Diving into Algorand’s Decentralized, Scalable & Secure Blockchain

Lucas Outumuro
Nov 24, 2021 · 6 min read

Analyzing Algorand’s pure proof of stake blockchain with key analytics into its network growth.

Smart contract platforms have emerged as a critical piece as the World awakens to the potential of decentralized applications. Though smart contracts are not a new concept, their usage in blockchain technology has seen various breakthroughs in recent years enabling use-cases previously not possible.

One of the largest challenges this technology has faced is the so-called blockchain trilemma: the trade-off between decentralization, security and scalability. Traditionally it was thought that those building a blockchain would have to pick two out of these three key characteristics since it would be unfeasible to pursue all three given technological constraints.

Image source: https://www.seba.swiss/research/the-blockchain-trilemma

Over the past few years, however, smart contract platforms have come up with contenders to solve the blockchain trilemma. One of the most novel of these is Algorand with its pure proof of stake model (PPoS).

Algorand is a smart contract platform founded by Silvio Micali, recipient of the Turing Award for his work in cryptography. Silvio Micali is a computer science professor in MIT and is credited with the creation of zero-knowledge proofs, a framework that has recently gained momentum for layer 2 blockchain scaling solutions.

Algorand’s PPoS is a variant of typical proof of stake (PoS) blockchains. It introduces major changes to solve the decentralization, security and scalability trade-offs outlined in the blockchain trilemma.

One major distinction between PPoS and PoS is that the former does not require users to lock up funds to participate in consensus and generate yield while the latter does. Algorand’s minimum amount to stake is also substantially smaller than most PoS networks, requiring just 1 ALGO worth currently under $1.80, making it more affordable to anyone wishing to participate in consensus.

PPoS intends to distribute staking rewards in a more egalitarian manner by randomly selecting validators of a block of transactions where any validator has chances of being rewarded. This creates an environment where even addresses with just 1 ALGO get to benefit from their stake, thus incentivizing the decentralization of ownership of Algorand’s native token. This has led to a community of over 15 million addresses holding ALGO.

Source: IntoTheBlock’s Algorand network indicators

The 15.2 million addresses holding ALGO place Algorand amongst the blockchains with the largest holder base. Although one address does not equal one user, it serves as a valuable approximation given that one user can have more than one address, but at the same time exchanges typically hold multiple users’ funds within a few addresses.

Besides decentralizing its ownership, Algorand also aims to decentralize its consensus. It does so by having one of the lowest requirements to host a node. Hosting a node can often be energy intensive and consume a significant amount of storage. In Algorand’s case, it currently takes only 100 gigabytes of space and 4 of RAM to host a node, requirements satisfied by any remotely capable computer.

Source: The Block

These low prerequisites have led to over 1,400 nodes currently participating in Algorand’s consensus.

While decentralization is necessary to ensure blockchain’s element of censorship-resistance, scalability is paramount for its utility. As decentralized applications start getting real-world usage, blockchains that can process a high number of transactions quickly stand to benefit from crypto’s rise to mainstream.

In Algorand’s case, its blockchain bolsters one of the fastest transaction speeds to finality. One block of transactions takes approximately 4.4 seconds to be validated, achieving finality within that time meaning that the blockchain is certain of the transactions that took place. This also makes Algorand less susceptible to so-called re-orgs where transactions blocks are rearranged by miners/validators to extract value.

Source: IntoTheBlock’s Algorand network indicators

As can be seen from IntoTheBlock’s Average Time Between Transactions, the time for Algorand activity to be executed has been persistently quick, with only a few minor spikes of less than a second over the past year. This allows Algorand to process over 1,200 transactions per second (tps) currently, with plans to expand the throughput to more than 45,000 tps.

The relatively high scalability has allowed Algorand to gain traction in terms of transaction activity.

Source: IntoTheBlock’s Algorand network indicators

Algorand is processing 2.2 million transactions per day on average over the past seven days. Excluding two outliers in March and May, the number of transactions taking place on Algorand has been consistently increasing.

Finally, it is essential for a blockchain to not only be scalable and decentralized, but also secure. Or else what is the point of having a capable censorship-resistant network if no one can count on it being safe to use?

As previously mentioned, Algorand randomly selects validators to participate in its PPoS consensus. This process is implemented through a Verifiable Random Function (VRF). The VRF privately selects multiple validators for each transaction block at random, making it mathematically nearly impossible for an attacker to attempt to influence the blockchain’s consensus as they would have to exploit over a third of all validators.

Moreover, validators have a private key known as the participation key, which is used solely for verifying transactions in the PPoS consensus. When a validator is selected for consensus, its participation keys generate ephemeral keys which are used to sign messages, confirm a block of transactions and are deleted afterwards to prevent attacks on previous validators from affecting the network’s future state. Finally, in the event that a validator were compromised, having their spending key and participation key separate ensures that at least their funds remain secure.

Although simply being secure, scalable and decentralized is enough to impress any blockchain enthusiast, there are other elements that make Algorand stand out.

For one, Algorand is “unforkable”, or unable to be copied or split into two versions. This capability is enabled by being able to reach finality within one block, leading to attempts to split the network being automatically pruned. In other words, if a minority group looked to fork the blockchain like occurred with Bitcoin and Bitcoin Cash, the blockchain itself would negate that attempt by not processing blocks in the chain with less validators.

From the investment standpoint, it is worth highlighting that the vast majority of addresses are profiting from their ALGO holdings. This is despite the fact that ALGO has remained below its initial price in major centralized exchanges at over $3.

Source: IntoTheBlock’s Algorand financial indicators

In the graph above we can observe the distribution of addresses based on whether they are profiting (“in the money”), breaking even (“at the money”) or under water (“out of the money”). Throughout 2021, 83% of addresses on average have been profiting from their ALGO positions and that percentage is currently slightly higher at 85%.

Another interesting pattern based on Algorand’s on-chain activity is the growing participation of institutional players. IntoTheBlock classifies as large transactions those that transfer over $100,000, an amount significant enough to act as a proxy for the level of involvement of institutions and whales for a particular token. In ALGO’s case, we observe an up-trend in the number of large transactions, which recently hit a new all-time high.

Source: IntoTheBlock’s Algorand network indicators

Last but not least, Algorand’s ecosystem has been growing particularly in the past few months as DeFi and NFT applications launch. Within DeFi a couple notable projects currently live are TinyMan, a decentralized exchange, and Yieldly, a staking and no-loss lottery protocol. The Algorand Foundation also announced a $300 million fund to support further growth within DeFi on top of its chain. From the NFT space, at least two marketplaces have already launched AB2 Gallery and Rand Gallery. Overall, although the Algorand ecosystem is still in its early stages, some of these protocols already highlight the demand to leverage its underlying decentralized, scalable and secure blockchain.


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