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What is Algorand?

Algorand is a two-tier open-source blockchain network with a focus on payment. In this article Coin Rivet explains what it is, and how it works...

The blockchain space has continued to witness tremendous growth in recent times with new cryptocurrencies, protocols and networks making their way into the emerging crypto market.

Surprisingly, while there are more than 6,000 crypto-tokens in circulation-  according to Statista’s report – there are only a few host blockchains that account for less than 1% of all cryptocurrencies in existence. 

One particular blockchain project that has made name for itself is Algorand which, alongside its native token ALGA, leverages the ability to accommodate both decentralised and traditional financial models on a single platform. Just before we go on to define what Algorang is and how its works, let’s quickly walk you through a brief history behind the blockchain project.

Brief history of Algorand

Algorand is a blockchain project funded by the Algorand Foundation – a Singapore-based corporation known for its strides in developing advanced technologies. Although Algorand officially launched in 2019, the theoretical work dates back to 2017 and was led by Silvio Micali – a computer science professor at the Massachusetts Institutes of Technology (MIT).

Known for his expertise in cryptography and computer science, Micali, alongside Stony Brook, co-authored the Algorand whitepaper which detailed every bit of the project from its underlying infrastructure to the finished product itself.

While coming up with the idea of Algorand, Micali and his team desired something that was more than a fundamental utility token. It resulted in developing a project that could track things like titles to property and their sale, as well as a platform for smart contracts.

However, while a crypto project does not end with a whitepaper, its use case is of paramount importance. As such, Algorand was launched two years after the research work began and raised around $60 million in token sales which was intended to raise capital as well as initiate a use for the native currency. 

What is Algorand?

Algorand is an open-source two-tiered blockchain network that solves the blockchain trilemma by combining the trustless, immutability, and decentralisation of mainstream cryptocurrencies with the speed and security of its fundamental pure proof-of-stake (PPoS) consensus mechanism.

If you’re familiar with the crypto space, you’ll understand what the term “blockchain trilemma” means. However, for those who are stumbling upon this for the first time, a blockchain trilemma is a circumstance in which a blockchain system cannot fully achieve three essential objectives — security, scalability, and decentralisation – without sacrificing at least one of them.

While the blockchain trilemma is mostly inherent in traditional blockchain systems like Ethereum (prior to its ETH2.0 update), and other layer-1 blockchains, Algorand is one of the few platforms offering genuine solutions.

Specifically, Algorand employs the randomness concept in solving the blockchain trilemma. This type of approach focuses on validators, whose primary function is to add new transaction blocks.

To that end, Algorand’s underlying algorithm selects random validators who are typically made up of token holders. Afterwards, the selected validators form a group of nodes that will be eligible to add new blocks to the network.

By applying this concept, Algorand is able to achieve true decentralisation since anyone and everyone who is a token holder within the network can be selected by the system. More so, the fact that validators are randomly picked by the system further resolve security issues attributed to older blockchain systems.

Because Algorand is a payment-focused network, it is designed to achieve rapid transaction and a near-instant finality. For instance, Algorand is able to process over 1,000 transactions per second (TPS) as well as achieve transaction finality in less than five seconds.

How does Algorand work?

Algorand utilises a unique type of proof-of-stake consensus mechanism known as ‘Pure Proof-of-Stake’ (PPoS) which is primarily responsible for increasing transaction speed and finality rate as mentioned earlier.

PPoS, in contrast to the more conventional PoS, is a highly democratised consensus mechanism with a low entrance barrier. To join in and secure the network, for example, the minimum staking requirement is merely 1 ALGO coin. By comparison, the Ethereum 2.0 consensus program requires at least 32 Ether to participate.

In addition to facilitating the random selection of validators on the blockchain, the PPoS consensus mechanism is also instrumental for the network’s reward system. In this context, the PPoS mechanism distributes validators’ rewards to all holders of the network’s native currency – ALGO.

Algorand also adopts a two-tier blockchain infrastructure, which means it incorporates the benefits of both layer-1 and layer-2 blockchains. Notably, Algorand’s base layer supports smart contract integration, asset generation, and atomic cryptocurrency swaps, all of which are responsible for security and compatibility.

By leveraging the layer-1 blockchain infrastructure, users can create Algorand Standard Assets (ASAs), which also implies that any asset can be represented – wrapped on the blockchain, for example – further benefiting from the same level of security and scalability as the native ALGO token.

Specifically, Algorand’s ASA protocol allows users to generate new tokens in the case of a developer and to transfer existing tokens from other ERC-20 compatible wallets to the Algorand ecosystem in the case of individual participants.

On the other hand, the additional layer is set aside for more complex tasks, some of which include the integration of complex smart contracts and the development of decentralised applications (dApps). 

More so given that Algorand is a public blockchain that relies heavily on staking, it accommodates as many dApps as possible, without sacrificing either speed or scalability.

Another interesting aspect of the Algorand blockchain is its adaptability with specific central bank digital currencies (CBDC). In the most recent development, the platform was chosen to host the Marshall Island CBDC, following thorough research into the several host blockchains.

Algorand native token – ALGO

ALGO is Algorand’s native cryptocurrency, which doubles as the fundamental exchange asset on the blockchain network. The ERC-20 token, beyond facilitating exchange within the ecosystem, is also an integral part of the network’s reward system, as it is used to incentivise validating nodes for producing blocks. 

Unlike other blockchains, the Algorand reward system operates in a unique way. Precisely, rather than being awarded to block producers alone, the benefits paid to validators for producing blocks are split and distributed among all ALGO coin holders. 

The reason for this, however, is attributed to the randomness concept adopted in the selection process for validators. This further implies that all ALGO token holders can earn as high as 7% annual percentage yield (APY), which is a significant percentage when compared to other platforms.

Another unique aspect of Algorand is that users are not compelled to ‘stake’ their ALGO token to benefit from the reward system. Instead, by holding a portion of their ALGO token in a non-custodial wallet, or an exchange like Algoswap, users can access earned rewards.

There are currently three billion ALGO tokens in circulation, with 1.75 billion tokens to be distributed as rewards for participating nodes, 2.5 billion to be distributed to relay nodes, 2.5 billion to be reserved for both Algorand Foundation and Algorand Inc, and 0.25 billion ALGO tokens to be distributed for end-user grants.

Algorand governance – the Algorand Foundation

The Algorand Protocol is governed by the Algorand Foundation. The non-profit organisation oversees the funding and development of Algorand Inc as well as the blockchain Protocol.

Beyond its responsibility to ensure growth and development on the blockchain Protocol, the Algorand Foundation also facilitates scholarships for developers in the University as well as other educational settings. Notably, the foundation’s global university program cuts across prominent institutions like MIT, and UC Berkeley, among several others.

The foundation also launched two accelerator programs in 2020, one in Asia and the other in Europe. The accelerator program, according to the foundation, is designed to help ongoing projects as well as developers who want to build on the Algorand Protocol.

Ultimately, Algorand has proven to be a scalable project, despite its brief lifespan, thanks to its unique and innovative approach to addressing the blockchain trilemma.


Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.