ​tokenized,​ ​value​ ​should​ ​behave​ ​like​ ​a​ ​unique​ ​object.​ ​Information​ ​can​ ​be​ ​copied​ ​and passed​ ​around,​ ​but​ ​a​ ​token​ ​representing​ ​ownership​ ​of​ ​something​ ​(say​ ​a​ ​vehicle​ ​title)​ ​cannot​ ​be cloned​ ​and​ ​traded​ ​on​ ​two​ ​different​ ​ledgers.​ ​This​ ​act​ ​would​ ​effectively​ ​destroy​ ​the​ ​integrity​ ​of​ ​the system. 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​ ​the exchange’s​ ​representation​ ​of​ ​his​ ​Bitcoin​ ​on​ ​their​ ​ledger.​ ​In​ ​the​ ​case​ ​of​ ​MtGOX,​ ​their​ ​ledger​ ​did not​ ​conform​ ​to​ ​reality,​ ​causing​ ​the​ ​users​ ​to​ ​lose​ ​everything. The​ ​problem​ ​is​ ​further​ ​complicated​ ​by​ ​the​ ​need​ ​for​ ​legacy​ ​systems​ ​to​ ​recognize​ ​tokens​ ​living​ ​in a​ ​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​ ​metadata to​ ​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​ ​a user​ ​issued​ ​asset. While​ ​Cardano​ ​would​ ​track​ ​ownership​ ​precisely​ ​and​ ​provide​ ​all​ ​the​ ​features​ ​we​ ​have​ ​come​ ​to love​ ​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

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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​ ​early days​ ​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​​ ​and ICANN’s​ ​DNS​ ​system​​ ​have​ ​been​ ​implemented.​ ​Given​ ​that​ ​we​ ​enjoy​ ​the​ ​modern​ ​web,​ ​these solutions​ ​are​ ​both​ ​scalable​ ​and​ ​practical.​ ​But​ ​they​ ​do​ ​not​ ​answer​ ​a​ ​more​ ​commercially​ ​oriented question​ ​of​ ​reliability,​ ​trustworthiness​ ​and​ ​other​ ​meta​ ​characteristics​ ​necessary​ ​for​ ​determining if​ ​one​ ​wants​ ​to​ ​do​ ​business​ ​with​ ​the​ ​entity. Multi-sided​ ​marketplace​ ​hosts​ ​like​ ​eBay​ ​have​ ​constructed​ ​a​ ​business​ ​model​ ​on​ ​providing​ ​some of​ ​this​ ​metadata​ ​alongside​ ​a​ ​framework​ ​to​ ​complete​ ​transactions.​ ​Judgements​ ​about​ ​the quality​ ​of​ ​content,​ ​events​ ​and​ ​businesses​ ​are​ ​often​ ​deeply​ ​influenced​ ​solely​ ​by​ ​online​ ​ratings from​ ​trusted​ ​sources26. The​ ​part​ ​of​ ​this​ ​point​ ​relevant​ ​to​ ​Cardano​ ​is​ ​a​ ​question​ ​of​ ​centralization​ ​of​ ​reputation.​ ​One​ ​of our​ ​goals​ ​for​ ​Cardano​ ​is​ ​to​ ​provide​ ​a​ ​financial​ ​stack​ ​for​ ​the​ ​developing​ ​world.​ ​A​ ​key​ ​to​ ​this​ ​effort is​ ​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​ ​project and​ ​defeats​ ​the​ ​broader​ ​point​ ​of​ ​using​ ​a​ ​cryptocurrency. Fortunately,​ ​the​ ​same​ ​mechanisms​ ​used​ ​in​ ​voting​ ​for​ ​treasury​ ​ballots,​ ​adding​ ​sources​ ​to​ ​a​ ​list​ ​of trusted​ ​data​ ​feeds​ ​and​ ​forking​ ​a​ ​protocol​ ​can​ ​be​ ​reused​ ​to​ ​establish​ ​a​ ​reputation​ ​space.​ ​It​ ​is​ ​an open​ ​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 25 ​ ​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. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​32​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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​ ​trading or​ ​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​ ​or some​ ​other​ ​powerbroker. For​ ​Cardano,​ ​we​ ​are​ ​integrating​ ​a​ ​new​ ​sidechain​ ​protocol​ ​developed​ ​by​ ​Kiayias,​ ​Miller​ ​and Zindros.​ ​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​ ​user base.​ ​To​ ​help​ ​accelerate​ ​this​ ​growth,​ ​Cardano​ ​SL​ ​supports​ ​a​ ​restricted​ ​version​ ​of​ ​Plutus​ ​for interoperability​ ​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, new transaction types, systems to assess credibility and the flow of information cannot be scoped to just 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 a user 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 for users willing to install them. Both approaches gave us the modern web alongside all its security horrors. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​33​ ​of​ ​44

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 be pulled 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 expected accounting and security features that are industry standards, such as spending passwords and BIP39. 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 and database 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 just another application for a Daedalus user. We also intend on exploring extremely unique features such​ ​as​ ​a​ ​universal​ ​key​ ​management​ ​service​ ​running​ ​solely​ ​in​ ​Intel​ ​SGX. 27 ​ ​Which​ ​is​ ​already​ ​available​ ​at​ d ​ ​ ​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 to encourage​ ​all​ ​cryptocurrencies​ ​to​ ​enjoy​ ​better​ ​interoperability​ ​and​ ​security. 4.​ ​Regulation The​ ​False​ ​Dichotomy As​ ​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​ ​of the​ ​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​ ​always be​ ​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​ ​to correct​ ​bad​ ​events.​ ​The​ ​unique​ ​challenge​ ​cryptocurrencies​ ​face​ ​is​ ​that​ ​they​ ​are​ ​a​ ​product​ ​of regulatory​ ​and​ ​monetary​ ​failure28. Culturally,​ ​many​ ​in​ ​cryptocurrencies​ ​consider​ ​government​ ​action​ ​to​ ​be​ ​corrupt,​ ​inept​ ​or ineffective.​ ​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​ ​of cryptocurrencies. On​ ​the​ ​other​ ​hand,​ ​counting​ ​exchange​ ​failures​ ​and​ ​historic​ ​events,​ ​more​ ​than​ ​10​ ​percent​ ​of Bitcoin​ ​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​ ​account for​ ​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: 28 The​ ​Times​ ​03/Jan/2009​ ​Chancellor​ ​on​ ​brink​ ​of​ ​second​ ​bailout​ ​for​ ​banks ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​35​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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,​ ​governments and​ ​international​ ​regulators.​ ​It​ ​is​ ​a​ ​well​ ​understood​ ​game​ ​with​ ​leakage​ ​occurring​ ​only​ ​on​ ​the cash​ ​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​ ​treats financial​ ​privacy​ ​like​ ​social​ ​media​ ​content.​ ​There​ ​is​ ​none​ ​and​ ​one​ ​cannot​ ​opt​ ​out.​ ​Hence​ ​we have​ ​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​ ​their users.​ ​Or​ ​he​ ​can​ ​adopt​ ​a​ ​more​ ​principled,​ ​but​ ​anarchistic,​ ​philosophy​ ​that​ ​divorces​ ​itself​ ​from current​ ​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​ ​usually concerned​ ​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​ ​a global​ ​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,​ ​how funds​ ​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​ ​to inconvenience.​ ​Counterparties​ ​need​ ​certainty​ ​as​ ​well. But​ ​how​ ​exactly​ ​does​ ​one​ ​move​ ​from​ ​the​ ​abstract​ ​to​ ​an​ ​actual​ ​system?​ ​What​ ​should​ ​something practical​ ​and​ ​legal​ ​look​ ​like?​ ​We​ ​have​ ​broken​ ​our​ ​solution​ ​into​ ​three​ ​categories:​ ​metadata, authentication​ ​and​ ​compliance​ ​as​ ​well​ ​as​ ​marketplace​ ​DAOs. 29 ​ ​The​ ​reader​ ​should​ ​consider​ ​picking​ ​up​ ​a​ ​copy​ ​of​ ​David​ ​Wolman’s​ ​The​ ​End​ ​of​ ​Money​.​ ​It​ ​covers​ ​the international​ ​movement​ ​towards​ ​cash​ ​disappearing. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​36​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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​ ​a Toyota​ ​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.​ ​Sadly in​ ​our​ ​current​ ​fiat​ ​based​ ​system,​ ​most​ ​consumers​ ​never​ ​see​ ​how​ ​rich​ ​in​ ​metadata​ ​their transactions​ ​are​ ​or​ ​who​ ​they​ ​are​ ​shared​ ​with30. For​ ​Cardano,​ ​we​ ​acknowledge​ ​that​ ​users​ ​could​ ​need​ ​or​ ​are​ ​legally​ ​required​ ​to​ ​share transactional​ ​metadata​ ​with​ ​certain​ ​actors​ ​like​ ​tax​ ​authorities.​ ​But​ ​we​ ​believe​ ​this​ ​sharing​ ​has​ ​to be​ ​at​ ​the​ ​user’s​ ​consent. We​ ​also​ ​believe​ ​that​ ​blockchain​ ​systems​ ​have​ ​tremendous​ ​power​ ​to​ ​eliminate​ ​fraud,​ ​waste​ ​and abuse​ ​by​ ​providing​ ​auditability,​ ​timestamping​ ​and​ ​immutability.​ ​Thus​ ​some​ ​metadata​ ​should​ ​be posted​ ​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​ ​label transactions​ ​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​ ​and encrypted​ ​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 30 Department​ ​in​ ​the​ ​war​ ​on​ ​terrorism​ ​in​ T ​ reasury’s​ ​War​.​ ​It​ ​provides​ ​a​ ​comprehensive​ ​view​ ​into​ ​how​ ​the current​ ​structure​ ​of​ ​global​ ​financial​ ​markets​ ​can​ ​be​ ​used​ ​for​ ​geopolitical​ ​ends. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​37​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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​ ​(see HD​ ​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​ ​the ownership​ ​of​ ​funds.​ ​For​ ​example,​ ​while​ ​there​ ​might​ ​be​ ​sufficient​ ​funds​ ​to​ ​buy​ ​something​ ​(for example​ ​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​ ​be destroyed.​ ​Compliance​ ​information​ ​is​ ​commercially​ ​valuable.​ ​It​ ​could​ ​be​ ​stolen​ ​for​ ​identity​ ​theft or​ ​resold​ ​where​ ​regulations​ ​permit. For​ ​Cardano,​ ​we​ ​want​ ​to​ ​innovate​ ​as​ ​much​ ​as​ ​possible.​ ​On​ ​the​ ​software​ ​side​ ​of​ ​protocols,​ ​there is​ ​little​ ​to​ ​provide​ ​a​ ​guarantee​ ​that​ ​the​ ​receiver​ ​of​ ​compliance​ ​information​ ​will​ ​behave​ ​within​ ​a scope​ ​of​ ​conduct.​ ​However,​ ​on​ ​the​ ​hardware​ ​side​ ​of​ ​protocols,​ ​using​ ​trusted​ ​hardware,​ ​one​ ​can leverage​ ​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​ ​the policies​ ​it​ ​was​ ​transmitted​ ​under.​ ​We​ ​believe​ ​that​ ​both​ ​uniform​ ​standards​ ​could​ ​emerge​ ​and also​ ​that​ ​this​ ​method​ ​will​ ​reduce​ ​risk​ ​to​ ​verifiers​ ​by​ ​preventing​ ​the​ ​loss​ ​of​ ​customer​ ​data​ ​from hackers. As​ ​a​ ​corollary​ ​to​ ​this​ ​effort,​ ​the​ ​layered​ ​model​ ​we​ ​propose​ ​for​ ​Cardano​ ​separating​ ​value​ ​from computation​ ​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​ ​and potentially​ ​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

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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​ ​timeline also​ ​assumes​ ​the​ ​ability​ ​to​ ​collaborate​ ​with​ ​ARM​ ​and​ ​Intel​ ​in​ ​order​ ​to​ ​get​ ​code​ ​signed​ ​to​ ​run​ ​on their​ ​hardware31. Marketplace​ ​DAOs The​ ​two​ ​previous​ ​sections​ ​covered​ ​the​ ​generation​ ​and​ ​movement​ ​of​ ​information​ ​assuming​ ​the existence​ ​of​ ​some​ ​external​ ​system.​ ​To​ ​ensure​ ​legacy​ ​interoperability,​ ​these​ ​features​ ​will​ ​always be​ ​necessary,​ ​but​ ​they​ ​do​ ​not​ ​address​ ​blockchain​ ​based​ ​regulation. Smart​ ​contracts​ ​enable​ ​a​ ​completely​ ​new​ ​kind​ ​of​ ​commercial​ ​system​ ​where​ ​relationships​ ​are deterministic,​ ​self-enforcing​ ​and​ ​free​ ​of​ ​ambiguity.​ ​They​ ​can​ ​in​ ​turn​ ​be​ ​used​ ​to​ ​create​ ​rules​ ​for marketplaces​ ​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​ ​from contract​ ​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. 31 ​ ​See​ ​Intel​ ​SGX​ ​Commercial​ ​License​ ​Policy ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​39​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 This​ ​effort​ ​allows​ ​us​ ​to​ ​have​ ​a​ ​macro​ ​discussion​ ​about​ ​how​ ​a​ ​marketplace​ ​should​ ​be​ ​controlled in​ ​order​ ​to​ ​ensure​ ​consumer​ ​protection.​ ​Second,​ ​we​ ​can​ ​discuss​ ​how​ ​to​ ​model​ ​transactions​ ​in​ ​a way​ ​to​ ​automatically​ ​ensure​ ​legal​ ​protection​ ​and​ ​rights​ ​within​ ​specific​ ​jurisdictions,​ ​such​ ​as New​ ​Hampshire. Working​ ​with​ ​the​ ​Cardano​ ​Foundation,​ ​IOHK​ ​and​ ​other​ ​entities,​ ​the​ ​Cardano​ ​project​ ​will​ ​create​ ​a reference​ ​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​ ​be self-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 to change 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 most stakeholders​ ​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 be coordinated, then how can enterprises and governments feel comfortable investing billions of dollars 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 even simple changes like the transition from ​IPv4 to ​IPv6 taking decades to realize. Yet there is a strong 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

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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 a strong 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 of cryptocurrencies​ ​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 not convenient​ ​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 and there​ ​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 even counterproductive.​ ​Yet​ ​certain​ ​factors​ ​can​ ​be​ ​encouraged​ ​to​ ​produce​ ​a​ ​more​ ​balanced​ ​system. First, while centralized custodianship of crowdsale funds allows for agile and rapid development of the protocol during the early days, eventually funding has to diversify and the speed of 32 ​ ​See​ ​link​​ ​for​ ​more​ ​information​ ​on​ ​this​ ​term ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​41​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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 the cryptocurrency’s technology, decisions about the roadmap cannot be centralized to a set of core 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 aligned with 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 the second, we will deploy a formal process to propose Cardano Improvement Proposals through a system 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 and beyond the scope of a survey paper. Mechanism design is one of the most intricate and interdependent academic fields with incomplete theory and no solid canonical model to stand on. 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 of 2017. For formal description and vetting of changes to a cryptocurrency protocol, this topic is the least 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 or use​ ​of​ ​liquid​ ​feedback​ ​to​ ​provide​ ​more​ ​rational​ ​voting. We expect research in this direction to consume most of IOHK’s formal involvement in the development 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. 33 ​ ​IOHK​ ​is​ ​retained​ ​to​ ​build​ ​Cardano​ ​until​ ​the​ ​end​ ​of​ ​2020 ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​42​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 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.​ ​Conclusion A​ ​cryptocurrency​ ​is​ ​more​ ​than​ ​the​ ​sum​ ​of​ ​its​ ​protocols,​ ​source​ ​code​ ​and​ ​utility.​ ​It​ ​is​ ​ultimately​ ​a social​ ​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​ ​of evolution​ ​and​ ​port​ ​it​ ​into​ ​Cardano. Evolution​ ​is​ ​not​ ​guided​ ​by​ ​a​ ​single​ ​hand​ ​or​ ​a​ ​grand​ ​design.​ ​It​ ​is​ ​a​ ​process​ ​of​ ​serendipity​ ​inspired by​ ​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​ ​meet the​ ​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​ ​have already​ ​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. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​43​ ​of​ ​44

IOHK​ ​|​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO​ ​|​ ​06/28/2017 We​ ​cannot​ ​know​ ​the​ ​future,​ ​but​ ​we​ ​are​ ​glad​ ​to​ ​be​ ​trying​ ​to​ ​make​ ​it​ ​a​ ​better​ ​one​ ​for​ ​everyone. Thanks​ ​for​ ​reading. ​ ​WHY​ ​WE​ ​ARE​ ​BUILDING​ ​CARDANO ​ ​Creative​ ​Commons​ ​Attribution​ ​4.0​ ​International​ ​License ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​Page​ ​44​ ​of​ ​44