5 min readDiscover Algo, 'the borderless economy’ that allows anything of value to be traded between two or more parties, wherever they may be, without the friction of current financial networks.
Protocol Mechanism
In the Algorand network, Pure Proof of Stake (PPoS) means stakers do not receive any rewards, instead, Algo tokens are rewarded to users who participate in governance whereas most other chains incentivise the block producers or validators. So while anyone with some Algo in their wallet can stake, only those who vote on governance proposals receive tokens. Algorand’s decentralised Byzantine agreement protocol can tolerate an arbitrary number of malicious users as long as honest users hold a supermajority of the total stake in the system. A Byzantine Agreement is a communication protocol that allows the users of a distributed system to reach consensus in the presence of malicious actors. Algorand’s Byzantine Agreement is uniquely efficient thanks to its novel use of Verifiable Random Functions (VRFs).
Key Figures
History
In February 2018, Algorand received $4M in initial investment from Pillar and Union Square Ventures followed by another $62M round from a number of additional investors in October that same year. In June 2019, the Algorand Foundation launched the Global University Program with the goal of advancing strong technical research in blockchain for a borderless economy. The first round of the Dutch auction for Algorand Tokens was held that same month.
In the fourth quarter of 2021, Algorand started its community governance which commenced the shift to a phase in which the community began to take more charge of the network, and rewards were distributed in return for verifiable engagement in the program. This means that Algorand has stopped rewarding validators for securing the network, instead, only those who participate in the governance process are issued tokens. The community governance rewards are scheduled to continue until 2029 whereby the remaining 3.3 billion tokens will have been distributed.
In 2022, Algorand’s upgrade bestowed smart contracts the ability to call one another, allowing for greater composability and for more complex applications to be built. This highlights how early Algorand is in the development cycle as smart contract platforms like Ethereum have had this capability since its launch in 2015. However, the DeFi landscape continues to grow as shown below, Total Value Locked in Algorand reached an all-time high in July 2022.
In 2023, Algorand’s network upgrade from the end of June enabled the blockchain to increase throughput to 10,000 transactions per second, decrease the blocktime to 3.3 seconds, and support quantum-secure interoperability via State Proofs.
In early 2024, on January 17th, the Dynamic round times upgrade, improved block times to average less than three seconds. Builders will benefit from the flexibility of dynamic round times as it enhances the efficiency and scalability of the Algorand network. End-users will experience quicker confirmations at a point-of-sale speed with which they’re familiar, creating a seamless and timely interaction with the blockchain.
Two of 2024’s largest goals include two transformational upgrades to the protocol, both of which are designed to markedly increase its decentralization. First, Algorand is introducing the incentivization of consensus, and second, it is transitioning to a peer-to-peer (P2P) gossip network. These strategic changes will give more power to Algorand users and improve the chain's autonomy.
CoinShares’ Analysis
Algorand stands out with a formidable team led by Turing award winner, Silvio Micali, showcasing significant achievements like post-quantum signature keys and Verifiable Random Function (VRF). It's environmentally conscious, being one of the few carbon-negative blockchains, thanks to on-chain carbon credit trading, and boasts exceptional speed and efficiency with its smart contract platform, ensuring quick and cost-effective transactions due to its non-forkable nature. However, its inability to fork might pose risks to its performance and stability in the event of delayed consensus among validators. On the opportunities front, Algorand is expanding its developer reach by supporting native Python for blockchain development, though it faces threats from competing Layer-1 blockchains with similar offerings and potential issues from a lack of network incentives for validator consensus.
Strengths
Algorand possesses a strong team, built around Turing award winner, Silvio Micali. This team has made notable accomplishments as evidenced by Algorand’s post-quantum signature keys for state proofs and Verifiable Random Function (VRF). The culture and values are also present as Algorand is also one of the few carbon-negative blockchains due to on-chain carbon credit trading. With high throughput and low latency, Algorand is one of the fastest smart contract platforms in the market. This speed is also accompanied by low fees as each transaction costs fractions of a penny. These fast times to finality are due to Algorand being unable to fork (when a blockchain splits into two paths). With no fork choice rule, users can be confident that their transactions will be finalised within a short period of time as long as most validators continue to act honestly.
Weaknesses
Without the ability to fork, if validators take long to reach a commitment (whether accidental or a coordinated attack), the blockchain performance will degrade and may eventually stall completely.
Despite losing Algofi and experiencing continued declines in the ALGO market cap, the stablecoin market cap, and governance participation throughout 2023, Algorand continued to add developments and remained focused on growing its ecosystem. Its efforts from the NFT Rewards program proved successful, driving a 321% growth in NFT-related transactions and a 2% growth in overall transactions on Algorand in Q3.
Opportunities
Now developers can use one of the most popular programming languages in the world – Python – to build on Algorand. Python, in its true native form, will open up new possibilities and expand the reach of Algorand blockchain technology like never before.
Threats
Other Layer-1s also offer high throughput, low latency, and cheap transactions. Algorand may need to differentiate itself more to improve its market share.
The lack of network incentives to participate in consensus may backfire if validators begin to collude as the network continues to decentralise.