Understanding the Layer 1 Blockchain: Algorand
The world of cryptocurrency is spellbinding and ever-evolving. Almost every month, we hear something new on coins, utility tokens, consensus protocols, and more. In this blog post, we will discuss a Layer 1 blockchain that offers high scalability with a unique consensus mechanism and expands the potential for the cryptocurrency space — Algorand.
From how it works and how it differs from Ethereum, to the benefits it brings to NFT and DeFi space, we will look into Algorand from various aspects.
Let’s get started.
What is Algorand?
Algorand is a blockchain platform that speeds up transaction processing and reduces the time taken to make the transactions on the network complete. It solves the blockchain trilemma through various improvements like using the Pure Proof of Stake (PPoS) consensus mechanism which chooses validators at random to maintain decentralization, paired with Byzantine Agreement (BA) which reduces fraud, decides how people must join the decentralized network, and offers a single verifiable source of truth.
How does it work?
Algorand uses two types of nodes, relay nodes, and participation nodes, to facilitate transaction speed and optimize decentralization simultaneously. Relay nodes are the network hubs that connect Algorand to the remaining nodes. On the other hand, participation nodes offer the required computing power to validate the transactions. Any node can be a relay or participation node, and relay nodes coordinate with participation nodes to keep track of the ledger.
In addition, the relay nodes use Algorand Virtual Machine (AVM) software to connect to the Algorand platform. The AVM operates on both relay and participation nodes and evaluates smart contracts.
Algorand manages smart contracts in an integrated two-tier architecture that includes on-chain and off-chain two types. Layer 1 supports basic transactions with on-chain smart contracts, in the meantime, the off-chain Layer 2 is reserved to execute more complicated smart contracts. With the on-chain Layer 1 smart contracts executing along with off-chain Layer 2, transactions in Algorand can be processed in a fast and efficient way.
How is it different from Ethereum?
Ethereum and Algorand are blockchains that support smart contracts and are considered competitors. However, they have a major difference.
The two blockchains differ in the consensus mechanism that they use. Ethereum uses the Proof-of-work (PoW) mechanism and is preparing a transition to the Proof-of-Stake(PoS) protocol, which is adopted by most blockchains. In the PoS mechanism, block transactions are validated based on the number of coins a validator stakes. On the flip side, Algorand uses the Pure Proof of Stake (PPoS) consensus protocol that selects users at random irrespective of their stake.
Another difference is the transaction speed. Ethereum takes about 12–14 seconds to process a block currently, and the processing time will mostly remain the same after the PoS transition is finished. Meanwhile, the Algorand network finalizes transactions in 5 seconds. After its Mainnet upgrade in September 2022, now it can process 5 times more transactions than before, bringing users a faster trading experience.
Benefits of Algorand
Algorand comes with several benefits, especially in NFT and DeFi space.
It has been intentionally designed to enable the feature of Non-fungible tokens (NFTs) and positioned itself as an extremely suitable choice for NFT creators. NFT creation is highly affordable at just 10 cents as compared to other blockchains, where it ranges from $50. This enables creators to tokenize huge volumes of artwork at reasonable rates. Also, the platform charges only 0.001 of its native token Algo as the transaction fee, which is $0.00029 US dollars at the time of writing. Thereby offering increased savings when users purchase NFTs. These aspects, together with the PPoS consensus mechanism, make Algorand a preferred blockchain for NFT creators.
Another key area of application is decentralized finance (DeFi). With its feature of smart contracts and digital assets, developers are eyeing applying it to real-world assets such as escrow payments at mortgages.
With its major upgrade in protocol this year, Algorand has significantly improved the processing performance, providing a stronger foundation for future development in the crypto space, and we will look forward to the new updates it brings to the crypto world.
So far we’ve looked into several types of Layer 1 blockchains which increase variety to the blockchain and crypto space. Why do these Layer 1 blockchains matter? In next blog post, we’ll discuss it in more detail. Stay tuned!
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