What is Algorand (ALGO)?
in Algorand (ALGO)
The blockchain trilema dictates that a blockchain can have any two of these features, but not all three.
- Speed (scalability)
For example, Bitcoin chooses security and decentralization, while XRP has gone with speed and security.
All About AlgorandIn this article:
The Blockchain Trilema
It’s difficult, some even say impossible, to build a decentralized, secure blockchain that can also scale. Decentralization means that nodes are spread out all over the world, and getting all of those nodes to communicate with each other at high speeds is quite hard.
The Algorand team believes that they’ve solved the problem, though. In a single sentence, Algorand promises a fast network with near-instant finality that anyone in the world can stake on. If Algorand can live up to that promise, it’s going to be a big deal for the cryptocurrency community.
Algorand Use Cases
- A built-in governance mechanism so that token holders can vote on changes to the platform
- A low probability of forking
- Fast finality, once a block is written to the blockchain, it’s considered finalized. This is different than a network like Bitcoin, where massive computing power could change a block from the recent past
Similar to Bitcoin or Monero, Algorand is designed to be used as a payment cryptocurrency. As a decentralized network with fast settlement speeds, Algorand could potentially be a good crypto to buy the proverbial cup of coffee with.
The second use case for Algorand is smart contracts, of which there are two types on the Algorand network. Layer 1 smart contracts are designed for simple actions such as executing an atomic swap or creating a new token.
Layer 2 smart contracts are executed off-chain and are designed to handle complex computations. For example, a contract could require input from dozens of different participants, or it could have multiple stages of execution that require complex computation.
By moving the most computationally intensive smart contracts off-chain, Algorand frees up space on the network for simple transactions, thus reducing congestion. More information about creating smart contracts on the Algorand blockchain is available here.
Apart from two-tiered smart contracts, one of Algorand’s other major developments is its unique consensus mechanism, referred to as “Pure Proof of Stake,” or PPoS.
The Algorand Consensus Mechanism
Algorand uses a Proof of Stake consensus mechanism that they refer to as Pure Proof of Stake. The idea behind the protocol is that anyone can participate in voting to create new blocks.
The minimum voting requirement is only 1 ALGO, which at the time of publication is equivalent to just $0.30. This is quite a bit different than some other networks. Once Ethereum launches its Proof of Stake protocol, the minimum staking balance will be 32 ETH.
In terms of how blocks are validated and written to the blockchain, Algorand uses a two-phase system.
- A block leader is selected by a Variable Random Function (VRF), and a new block is proposed. The block leader can be any account that is currently online (more information about what it means to be “online” is available here). The more ALGO an account is holding, the more likely it will be selected as a block leader.
- The block moves on to the “certify vote” stage where it’s checked that the block does not contain a double-spend transaction. As long as the block does not contain a double-spend transaction, it gets passed and is written to the blockchain.
If a block is deemed to be malicious, the network will go into recovery mode. A new block leader can be selected and voted upon while the old block is discarded from recovery mode.
One of the interesting features of this system is that there is instant finality. Once a block is written to the blockchain, it can never be changed. Another interesting feature is that there is no slashing.
On Algorand, a node cannot get slashed (have its balance reduced) for proposing a bad transaction. The network simply enters recovery mode and moves on. This is a slightly different way of dealing with a bad actor, and it’s not clear yet which network has a better solution.
For those interested in learning more about Algorand’s consensus mechanism, the best source of information is this paper, which, although technical, should generally be accessible to anyone with a good grasp of blockchain technology.
Algorand Coin: ALGO
According to the Algorand staking calculator, it’s currently possible to earn about a 5.5% ROI per year by holding ALGO coin. This is in line with other popular PoS networks like Tezos and Cardano, which tend to offer similar returns.
However, a key point is that Algorand users don’t need to stake to earn a reward. Instead of distributing tokens to the block producer (as is the case for most networks), the Algorand protocol distributes tokens throughout the network to all ALGO coin holders. The only requirement is that the coins are held in a non-custodial wallet like the Exodus Algorand Wallet.
The token distribution happens approximately once every ten minutes, and the tokens are distributed to holders in proportion to how many coins they have in their wallet.
This token distribution model is similar to yield farming, where DeFi platforms give out “free” tokens to people just for holding their coin or using the network.
There is a precise distribution schedule for the Algo coins which can be seen in the following chart.
While distributing tokens to Algo investors has incentivized people to hold the coin, the long term effects must be uncertain at this point. Once Algorand stops distributing tokens, will users drop off the network and sell their holdings? It should be interesting to track the project’s usage over time to see if this happens.
In total, there will only ever be 10 billion ALGO tokens. The coin supply has a hard cap, similar to Bitcoin.
As the high fees on the Ethereum network have shown, there’s a real need for a decentralized, smart contract platform that can scale. Algorand promises to meet that perfect trifecta of decentralized, fast, and secure.
While Algorand has a long way to go before it can rival Ethereum’s adoption, the technology is good, and the token distribution model is an ingenious way to incentivize people to invest in the project.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.