A permissionless pure proof of stake(PPOS) blockchain
Algorand is an open-source, permissionless, Pure Proof-of-Stake (PPoS) blockchain protocol for “the next generation of financial products”. As such, Algorand ensures “full participation, protection and speed within a truly decentralized network”.
Algorand competes with large payment and financial networks and focuses on industrial use-cases. Furthermore, Algorand offers highly-customizable smart contracts (ASCs), Asset Tokenization (Algorand Standard Assets), and Atomic Transfers built directly in Layer-1.
Algorand is a fairly new blockchain focused on improving scalability without sacrificing decentralization. This problem is common to many of the first and second-generation blockchains, such as Bitcoin and Ethereum. To achieve this, Algorand developed perhaps its most notable feature: the Pure Proof of Stake (PPoS) consensus mechanism. Along with its passive staking, both of these features have made Algorand a large market cap project popular with users seeking rewards.
What is Algorand?
Algorand is a blockchain network and project founded in 2017 by Professor Silvio Micali, a computer scientist from MIT. The mainnet network launched in June 2019 along with its native cryptocurrency, ALGO. As mentioned, the blockchain focuses on improved scalability and also supports smart contracts. The Algorand network is a public, decentralized, Pure Proof-of-Stake blockchain with support for customized layer-1 blockchains. These can be used to create blockchains tailored for specific uses. The project claims its technology is particularly useful for financial services, Decentralized Finance (DeFi), fintech, and institutions.
What is the Algorand Foundation?
The Algorand Foundation is a non-profit organization launched in 2019 that funds and develops the Algorand network. It also carries out important work in the blockchain’s community, research, and governance.
For example, the Foundation has educated developers in universities and supported Algorand projects in its ecosystem with accelerator programs. However, technical development work is carried out by the private company Algorand Inc. The Algorand Foundation is also a large holder of ALGO, which it uses to fund its activities.
How does Algorand work?
The key to Algorand’s scalability comes from its Pure Proof of Stake consensus mechanism. This protocol allows it to process many transactions quickly without sacrificing decentralization .Proof of stake (PoS) blockchains are scalable but often at the cost of a small number of validators who have large stakes dominating block approvals. Proof of Work (PoW) has the same issue as large mining pools almost always win the race to create new blocks.
In contrast, Alogrand’s PPoS consensus mechanism chooses validators and block proposers randomly from anyone who has staked and generated a participation key. The chance of being chosen is directly related to the proportion of the participant’s stake of the overall amount staked.
Naturally, a small holder will have lower chances of being selected than a big holder. But unlike PoS blockchains, Algorand doesn’t require a minimum stake, which is a significant barrier to entry for the average user. With every staker who runs a node being a possible validator, the network’s security is more decentralized than with a chosen set of validators, such as in Delegated proof of stake.
Once users have staked and generated their participation key, they become participation nodes. Communication between these nodes happens through Algorand relay nodes. The block proposal phase then selects multiple block proposers using a Verifiable Random Function (VRF), considering the proportion of each validator’s stake. Once block proposers are chosen, their identity is kept secret until the new block is proposed. This improves network security as bad actors cannot maliciously target the chosen validator. However, a proposer can demonstrate their VRF output along with their proposed block to prove their legitimacy.
Soft vote stage
Once a block is submitted, participation nodes are selected randomly to join the soft vote committee. This stage filters proposals, so only one candidate can add to the blockchain. Voting power on the soft committee is proportional to the amount each node has staked, and votes are used to select a proposed block with the lowest VRF hash. This means that it will be impossible to preemptively attack the proposer of a block, as the lowest VRF hash is a value that is impossible to predict.
Certify vote stage
Next, a new committee is created to check for double-spending and the integrity of transactions in the block from the soft vote stage. If the committee deems the work valid, the block is added. If not, the block is rejected, the blockchain enters recovery mode, and a new block is selected. There’s no slashing penalty for the leader who proposes a bad block, making it a controversial part of the PPoS consensus mechanism. The chance of a fork with Algorand is extremely rare, as only one block proposal reaches the certify stage at a time. Once the block is added, all transactions are then treated as final.
What is ALGO?
ALGO is the native coin of Algorand and has a maximum total supply of 10 billion coins to be distributed by 2030. New ALGO is sent to specific ALGO-holding wallets with each newly forged block. You need to hold at least 1 ALGO in a non-custodial wallet to receive these ALGO rewards. This reward can generate an APY of around 5–8% for ALGO holders and is distributed roughly every 10 minutes. This mechanism makes the ALGO coin one of the simplest cryptocurrencies to generate a passive income with, as you can “passively stake” the token.
What are ALGO’s use cases?
Like many other native coins, ALGO has three primary use cases:
1. ALGO can be used to pay transaction fees on the Algorand Network. Compared to networks like Ethereum (ETH) and Bitcoin (BTC), Algorand has minimal fees. As of January 2022, it costs only $0.0014 per transaction.
2. ALGO can be staked to have a chance of being selected as a block proposer or validator.
3. ALGO can be held in a non-custodial wallet to earn rewards with every block that is successfully added to the chain.
The third use case provides a large incentive for the average user investing in ALGO. There’s no need to deal with a Decentralized Application (DApp) to stake your coins or a lock-up period to begin earning. It’s all automatically handled by smart contracts. Algorand also publishes a list of projects adopting the blockchain’s technology, many of which require ALGO to be used.
The ALGO token is the network’s native currency and the bedrock for any activity on top of the Algorand blockchain. ALGO is capped at 10 billion tokens that were minted during the token generation event, with only 25 million sold during the first public ICO on CoinList at a price of $2.4 in June 2019.
The wide discrepancy between what private investors bought at versus the public price created an initial huge selling pressure, prompting the foundation to offer two buy-back programs in August 2019 and June 2020 for all retail investors who were affected by the chaotic launch, where almost all of the retail investors opted in for redemption, as it was significantly higher than ALGO’s current market price.
The carbon-neutral blockchain did not really pick up steam until last year. Early 2020 saw the Algorand 2.0 network upgrade introducing some of the layer-one capabilities that make up the present foundation of the blockchain’s core functionality, such as stateless smart contracts, atomic transfers and the ASA protocol.
However, it was the debut of stateful smart contracts in August 2020 that set the ball rolling for Algorand to garner attention as it became capable of servicing the exciting new wave of DeFi projects currently being developed on top of the network.Few players understood Algorand’s potential early in the journey as initial rounds of adoption saw Algorand ink partnership with the Marshall Islands to underpin the issuance of their central bank digital currency while integrating conventional stablecoins such as USDC and USDT onto the network to cater to DeFi’s rudimentary substratum.
Algorand also collaborated with SIAE, the largest Italian copywriting agency, to issue 4 million NFTs representing over 95,000 creators as ASAs. This complemented another coalition with planetwatch, an environmental monitoring service designed for capturing data to operate air-quality sensors in hopes of maintaining a global air quality ledger on Algorand’s blockchain.
Algorand uses a zero-knowledge proof algorithm to solve the blockchain trilemma. Its new consensus mechanism enables the system to be efficient and secure while being sufficiently decentralized. In theory,
Algorand’s blocks can reach their final state in seconds, and the transaction throughput of the entire blockchain network will be comparable to that of large financial networks. Given the current adoption metrics, it is hard to imagine that Algorand is a threat to Ethereum; however, if the Algorand public chain is fully realized, the project and the entire blockchain industry will benefit greatly.
No matter which dimension is analyzed, the project will not lack market attention. With the likes of crypto companies such as Circle developing solutions on the Algorand chain and the government of El Salvador choosing Algorand as the backbone of the nation’s blockchain infrastructure, the longer-term picture looks constructive.
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