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Simply Explained: Algorand (ALGO)

The Blockchain Trilemma was termed by Ethereum creator Vitalik Buterin. The trilemma references the challenges developers face in creating a blockchain that is scalable, decentralised and secure, without compromising on any of the three.

Decentralisation: creating a blockchain system that is not controlled by a small centre of power.

Scalability: the ability of a blockchain system to handle the obstacles that come with increased adoption.

Security: the ability of the blockchain to counter attacks, remain bug-free and combat any security issues that may arise.

Introducing Algorand, a solution to the Trilemma

Algorand is a blockchain project developed by an impressive team headed by Turing award winner Silvio Micali. Algorand’s mission is to address the trilemma and resolve the issues of scalability, security and decentralisation that hinder most blockchains.

Let’s see how Algorand tackles these three issues.

Scalability and Decentralisation

Algorand can process 1,000 transactions a second, and the time to complete a transaction sits at 5 seconds. Compare this to Ethereum’s TPS of 15, and completion time of 2 minutes. Algorand is able to do this via its unique consensus mechanism.

Let’s quickly recap these different types of validating mechanisms, and introduce ourselves to PPoS.

Proof of Work (PoW): a validator runs computer software to verify transactions and add blocks to the blockchain. This process requires them to use electricity. The gas fee is paid to the validator as a reward to compensate for the cost of the electricity used. This is Bitcoin’s consensus mechanism, and although effective, the high fees and slow transaction times are one of the scalability issues Algorand are trying to tackle.

Proof of Stake (PoS): is another method used to validate transactions. PoS is used by blockchains such as Solana and Avalanche. With PoS, instead of anyone being able to validate transactions, validators must first stake tokens to have the chance to validate. There is also no block reward. Instead, validators are incentivised by taking a small fee from every transaction they validate.

Now, even though the PoS blockchains quite confidently address the scalability issues, they can still be monopolized by stakers with lots of tokens, which means we still have the decentralisation issue from our trilemma. A notable example is the Fantom Network, which only has around 50 validators.

Pure proof of stake (PPoS)

To address this decentralisation with PoS networks, Algorand created Pure Proof of Stake (PPoS).

The main difference between PPoS and PoS is that PPoS introduces the element of random selection when choosing a validator for a transaction. So it’s not just about how much you’re staking as with other networks. Even smallholders can be selected.

The selection of a validator is based on something called a Verifiable Random Function (VRF). Think of this as a weighted lottery. Every ALGO token has its own lottery ticket and therefore, even though the chance of winning is higher by a person staking more, there is still a chance for small stakers.

PPoS also differs in that staking and participating in the Algorand network is seamless. If you’re holding ALGO in your wallet, you’re participating. This is why if you’re holding ALGO on your Coinbase right now you’re probably earning about 6% APR. Users are also not bonded by a specific time period.

Security: Algorand standard asset protocol (ASA)

This is a mechanism used by Algorand to create and deploy new tokens on the network. It’s similar to Ethereum’s ERC-20 protocol. However, unlike with the ERC-20 protocol, instead of writing the smart contract yourself, you fill out a form to create a new asset and then build smart contracts around that asset. This means contracts are less prone to bugs, and things are more secure.

To further solve the security issue, the Algorand network has been designed in a way where forking is quasi-impossible. This presents an issue if the majority of users become malicious.

The team have also come up with a very diligent tokemonic allocation to appease potential detractors of the project.

The Algorand structure

Layer 1: supports the building of smart contract applications and NFTs, taking care of security and comparability.

Layer 2: smart contracts that are very complex are then verified off the main chain.

Now and again, snapshots of Layer 2 are taken and sent back to layer 1 which allows Algorand to continue to scale whilst maintaining its security.

Usually, on platforms like Ethereum, scaling solutions and layer 2s, are built on separate chains. However, Algorandd does this itself by randomly selecting validators to execute the more complex smart contracts when necessary.

Algorand and Ethereum

In February 2022, the Algorand Foundation revealed a $10M grant to Applied Blockchain to develop the London Bridge, a bridge that will bring Ethereum compatibility to Algorand. This bridge to Ethereum would allow Algorand to connect to these applications and attract more liquidity, something Algorand has been struggling with.

The question we pose to you, the reader, is this: in the above, we have detailed what Algorand states it does, but what do you think? In these Simply Explained pieces, we don’t share our opinion. We detail what the project markets, and the objective facts.

Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.

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