All you need to know about - Algorand

By Mishal Alexander | Learn you a new crypto knowledge | 1 Aug 2021

The topic of this blog post is Algorand, a popular blockchain network and it's native cryptocurrency token - Algo. Some speculate it to be a sleeping giant like Cardano or Ada whereas some see it as a strong contender against other public blockchains. The following article is my take on the whole thing. So let's dive in!

Blockchain Trilemma

In this world of many blockchain networks, Algorand is not just another blockchain network. It claims to have solved the blockchain trilemma by improving all the three pillars of a blockchain - decentralization, scalability, and security - together, which was previously thought to be impossible. Now what is this blockchain trilemma? Well, it is something that is postulated by the creator of Ethereum - Vitalik Buterin - which states that it’s difficult to build a blockchain that is secure, decentralized (meaning it's nodes should be spread out all over the world) and can scale (meaning getting all of those nodes to communicate with each other at high speeds regardless of the demand). He says that one can only have two of these three features and if you try to improve the third one, then the other two will degrade.

For example, if there are a large number of nodes in a blockchain network, then that network is secure because if someone wants to hack this network, then they'll need to take control of all of it's nodes. But then such a network will have limited scalability, i.e. retaining the network speed when there are a lot of users in the system, because all nodes must validate the transactions. It simply takes longer for the many nodes to get the same status as if there were fewer nodes on the network. In addition, there will be nodes with fewer resources or poor Internet connection in a network which can paralyze it. Now say in order to improve the scalability, the network kicked out most of it's node where only selected individuals where allowed to be a node. This improves the scalability thereby it's speed but as the nodes got fewer, the security of the network took a hit; also since few people who own the nodes the decentralization of the network also became limited. This is the same if you try to do it with another blockchain network with a different 'weakness'. So that's the blockchain trilemma. Ethereum, at the time of writing this article, facing this issue of scalability with it's current consensus algorithm which is 'Proof of work'. One way to solve this trilemma is to use another consensus algorithm called proof of stake.

Proof of Stake

Proof of Stake is an alternative consensus protocol to proof of work. In proof of work algorithm, all the miners simply race to solve the cryptographic puzzle to mine a block. The one miner who solves the puzzle gets the mining rewards but all the other miners essentially became sitting ducks; they wasted their energy and resources for nothing. In proof of stake, on the other hand, miners (here they will be referred to as - forgers) becomes eligible to mine & validate blocks by the amount of 'staked' tokens, i.e. locking up tokens above a minimum amount and the miner to solve the puzzle is chosen by the network based on the amount of staked coins. Now here comes the interesting part - many blockchain networks uses proof of stake algorithm as it's consensus algorithm but they do so by slightly modifying it to make it their own. So, there exists versions of proof of stake algorithms, three to be precise. They are = bonded proof of stake, delegated proof of stake and pure proof of stake.

Bonded Proof of Stake : Here the network forces it's nodes into compliance by making them deposit a certain amount of tokens before producing blocks. A node could lose it's deposit if the network detects any malicious activity from it's side. And once the deposit has been made, it cannot be withdrawn until after a certain amount of time. In other words, the staked tokens get bonded to the network and therefore it is named so. Ethereum will have this algorithm after it's 2.0 update. The problem with this algorithm is as anyone could be a block producer, a staker with malicious intent can put in some of the funds to join a well functioning node and could harm the network as this person doesn’t have much to lose.
Delegated Proof of Stake : Here the entities are selected or 'delegated' to create blocks in a round-robin order. Block producers or miner nodes are voted into power by the users of the blockchain, who get votes according to the number of tokens they own. The block production power is delegated to the nodes and that's why it is named so. Polkadot network uses this type of proof of stake algorithm. But according to the research conducted by the Algorand team, this algorithm never assures that the selected block producer will be always honest, which might result in more centralization.
Pure Proof of Stake is a new entry in this category and it is introduced by Algorand. Anyone who wants to participate in the block production in the Algorand network can “flag” their account with a certain number of Algos. The higher the number of algos a node have, the higher it's chances to get selected. It is termed as 'pure' because the block producers are free to come and go as they wish, and that their Algos doesn't get locked up like in the case of bonded proof of stake algorithm.

There are other ways to work around the blockchain trilemma like sharding (Eg: ETH 2.0), Side chains (Eg: Polygon), and increasing the block size (Eg: Litecoin). Proof of stake algorithm is just of one of them.

Algorand

Algorand is an open-source blockchain technology project which is prepped up as another Ethereum competitor. Its crypto token ALGO is trading around to $0.8 at the time of writing this article (check the link for latest price) and holds the 41th largest market cap in crypto universe. It is a fast growing blockchain network with a strong community & excellent developer support. Silvio Micali is the main man behind the Algorand blockchain, and he is not your average Joe. He is a computer scientist at MIT Computer Science and Artificial Intelligence lab. He is also the co-inventor of the cryptographic protocol called Zero-Knowledge Proofs. He is a recipient of a number of awards like the Turing award, Godel award, and RSA Award for Excellence in Mathematics, to name a few. He is pretty well established in the cryptographic field which the one of the core technologies that power a blockchain network.

Micali and his team wanted to solve the blockchain trilemma with their new improved version of proof of stake which they call - pure proof of stake, which randomly selects the block producers (through a mathematical technique known as Verifiable Random Functions) which was a result of 2 years of research. The first block of Algorand was mined on 11th June 2019. Algorand claims to be a truly decentralized network as it is controlled completely by its users using the pure proof of stake algorithm. As the users are the block producers, there is hardly any chance of a bad actor being present. They have got a lot of dApps and NFTs going on in their ecosystem.

How does Algorand solved the scalability issue?

Well in a traditional blockchain network using proof of work consensus algorithm, for a block to be finalized, it must be propagated to every single node and it is added to the chain only if all of them agrees to the block production. As you might have guessed, this is a time consuming task and requires a lot of work. Pure proof of stake protocol essentially improved this step. While a block is still propagating, the consensus agreement on the proposed block is reached. The moment, the users receive the block, they vote and the block continues to propagate. That means when the voting reaches it's last user, the block is already created.

The blocks are constructed into two phases - proposal and voting phase. Proposal phase is where the cryptographic protocol randomly selects an ALGO owner to create a block. And only the selected ALGO owner knows about this. Before he or she even shares this information, the new block creation is complete, so that even if this person wants to, his or her vote cannot be transferred. Then comes the voting round where the network randomly selects a group of 1,000 verifiers. They will be informed about the new block creation. These verifiers validate the block which takes roughly about 5 seconds to complete.

ALGO Token

Let's talk about the ALGO token now. ALGO is a utility token that can be used for paying staking rewards, transaction fees and dApp computations. Let's look at some statistics for ALGO:

Maximum supply: 10 billion
Current circulating supply: 5.5 billion
Date for all tokens to be released: 2030
Staking reward: roughly 6% APY
No minimum stake amount
No staking lock-in
Rekeying : Algorand allows users to change their private key while keeping their public key.
Blockchain Scanner: https://algoexplorer.io/

ALGO is inflationary because not all tokens are released into circulation yet, about which there is quite a bit of debate in the Algorand community on reddit in terms of how it affects the token price. The facts that it has over 1000 TPS, takes 5 seconds for the block finality and has low transaction fees of 0.001 Algo make it a prime candidate for creating a stablecoin or Central Bank Digital Currency. Do note that Algo even beats Solana in terms of Block Finality. Some countries are already ahead of it, for example, the Marshall Islands is already using the Algorand network for their national digital currency, SOV. If proven successful, other countries may follow suit.

Should you buy it?

First of all, this is not financial advise. I could be wrong and it's value can go down to zero tomorrow. You should always do your own research before investing your hard earned money into anything. Your profits and loses are your own. Now I personally own some Algos. Why?

Because I like this technology. I get that there are other networks like Solana which offered better TPS than Algo. I think Algo will come through. I like the people working behind, they seem pretty solid. But I also don't see my investment 'going to the moon' like today; I believe it's going to take some time to get Algo established. I am in the long game with Algorand. Long-term, steady growth is sewed into Algorand, though this relies heavily on the growth of utility demand for DApps and transactions on the network. Factoring in all these, I see a good future potential for Algo. If you are planning to buy Algo and trade, I recommend using the KuCoin exchange (referral link enabled). They've got some great services for Algorand in terms of lending and staking.

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