Algorand bills itself as “the world’s first open, permissionless, pure proof-of-stake blockchain protocol that, without forking, provides the necessary security, scalability, and decentralization needed for today’s economy.” In contrast to many other cryptocurrencies that simply want to solve the problems of the existing fiat-based financial system, Algorand also recognizes that there are problems with existing cryptocurrencies and attempts to solve both of these problems at the same time. In this article, I will explain the basics of what Algorand is, some of the issues with existing blockchains, and how Algorand proposes to solve them.
The Blockchain Trilemma
The limitations of existing financial systems (centralization, opaqueness, high fees, etc) are well-known and don't need to be discussed in this article. However, just as existing financial systems have drawbacks, so do many of the cryptocurrency projects that have been developed to replace them. For example, Bitcoin does provide a more open and decentralized way of sending money from one place to another, but it also uses an enormous amount of electricity. The Ethereum Blockchain has revolutionized decentralized finance, but it suffers from high fees and occasional network congestion.
The various problems associated with creating the perfect blockchain have been labeled the “Blockchain Trilemma”. The blockchain trilemma refers to the notion that there is usually a trade-off between the amount of scalability, security, and decentralization that a blockchain can employ. In other words, as a blockchain becomes more scalable and increases the number of transactions per second, it either loses a degree of security or some degree of decentralization.
Pure Proof of Stake
Algorand hopes to offer the best of all worlds with its unique “pure proof of stake consensus” mechanism. Unlike Bitcoin and other proof-of-work cryptocurrencies, the proof of stake system does not require an excessive degree of computational power and therefore requires less electricity and less of an environmental impact on the Earth.
Algorand differs from many other cryptocurrencies in that it’s pure proof of stake method has two separate phases to block creation and resists forking. As described on the Coinbase Earn videos every 4.5 seconds, a random Algorand token is selected to propose and generate the next block. If this token is currently staked, then the selection process proceeds to phase 2. If the token is not currently staked, then the algorithm randomly selects another token until it selects one that is currently staked. After a staked token is chosen to generate the next block, 1000 tokens are selected to verify the block. This two-part system is designed to constantly refresh the pool of block creators and validators while also protecting the integrity of the consensus mechanism.
What I find most interesting is that the Algorand protocol is extremely resistant (One chance in a Trillion) to forking. In my opinion, forks usually result in a division of the community, and each chain goes forward with less support than the previous consolidated chain had before it. Look at how BTC was forked into BCH then BSV, and now BCH is poised for another fork.
Just as importantly, the minimal possibility of forking reduces the chance of “orphaned blocks”. This means that, at least in theory, long confirmation times are unnecessary when using Algorand.
Strengths / Predictions
So, where does that leave Algorand, and where does Algorand go from here? According to CoinGecko, Algorand is currently ranked as the #64 cryptocurrency. Although the relatively low ranking might be seen as a cause for skepticism by some, Algorand is listed on several major exchanges including Coinbase, Kraken, and Binance. I consider listing on a major exchange to be a strength of any cryptocurrency project. Number one, it shows a high degree of liquidity, but it also proves that the team has the financial ability and administrative experience necessary to fulfill all the requirements to achieve such a listing.
Further, Algorand has made several steps towards proving its use case. For example, the Marshall Islands is using Algorand to power their government-issued digital currency,the SOV. I believe DeFi will be one of the main selling points of cryptocurrency in the coming years, and I further believe that any blockchain without a reliable stablecoin will be severely hindered in its ability to operate in the DeFi ecosystem. Therefore, I think it's extremely promising that Algorand has been able to incorporate the tether stablecoin as an ASA (Algorand Standard Asset). Just as ETH allows the listing of other tokens under the ERC-20 standard, Alogrand supports listing other tokens as ASAs.
In summary, I never like to make price predictions or even top 10 crypto predictions. I think so much in cryptocurrency depends on unforeseen circumstances and the will of the market. That being said, I do think Algorand introduces a unique consensus mechanism, and its ability to achieve listing on major exchanges and field a well-known stablecoin speak to the strengths of the team. At the same time, there are countless “ETH-Killers” which, despite the improvements they offer, have failed to gain traction and de-throne King ETH. Will Algorand prove to be the exception? Time will tell, but I’d like to hear your predictions.
Thanks for reading!