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What is Algorand? Looking into the ALGO ecosystem

Key Takeaways:

  • Algorand is one of the fastest L1 blockchains, offering over 1,000 transactions per second with negligible fees and transaction finality under 5 seconds.

  • The speed and cheapness of Arbitrum is achieved by their unique Pure Proof-of-Stake consensus mechanism.

  • The Algorand ecosystem has held up well despite the bear market as there is a growing amount of TVL, as well as an increasing number of users, developers, and dApps.

In 2022 the market has entered into a bear market and TVL across various crypto ecosystems has dropped drastically. However, Algorand’s ecosystem has continued to do well. TVL is steadily going up, and dApps are still updating and adding new features. Read on to find out what Algorand is and what makes them so special. 

Algorand TVL

What is Algorand?

Algorand is a decentralized network designed to solve the blockchain trilemma, which occurs when a blockchain must choose to compromise on one of three things: scalability, security, or decentralization. 

Algorand was founded in 2017 by Silvio Micali, a computer scientist with deep expertise in cryptography and the recipient of both the Turing Award in computer science and the RSA Prize.

Under the guidance of an experienced professor, the team is working to develop Algorand as a payments-focused network with quick transactions, prioritizing security and decentralization, and attempting to address the blockchain trilemma as best they can. 

Some of the key points of Algorand are as follows:

  1. High transaction speeds of up to 6,000 TPS

  2. Fast finality under 5 seconds

  3. Low chance of forking the blockchain

  4. ALGO holders receive a proportionate share of newly created ALGO

  5. Requires two-thirds of validators to be honest

Fun fact: The name Algorand is a combination of ALGOrithmic and RANDomess.

How Does Algorand Work?

Let’s look at the mechanism that Algorand uses for their blockchain now that we have a brief overview of what Algorand is about. 

Pure Proof-of-Stake (PPoS) Consensus 

Pure Proof-of-Stake is used at Algorand which is a somewhat different consensus process than PoS used by the popular Ethereum network.

Users become Participation Nodes when they stake ALGO and produce a valid participation key. A user that participates in the consensus method can make sure their ALGO is secure even if their Participating Node is compromised by utilizing a participation key rather than the regular spending key.

PPoS can be explained simply by imagining that we are both Participation Nodes and that, in order to connect with one another, we would need to rely on Relay Nodes to facilitate communication, much like how we rely on phones to communicate.

Algorand Cryptographic Sortition

Algorand constructs blocks into segments using a unique verifiable random function (VRF) called lottery. After that, the segments are divided into the proposal phase and the voting round. 

These “cryptographic sortition” lotteries are helpful for facilitating quick transaction completion and finality recording. This eliminates the need to wait for 20 or more confirmations in order to determine whether or not a transaction has actually occurred.

There are three main phases to this: proposal, voting, and writing.  

Proposal phase: Tokens are chosen at random to be a part of the following block. This proposer is kept from the network at first and only made known to them during the propagation phase in order to avoid any manipulation or interference. A token has the same chance of being chosen as any other token in the network.

Voting phase: Once completed, every participating node will execute the VRF. There will be a weighted vote assigned to an account depending on how much ALGO it possesses and if it has been selected to participate in soft voting. Various block proposals are subsequently reduced to a single block that will be put on the blockchain after confirmation. Votes are utilized specifically to choose the proposed block with the lowest VRF and the mechanism will proceed to the next phase once a quorum has been reached for the soft vote.

Writing phase: A new committee will be chosen to review the single block proposal for the overall integrity of the block (e.g double-spending) now that it has been voted on. The block will be added to the blockchain and published to the ledger if the committee approves it as genuine. The procedure will then begin again to choose the next block to be added in a new round. However, if the block is rejected, the blockchain will go into recovery mode, which will result in a new block leader being chosen and the previous block being deleted.

Algorand Standard Assets (ASA)

Algorand Standard Assets (ASA) are unique to Algorand and they act as a standardized framework that is used to represent any asset on the Algorand blockchain.

ASAs protect users from asset spam protection which prevents unknown assets or non-whitelisted assets from being sent to the user without their approval. This is accomplished through the “opt-in” function, which requires users to complete a process before accepting additional assets into their wallets. With ASAs, users can feel secure as they are largely protected from potential hackers or unwanted random assets, enhancing their overall user experience.

Another feature that ASAs offer for businesses is called Role Based Asset Control (RBAC). The asset control system gives owners the option to utilize flexible asset control. ASAs also have a limitation policy that permits specified addresses to be approved for use with particular assets. It enables the documentation of off-chain assets to be included in the on-chain asset definition, which is made possible by the Layer 1 Algorand smart contract design. However, ASAs can force an asset transfer on strong grounds of legal allegations and even quarantine accounts in the event of an investigation.

There are four types of ASAs that allow users to manage on the Algorand blockchain: Fungible tokens, Non-fungible tokens, Restricted fungible tokens, and Non-restricted fungible tokens.

Fungible tokens: Fungible tokens contain exchangeable items that may be exchanged for others of the same kind, including any cryptocurrencies, in-game currency, reward points, etc.

Non-fungible tokens: Non-fungible tokens (NFTs) are unique assets that increase in value based on different properties. These include character identity, collectables, in game items, etc.

Restricted fungible tokens: Restricted fungible tokens are replaceable assets that are constrained by certain legal rules such as licenses, securities, and government-issued assets.

Non-restricted fungible tokens: Non-restricted fungible tokens are not directly affected by legal rules and they can include real estate, ownership registries, etc.

All ASAs have functions that work similarly with the Algorand blockchain due to it being built into the Layer 1 smart contract architecture. ASAs have taken on features of the Algorand blockchain such as making the asset highly secure and quick in function. Additionally, ASAs are easily issued and allow cross border transactions without the need for intermediaries. This saves users both time and money, and transactions can be seen transparently on the blockchain.

Algorand Virtual Machine (AVM)

Algorand has created their own version of the popular EVM, called the Algorand Virtual Machine (AVM). The AVM provides a safe, scalable, and sustainable platform to address inefficiencies and major issues surrounding Layer 1 blockchains. 

While it was previously too expensive and unscalable for dApps to build on, the AVM now makes it easier to drive real-world utility on to the Algorand blockchain through smart contract integration.

The language used to create smart contracts on Algorand is called Transaction Execution Approval Language (TEAL). These smart contracts have been implemented into every node in the Algorand blockchain, allowing them to benefit from the platform’s high speed, scalability, and security. Developers may now create any dApp using Algorand while maintaining high execution speed and cost efficiency using the AVM.

With AVM, users can also be sure that the program they interacted with secure and the results produced have not been tampered with thanks to trustless programs of smart contracts that are executed on-chain.

Algorand Pros and Cons

Pros of Algorand

Decentralized: Algorand does not require Azure or Amazon Web Services (AWS), which are typically needed by other blockchains, to set up participation nodes. Since there are fewer technical requirements, there is a lower entry barrier, which encourages participation and furthers the network’s decentralization. Also, the PoS consensus makes sure that running nodes are chosen at random, no matter how much Algorand they own. This makes sure that regardless of how many tokens they own, all investors have an equal say in the project’s governance.

Scalable: Algorand currently has a maximum TPS of 6,000 however it foresees a final target of 46,000 TPS as the protocol develops its processing capabilities.

Developer-friendly: Algorand uses the Python programming language, one of the most popular languages for developers. Additionally, it provides developers with a software development kit (SDK) and guides on how to build on the platform, covering everything from the fundamentals of the Algorand Virtual Machine to creating Algorand smart contracts, promoting more innovative developments on Algorand. 

Native USDC: Circle USD (USDC) supports native USDC on Algorand, creating a safer DeFi environment for users as native USDC are safer than using wrapped USDC which is susceptible to bridge risks.  

Cons of Algorand

Lack of slashing penalty: Slashing typically fosters positive behavior since block leaders are motivated to suggest positive blocks for inclusion on the blockchain in order to prevent the loss of individual investments.

Concerns have been expressed about the security element of Algorand due to the PPoS’s lack of a slashing penalty because block leaders might propose defective blocks without incurring any money loss, the integrity of the system could potentially be compromised.

It should be emphasized that the VRF used aids in enforcing the security and decentralization components greatly, despite the lack of consequences for dishonest behavior. 

How to Stake Algorand $ALGO

Algorand rewards ALGO stakers who protect the network by acting as validators or delegators with stake payouts. 

Staking your ALGO on the official Algorand Wallet gives you around 6% APY. ALGO rewards are directly transferred to the wallet and will automatically accumulate and compound as time passes. 

With as little as 10 ALGO, centralized exchanges such as Binance and Coinbase provide additional options for users to stake their ALGO tokens. These platforms allow users to have the choice of flexible staking for easy withdrawals and locked staking for a set duration to earn higher yield with your ALGO.

ALGO staking has a low entry barrier and which lets anyone do so within a few clicks on their preferred platform. With a decent payout of 6% APY, this gives users the opportunity to secure the network while generating yield on their ALGO tokens.

What is ALGO

ALGO is the governance and utility token, which can be staked to earn rewards throughout the Algorand ecosystem. The ALGO token is used as gas fees for all transactions within the Algorand community and is the most popular token within the Algorand ecosystem. 

ALGO Tokenomics

Let’s take a look at the tokenomics of ALGO. Algorand started with a fixed supply of 10 billion tokens, but due to 25.5 million ALGOs being burned, the total supply now stands at 9.97 billion ALGOs. 

As of this writing, there is a circulating supply of 7.1 billion and a market cap of $1.74 billion.

Algorand tokenomics

Where to Buy ALGO

ALGO tokens can be bought on cryptocurrency exchanges with fiat currencies. You may purchase them using stablecoins like USDC and USDT, or directly on the exchange with a credit/debit card or bank transfer. 

You can purchase ALGO through popular CEXs like Binance, Coinbase or Crypto.com. These platforms would require you to go through KYC and might not be available in certain countries. This can also be done on Algorand based DEXs such as AlgoFi and Algodex permissionlessly.

Algorand Projects

AlgoFi

AlgoFi is a DEX and the leading lending protocol built on Algorand with the highest total value locked (TVL). The protocol features multiple services such as a swap DEX, lending market, and liquidity farms, which allow users to earn interest on their Algorand assets. 

algorand dex algofi

Additionally, users that do not want to sell their assets can provide collateral to mint their native decentralized stablecoin (STBL) for higher capital efficiency.

For more information about AlgoFi and how the platform works, you can visit their docs here.

Folks Finance

Folks Finance is another lending and borrowing protocol built on Algorand that also features liquid staking feature on Algo token, allowing users to receive a liquid staked token of ALGO when they stake, enabling them to still vote on Algorand governance proposals and earning yield while interacting with DeFi activities such as lending, liquidity provision, and more.

algorand money market folks finance

For more information about Folks Finance and how the platform works, you can visit their docs here.

Tinyman

Tinyman was the first automated market maker (AMM) DEX on Algorand launching in October 2021. Similar to well-known Uniswap and SushiSwap, the DEX enables users to trade assets directly by swapping them at market rates. By staking assets in several pools, users can benefit from incentives and swap fees.

tinyman algorand dex

Tinyman will be launching Tinyman v2.0 in 2023 with features that include flexible liquidity addition and removal, flash loans & flash swaps, dynamic fee settings, full composability and interoperability and additional security and readability features.

To find out more information about Tinyman, you can visit their docs here.

Algodex

Algodex is the largest order book DEX built on Algorand. The trading platform enables limit and market orders for trading a variety of assets, including NFTs and Algorand coins. Users can provide liquidity on Algodex to earn rewards in ALGX.

algodex algorand dex

Algodex also features a multi-asset sender called Algodex Mailbox. The mailbox enables users to simultaneously send assets to several recipients which saves users time and gas fees instead of having to do so with multiple transfers.

To find out more information about Algodex, you can visit their docs here.

FXDX

FXDX is a decentralized derivatives exchange with a simple to use UIUX, lightning-fast transaction speeds, and low transaction costs. They are heavily inspired by GMX, another popular decentralized derivatives exchange on Arbitrum. After only one week of operation, FXDX surpassed all other decentralized trading platforms on the Algorand blockchain in terms of volume and has since achieved over $350 million in trading volume in just a few months from launch.

algorand derivative dex gmx

FXDX features include zero gas fees for trading, up to 50x leverage, 100% on-chain, 100% non-custodial, the ability to hold long or short positions in any cryptocurrency asset, unique listings, the ability to establish derivatives markets, regulatory readiness for DEX, extreme speed, high scalability, and a powerful UX/UI.

If you want out more about FXDX, here is a guide to their platform.

FIFA Partnership

In May of 2022, Algorand was announced as one of the official sponsors of FIFA, and Algorand will be providing blockchain support for the FIFA wallet. However, in late November 2022, Algorand mentioned that they will instead be focusing solely on the technical development aspect of the partnership to help with FIFA’s digital asset strategy. 

Conclusion

As one of the few systems that could potentially resolve the blockchain trilemma, Algorand is an interesting project that has continued to scale with its PPoS consensus method. 

While TVL across the crypto markets has dropped since the beginning of the year, TVL in Algorand has actually gone up a lot despite the current state of the market.

With strong technology and partnerships, it will be exciting to see what is in store for Algorand in the coming years.

Tell us how much you like this article!

CJ

CJ

CJ sold his property to go all-in on crypto in March 2020 and now spends his time sharing about decentralized finance products through educational videos and articles.
Follow the author on Twitter @fishmarketacad

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