Algorand — here’s why crypto lovers are so bullish on this ‘Ethereum Killer’
It is also one of the few projects that has its own investment arm, called Borderless Capital. The Miami-based venture capital firm announced a new $500 million fund on November 30 to invest in the Algo DeFi ecosystem.
What is Algorand?
Like every other public blockchain platform, Algorand is also a decentralised network. However, this one aims to solve the ‘blockchain trilemma’, and tackles the three big problems that the ecosystem faces today — speed, scalability and security. It was launched in 2019 by Turing award winning computer scientist and MIT professor, Silvio Micali.
This is an important feature, since it helps achieve scalability, one of the biggest roadblocks in the crypto space today, and also why some peg ALGO to be among the ‘ Ethereum Killers’. Existing payments systems from Visa and Mastercard can process 1,700 and 5,000 transactions, respectively, and what comes in the way of scaling crypto apps is the fact that transactions can take a long time to process.
It also uses the ‘pure-proof-of-stake’ (PPoS) consensus mechanism, which means that only a select group of miners are rewarded for lending their computing power to complete transactions. This is the same system that Cardano and Solana currently use, and Ethereum is moving towards, in order to reduce gas fees on the network.
Speed and low transaction fees are prerequisites in order to make public blockchain networks real payments systems that can be scaled on a worldwide level.
Algorand is also inflationary, in the sense that there’s a limit to how many ALGO tokens there will be on the network. The supply is capped at 10 billion ALGO tokens, of which 3 billion will be circulated in the first five years including 25 million that were auctioned at launch. Of the rest, 1.75 billion will be distributed to miners as rewards over time, while 2.5 billion is earmarked for relay nodes (a type of mining node supported by Algorand).
Another 2.5 billion has been reserved for the Algorand Foundation and Algorand Inc, which run and maintain the network, respectively. The last 0.25 billion will be distributed for end user grants.
How does Algorand work?
Yes, Algorand does use the proof-of-stake (PoS) consensus mechanism, but the Algorand network’s mining protocols are quite different from what you may otherwise understand about PoS. Instead, the network functions on something called pure-proof-of-stake, or PPoS, which is a more egalitarian approach than PoS and is meant to avoid the ‘rich getting richer’ phenomenon. Essentially, while PoS rewards miners with the most stake, PPoS picks miners at random and irrespective of their stake in the system.
The network has two kinds of nodes — participation nodes and relay nodes. The relay nodes serve as network hubs and their job is to maintain the connection between Algorand’s all the other nodes in the system.
The participation nodes are the ones that actually lend computing power to validate transactions, and these are the ones that are rewarded the most. The participation nodes use the relay nodes to communicate with each other and maintain the ledger.
But the network’s inner workings don’t end there. The Algorand network has its own way of managing smart contracts — a feature of top blockchain networks that allows building decentralized apps (DApps) on them.
“Smart contracts make blockchains programmable. Like a vending machine, a smart contract establishes a clearly defined procedure for transferring assets. For example, Alice wants to buy tokens issued by Bob, so she sends coins to Bob’s smart contract. The contract's code counts the coins, perhaps checks that Alice is in the contract's database of qualified investors, and then transfers the correct number of tokens to Alice's account. The exchange is transparent: Alice can inspect the contract’s code, and the code runs without Bob’s participation.”
The secret sauce that makes Algorand an alternative to Ethereum
Algorand handles smart contracts in two layers, on-chain and off-chain. On Layer-1, the system allows the smart contracts to be run ‘on-chain’, much the same way Ethereum does. This means that every smart contract is directly adding traffic to the network, and too many of them can slow the network down.
In order to avoid that, Algorand offers layer-2 smart contracts as well, where the contract will be executed “off-chain”. This means that the smart contract doesn’t add traffic to the network, but is executed outside its purview, and then added to the blockchain ledger.
What is AVM?
As mentioned above, the Algorand Virtual Machine is a piece of software that runs on every node on the Algorand network, both relay and participation nodes. The AVM contains a stack engine, which is what evaluates the smart contracts on the Algorand network. The AVM evaluates all the logic inside smart contracts and decides whether to execute them.
Algorand claims to be carbon neutral, if not carbon negative
No, Algorand doesn’t run on some magical green power source. While there’s no reason for miners not to power their infra using green power, the Algorand Foundation has pledged to offset the carbon footprint of its network through a partnership with Spanish environmental foundation ClimateTrade.
In order to create a carbon-negative network, Algorand and ClimateTrade decided to implement a sustainability oracle, which will notarise the carbon footprint generated by Algorand’s on-chain transactions for a set amount of blocks. Algorand will lock the equivalent amount of carbon credit in a smart contract, and put the same amount into a green treasury to offset its carbon footprint.
Is Algorand an Ethereum killer?
This isn’t really a yes or no answer. There are pros and cons though, the big pros being the fact that Algorand is faster than Ethereum and that it has no concept of gas fees. The minimum transaction on Algorand is 0.001 Algos and it depends only on the size of the transaction.
The Algorand Standard Asset (ASA) is also similar to the ERC-20 token, since both of them allow smart contracts to be built. However, while ERC-20 will always add traffic to Ethereum’s network and increase gas fees, ASA smart contracts can be run off-chain too and hence reduce transaction fees.
In addition, bridges between ASA and ERC-20 allow applications built on Algorand to talk to those built on Ethereum. Which is why currencies like Tether and USDC can be transferred to ALGO at 1000 TPS.
Algorand’s unyielding price on exchanges like WazirX is a good sign that the cryptocurrency is running on a strong foundation.
Algorand and CBDC
As mentioned earlier, Algorand’s biggest benefit is that it solves the blockchain trilemma. Which means that it’s one of the best suited networks to power central bank digital currencies (CBDCs), like the ones being formulated in countries like India right now. The Republic of Marshall Islands had selected Algorand to power its national currency earlier this year. 16 other such CBDC projects are in the works as well.
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