Algorand: A Blockchain Breakthrough in Speed and Efficiency

1,000 transactions per second, and five-second finality — how does Algorand do it?

Summary

Contents

What is Algorand?

Algorand uses a Proof-of-Stake (PoS) consensus mechanism, and distributes validator rewards to all holders of its native ALGO cryptocurrency. Through strong throughput capacity and equitable community incentivization, Algorand is capable of managing the high-throughput requirements of widespread global usage and a variety of use cases.

As a public smart contract blockchain that relies on staking, Algorand is currently capable of hosting decentralized application (dApp) development and providing scalability. Rising gas fees on Ethereum have led many dApp developers and decentralized finance (DeFi) traders to look for alternative blockchain solutions, with some turning to Algorand as an Ethereum-alternative for dApp development and DeFi applications.

Algorand also allows developers to use the Algorand Standard Asset (ASA) protocol to create new tokens or to transfer existing tokens to the Algorand ecosystem. For example, stablecoins like USDT and USDC also exist as ASAs on the Algorand blockchain and enjoy much higher throughput and much lower transaction fees than what is typical on Ethereum. Further, as central banks continue to research networks to host their central bank digital currencies (CBDCs), Algorand has become a viable option and has been chosen to host the Marshall Islands CBDC.

Algorand Protocol Structure

On this first layer of the Algorand network, platforms and users can create ASAs which represent new or existing tokens on the Algorand blockchain. This is similar to how ERC-20 tokens function on the Ethereum network. In regards to security, simple smart contracts on the Algorand platform execute as Layer-1 Algorand Smart Contracts (ASC1s), which means they maintain the same level of security as the consensus protocol itself.

The second layer of Algorand is reserved for more complex smart contracts and dApp development. It’s this bifurcation of the network, between Layer 1 and Layer 2, that allows Algorand to process transactions so efficiently. With more complex smart contracts taking place off-chain, simple transactions can be processed more quickly on Layer 1 without being bogged down by larger, more complex smart contracts.

Algorand Staking Mechanism: Pure Proof of Stake

Algorand Block Production Under PPoS

In the proposal phase, a block leader is selected to propose the current block. Block leaders are selected via Algorand’s verifiable random function (VRF) — a provably random mechanism that selects nodes randomly, but weighted by the relative size of their respective stakes. The block leader is secretly assigned by means of their private participation key, which means that only the block leader knows that it has been assigned to propose the block. The VRF supplies a cryptographic proof that allows the block leader to easily and verifiably prove its status as the current block leader. This methodology provides additional network security because malicious actors have no way of knowing who the randomly designated block leader is before the block itself is actually proposed, reducing the opportunity to target the block leader in an attempt to compromise the network.

Following block proposal, we arrive at the voting stage where participation nodes are randomly elected to a committee responsible for ensuring that no double-spend, overspend, or other problems have occurred in the current block. If a quorum agrees that all is well, the block is added to the blockchain. If malicious activity is detected, the network goes into recovery mode whereby the block is discarded and a new block leader is elected.

Algorand, somewhat controversially, does not make use of slashing. This means that a node cannot have its staked balance reduced for proposing a bad block. Instead, the network enters recovery mode and continues on. While this promotes speed and efficiency by quickly moving on from errors, some have criticized this facet of Algorand’s block production system as it lacks any mechanism to punish dishonest behavior on the network.

With this method of block production, two blocks cannot be proposed simultaneously for the same slot, which means that there should never be a fork of the blockchain. Once a block appears, it has already achieved consensus and users can rely on it immediately, eliminating a good deal of network latency.

Algorand’s Native Cryptocurrency: ALGO

To make this process even easier, users don’t have to actually “stake” the coin themselves as part of the block production and validation process, but can simply hold ALGO in a non-custodial wallet or on an exchange to access earned rewards. In this sense, Algorand has achieved near automation, as stakers can passively hold ALGO while also supporting the network.

There is a hard supply cap of 10 billion ALGO coins, which is allocated as follows:

  • 3 billion ALGO to be released into circulation over the first five years (including the initial auction of 25 million ALGO coins)
  • 1.75 billion ALGO estimated to be distributed over time as rewards for participation nodes
  • 2.5 billion ALGO will be distributed over time to relay nodes
  • 2.5 billion ALGO are reserved for the Algorand Foundation and Algorand Inc.
  • 0.25 billion ALGO to be distributed for end user grants

Like many blockchain-based projects working toward an optimally equitable coin distribution process, Algorand’s decentralization of its ALGO coins is an iterative process. The Algorand Foundation currently holds a large amount of ALGO, which critics claim makes the protocol centralized in the short term. However, Agorand’s democratized reward distribution mechanism is built to mitigate network centralization over a longer timeframe.

The Algorand Foundation

The Algorand Foundation further launched two accelerator programs in 2020 — Algorand Asia Accelerator and Algorand Europe Accelerator — which focus on assisting ongoing projects and developers interested in building on Algorand. These programs provide promising projects with end-to-end support from strategy formulation all the way to launch in an effort to help the Algorand ecosystem grow and thrive.

A relative newcomer in the blockchain space, Algorand has already proven to be a powerful platform with strong tech innovation, developer support, and real-world use cases. Algorand’s highly equitable coin rewards structure and consensus mechanism is pioneering a new standard in blockchain, and expectations are growing fast for the Algorand endeavor.

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