Algorand is a smart contract platform for building decentralized applications (dapps) created with the goal of solving the blockchain trilemma of decentralization, security, and scalability.
Blockchain developers often aim to solve for the trilemma when building new protocols. To that end, the platform was created to handle up to 1,000 transactions per second with a focus on near-instant completion finality on the blockchain in under 5 seconds, all the while maintaining rigorous standards of security. With no central authority and transactions being verified by participating users who have equal say in decision-making, Algorand also maintains a great degree of decentralization.
It uses a variation of Proof of Stake (PoS) called Pure Proof of Stake (PPoS) to verify transactions and add blocks to the blockchain. The validator rewards are then distributed to all holders of ALGO, the protocol’s native cryptocurrency.
ALGO is considered to be a carbon negative blockchain. It achieves this by not only emitting low carbon emissions, but Algorand, Inc., the blockchain’s parent company, also donates significantly to Climate Trade, a company whose goal is to develop solutions to offset carbon emissions and financing climate change projects.
This blockchain has also been popular for enterprise applications, such as creating and launching central bank digital currencies (CBDCs) due to its speed, scalability, security, and the network’s ability to implement compliance controls needed for a national currency. The Marshall Islands was the first country to launch its CBDC on Algorand, with many more waiting in the wings.
Further, Algorand has partnered with FIFA to provide an official wallet solution for NFT (non-fungible tokens) collections and blockchain-based initiatives such as ticketing and merchandise purchases.
ALGORAND ESSENTIALS
- ALGO is a smart contract platform for building decentralized applications (dapps) and was created with the goal of solving the blockchain trilemma by trying to find the right balance between speed, security, and decentralization.
- Algorand’s Pure Proof of Stake (PPoS) consensus mechanism is designed for all those who stake its cryptocurrency, ALGO, to participate in verifying transactions and producing blocks.
- ALGO also enables users to vote on changes to the software and earn a share of new ALGO tokens as rewards.
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Who created Algorand?
Algorand was launched in 2019 by Silvio Macali, an MIT professor and computer scientist who received the prestigious Turing Award for his work in cryptography.
The platform’s development is also supported by two independent entities. The non-profit Algorand Foundation oversees the protocol, its governance mechanism and the open-source development of the platform while Algorand, Inc. oversees the enterprise adoption of its technology.
The Foundation also supports training and education by organizing events, certifications, and hackathons for its ecosystem, as well as develop courses at major universities like MIT and UC Berkeley.
Mainnet was launched in June 2019 and a Dutch auction was held to release its token around the same time. The auction helped sell 25 million of its 10 billion total minted tokens and raised $60 million.
Where ALGO came from
As previously noted, Silvio Micali, an MIT professor who has been involved in cryptography since the 1980s, founded Algorand in 2017. Micali is a Turing Award winner and the co-inventor of many protocols used in modern blockchain projects, including probabilistic encryption, zero-knowledge proofs, and verifiable random functions.
Algorand received multiple rounds of funding in 2018 and launched its testnet in July of that year. The testnet was then released to the public in April 2019, and the mainnet launched in June 2019. The Algorand Foundation promotes the ecosystem and coordinates community governance, and a for-profit company, Algorand, Inc., oversees code development.
How does Algorand work?
Architecture
To achieve its goal, Algorand uses a two-tier blockchain structure:
- Layer 1 – base layer that supports most types of smart contracts, token creation and exchange, and NFT creation.
- Layer 2 – supports complex smart contracts that require more computing and/or space.
Both layers work hand in hand to support each other. The Layer-1 helps ensure security and compatibility while the Layer-2 can compute complex applications and transactions without interfering with Algorand’s efficiency when processing transactions.
Algorand Standard Asset (ASA) protocol
The Algorand Standard Assets (ASA) protocol is the token standard for creating and deploying assets on Algorand, much like ERC-20 on Ethereum or TRC-20 on Tron. The creation of ASAs focuses on simplicity and allows anyone, regardless of their computing background, to create them.
In order to create an ASA token, users do not need any technical expertise as all they have to do is fill out a form. ASAs can be configured to fit any use case the creator chooses, and benefit from the same security and speed as the ALGO token, which is also built on an ASA standard.
What is Algorand’s Pure Proof of Stake? (PPoS)
Pure Proof of Stake (PPoS) is a variation on the more common Proof of Stake (PoS) protocol on which other blockchains operate. Its main goal is to democratize the process of block creation by allowing anyone who holds a balance of 1 ALGO or higher to be able to validate blocks on the blockchain (as opposed to Ethereum post-merge, that will have a minimum staking requirement of 32 ETH).
When it comes time to validate blocks, the protocol randomly and privately selects a block leader using a process called the verifiable random function (more on that below). Selecting the leader privately is an important feature to help reduce the vector of attack from bad actors.
A committee is then selected from all ALGO holders to approve the proposed block and ensure that no problem occurred. If the committee approves the validity of the block, it is then added to ALGO’s blockchain. If malicious activity is detected, such as double spending, the block is removed, and a new block leader is elected.
ALGO has become a popular cryptocurrency to stake thanks to its flexibility and usability. All you need is 1 ALGO to start staking, and, once you purchase ALGO, you only need to send it to your crypto wallet as staking happens automatically.
What makes ALGO unique?
With ALGO, it’s not so much about what it does differently but what it does better. In terms of functionality, it’s similar to other programmable blockchains such as Ethereum (ETH 0.02%). It can run smart contracts, and developers can use it to create decentralized apps (dApps) and crypto tokens.
Here are the most notable ways that Algorand stands out:
- It’s built for scalability and uses a modified proof-of-stake consensus mechanism for efficient transaction processing. This results in speeds of about 1,000 transactions per second.
- It’s a developer-friendly blockchain that supports many programming languages. According to the Algorand website, languages it supports include “Java, JavaScript (node.js and browser), Go and Python SDKs, REST APIs, as well as many community SDKs, such as Rust, Swift, PHP, Dart, C#, etc.”
- It has experienced zero downtime since launch. Other blockchains, such as Solana (SOL 0.01%), have had numerous outages, so the fact that Algorand hasn’t had any is very impressive.
- The ALGO blockchain never forks (its ledger never splits when new blocks are added). This ensures that Algorand isn’t fractured into separate projects and that no one can double-spend on its blockchain.
Partnerships
Thanks to its scalability and ease of use, ALGO has built partnerships across a variety of industries. Here are a few notable partners in the Algorand ecosystem:
- Circle, the global financial company behind USD Coin (USDC -0.01%), is using ALGO to allow consumers to conveniently transfer funds between banks, card networks, and digital dollars.
- The Republic of the Marshall Islands was the first country to adopt a national digital currency, and it chose Algorand to power that currency. It also formed a partnership with Koibanx in August 2021 to develop the blockchain infrastructure for El Salvador.
- Entertainment platform Xfinite has worked with Algorand to create a native cryptocurrency token and dApps.
- Spanish company ClimateTrade helps companies achieve their sustainability goals. It chose Algorand for its infrastructure layer and uses the Algorand blockchain to track carbon credits.
- Watr, a supply chain ecosystem for commodities, also has formed a partnership with ALGO. The Swiss-based foundation will use its protocol as the first “public, sovereign instance of the Algorand mainnet.”
Can I make passive income with Algorand?
Yes, you can make passive income with ALGO. Since Algorand is a proof-of-stake blockchain, you can stake ALGO tokens and earn quarterly rewards by opting in and actively participating in its new community governance program. When you stake crypto, you’re pledging it as collateral to become part of the transaction validation process.
The best way to stake Algorand is through a blockchain wallet. The official Algorand wallet is Pera Wallet, but there are also other wallets that support Algorand staking, including Trust Wallet and Atomic Wallet. Transfer your ALGO tokens to your wallet, and then you’ll be able to earn rewards by staking them.
There are also crypto exchanges that let you stake Algorand, including Crypto.com, Coinbase Global (COIN 11.39%), and Binance.US. However, the rates they offer on Algorand are lower than what you’d get staking through your own wallet.
Verifiable Random Function (VRF)
The custom-made cryptographic randomization tool called Verifiable Random Function (VRF) works by selecting a block leader from participating ALGO holders. User selection is weighted based on the amount of ALGO staked.
The benefit of VRF is that when a block leader is selected, it is known only to them, which helps them validate and approve blocks without any external influence. Block leaders only become known after the round is complete and the committee disbands. The next round then starts fully independently of the previous committee and the blockchain continues.
Committee selection via VFR and the notion of user replaceability are essential in making the blockchain secure, as they eliminate the requirement for a central authority that may be used as a target for attack. Since there is never any communication between the central authority and the block leaders, there is no information to intercept.
Why does ALGO have value?
ALGO is a new public blockchain, meaning its technology, while novel, has not yet seen much testing under real-world market conditions.
Users may find the ALGO cryptocurrency valuable should they believe ALGO’s technical specifics will make it likely to be the blockchain of choice for developers who want to design and launch new kinds of decentralized applications.
Investors may also see Algorand as a viable part of a cryptocurrency portfolio should they believe that proof-of-stake blockchains, which lower the cost of participating in a blockchain’s operation, will ultimately prove more successful in the market.
Token Economy
The Algorand Foundation, the non-profit organization overseeing and funding development of the protocol, says that only 10 billion units of its ALGO cryptocurrency will ever be created.
ALGO maintains a block explorer, which keeps an official count of its circulating supply.
A schedule of distributions, which the foundation expects to be completed within five years of the protocol’s launch, can be found below:
Overall Token Distribution:
3.0 billion
Estimated algos to be injected into circulation (initially via auction) over the first 5 years
1.75 billion
Estimated participation rewards (distributed over time)
2.5 billion
Relay node runners (distributed over time)
2.5 billion
Algorand Foundation & Algorand, Inc.
0.25 billion
End user grants (distributed over time)
The Algorand Foundation has also published additional details about how payouts work and the time in which users can expect to receive new funds for their participation in the blockchain.
What are the benefits of the ALGO token?
On top of being used by block leaders, ALGO can be used to pay for transaction fees when using its platform.
Further, any holder can participate in the platform’s governance system. Holding ALGO enables users to vote on changes and upgrades to the software and earn a share of new ALGO tokens as rewards.
Anyone wishing to become a block leader or to be chosen as part of the selection committee may wish to add ALGO to their portfolio and stake it.
Unique risks
ALGO solved two parts of the blockchain trilemma; it’s secure and scalable. The jury’s still out on whether it’s sufficiently decentralized.
The maximum total Algorand supply is 10 billion ALGO tokens. Algorand, Inc., holds 2 billion tokens, and the Algorand Foundation has 500 million. With 25% of the total supply going to those two organizations, Algorand’s tokenomics have been criticized, even by its supporters.
Another example of Algorand’s centralization are its relay nodes, which are the backbone of its network. As of March 2022, there are approximately 140 relay nodes.
The Algorand Foundation manages the official list of relay nodes. Those running relay nodes include Algorand, Inc., the Algorand Foundation, early backers, and participants selected from a relay node pilot program.
ALGO would remain secure even if all the relay nodes acted in a malicious way. Still, the fact that such an important part of the network is essentially handpicked by the Algorand Foundation is an issue. Even the foundation itself has acknowledged this and is working on changes.
Is ALGO a good investment?
ALGO is a quality blockchain project, and it’s easy to see why it has built a passionate following in the crypto community.
The protocol is designed for high performance and delivers with fast transactions and low fees. There’s a very knowledgeable team behind it, headed by Micali, which gives it credibility. Since it supports so many programming languages, it’s easy for developers to use.
There aren’t any glaring weaknesses with ALGO, but it has strong competition from a number of smart contract blockchains. Scalability has also become a point of focus among these projects, so Algorand no longer has an advantage there.
For example, ALGO was notable for being able to process 1,000 transactions per second, much higher than Ethereum’s 30 transactions per second. But Ethereum is upgrading and will reportedly be able to process up to 100,000 transactions per second. Solana is estimated to handle up to 65,000, although it has dealt with frequent outages.
Overall, Algorand is a good choice for a cryptocurrency investment with growth potential. If you’re not sure about investing in specific coins, another option is investing in cryptocurrency stocks. Just keep in mind that crypto is volatile, so you should only invest what you can afford to lose and be ready for price swings.
How to buy Algorand
Several of the most popular crypto exchanges offer ALGO trading, so it’s easy to find. Here are a few places where U.S. investors can sign up for an account and buy Algorand:
- Coinbase
- Crypto.com
- Binance.US
- Kraken
- eToro
With so many blockchain platforms offering similar features, it can be hard to figure out which one to choose. Algorand definitely has a lot going for it and is worth checking out, especially if you’re looking for a protocol that isn’t a household name yet.
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