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Official site algorand.foundation Explorer algoexplorer.io Source code github.com/algorand
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Inside the Algorand blockchain

Algorand (ALGO) refers both to a decentralised blockchain network and a digital currency. Built to resolve the blockchain trilemma of achieving speed, security, and decentralisation at the same time, the Algorand blockchain presents an open-source and pure Proof-of-Stake (POS) network. 

The Algorand network utilises a particular version of Proof-of-Stake known as Pure Proof (PPoS). It refers to a highly democratised PoS consensus protocol that requires a minimal stake for securing the network - just one ALGO coin is enough.

Proof-of-Stake (PoS) presents a consensus mechanism. To learn more about Proof-of-Stake networks, we suggest reading this article: ‘Proof-of-Stake vs Proof-of-Work: Is POS better than PoW?’. 

Designed to process financial transactions quickly similar to centralised versions such as Visa or Mastercard, the Algorand network encompasses a collection of Layer 1 blockchains to provide security, scalability, and privacy.

The forefront of Algorand’s technology includes Layer 2 smart contracts, off-chain computing, and payment scalability. The native cryptocurrency of the Algorand platform is called ALGO; it is used to secure the blockchain and pay transaction fees.  

Algorand aims to achieve global trust among many trustless parties through a blockchain-based decentralised network. The blockchain platform prioritises simple designs for developing technology that can eliminate barriers to entry.

Due to its potential to host other cryptocurrencies and blockchain-based projects, Algorand is a direct competitor to Ethereum. 

A brief history of Algorand

Algorand (ALGO) was founded by Silvio Micali, a Massachusetts Institute of Technology (MIT) professor who has been in cryptography since the 1980s. The Turing Award winner is a co-inventor of several protocols used in existing blockchain projects based on zero-knowledge proofs and probabilistic encryption. 

Back in 2018, Algorand received multiple rounds of funding. It launched its testnet in the same year, and the mainnet launched the next year.  

Due to its main perks, Algorand managed to build partnerships across a wide range of industries such as Circle, Xfinite, and Climate Trade. Additionally, the Republic of Marshall Islands adopted a national digital currency and chose Algorand to power it.

What is the Algorand foundation?

The Algorand Foundation is claimed to be a non-profit organisation focused on protocol governance, open-source development, and token dynamics of the Algorand ecosystem. This decentralised autonomous organisation (DAO) is incorporated as Algorand Foundation Ltd in the Republic of Singapore.

$53.5 million
The value of Algorand Foundation's application to liquidate Three Arrows Capital on a USD coin (USDC) claim in April 2023. The Singapore High Court rejected this claim on the basis that cryptocurrency is not recognised as money in Singapore  

If you are a frequent reader, you probably remember our 'Ukraine DAO: How a DAO is funding the Ukraine defence'. The recent example demonstrated how DAOs could become a new and more efficient model of non-profit organisations. The Algorand foundation is doing the same following the country's government decision to receive donations in ALGO.

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As stated, the Algorand Foundation functions independently from Algorand Inc which is focused on Layer 1 development of the Algorand protocol and enterprise adoption of Algorand’s blockchain technology. 

Even though they operate independently, it has been said that the Algorand Foundation and the company cooperate on many projects and initiatives regarding the Algorand blockchain. 

The link between the Algorand Foundation and the stakeholders is the Governance Advisory Committee (GAC). The main objective for forming the committee was to bring stakeholders one step closer to the governance measures' process, along with deploying the xGov program. 

The 2023 committee includes 14 committee members with representatives from a number of vertical groups such as Web3, decentralised finance (DeFi) and gaming. 

The mentioned xGov program is claimed to be the next step in Algorand’s path to responsible decentralisation by creating an expert layer of governors.

Why is Algorand special?

The answer is obvious – Algorand stands out due to its potential to resolve the blockchain trilemma. It was created with the purpose of achieving scalability, along with the use of a modified PoS consensus mechanism resulting in a fast transaction speed.  

Secondly, the Algorand ecosystem is developer-friendly. As stated by the team behind Algorand, the network supports a wide range of programming languages. The Algorand blockchain enables users to create smart contracts for building decentralised applications and asset creation.

Furthermore, the Algorand blockchain is special because it never forks. In other words, its ledger doesn’t split when new blocks are added. This means that it isn’t divided into separate projects so no one can double-spend on the platform. 

Lastly, Algorand claims to be a green blockchain. It has been stated that it is an eco-friendly blockchain that promotes carbon-neutrality on all levels as reflected in some of its partnerships and internal values.

Algorand's main weaknesses

Being a new platform that entered the crypto market after Bitcoin and Ethereum, it lacks a first-mover advantage and faces the challenge of competing with well-established blockchain platforms. This is a weakness that faces all new crypto projects since they need some time to overcome the network effects and create better brand recognition. 

Apart from being Ethereum’s competitor in the market, Algorand is also in competition with other smart contract platforms that aim to enhance Ethereum’s design and provide more scalability.

Besides setting out innovative technology, each crypto project needs to play its card right to get a slice of the market. For example, in July 2023, Cardano founder Charles Hoskinson offered Algorand to become a sidechain of Cardano.

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The crypto community had mixed reactions to Hoskinson’s offer; a part of the community thought it was a sarcastic one, while the rest viewed it as a genuine offer.   

Algorand is considered undervalued in the market due to its technical perks and potential. However, it has been called out for not being decentralised, even by its supporters from the crypto community.

The centralisation issue

Despite successfully solving two components of the blockchain trilemma, it is still not clear whether it is sufficiently decentralised.  

Let’s start with the fact that 25% of ALGO tokens’ total supply belong to two organisations, Algorand Inc and the Algorand Foundation.  

However, this is not all – another example of centralisation is associated with Algorand’s relay nodes. There are approximately 140 relay nodes, and the list is managed by the Algorand Foundation. Those that are running these relay nodes involve Algorand Inc, the Foundation, early supporters, and participants selected from a relay node pilot program. 

This system was created for the network to remain safe even if all the relay nodes behaved maliciously. The problem is that such a significant component of the platform is handpicked by the Algorand Foundation.

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The 2023 hack

In February 2023, Algorand’s wallet MyAlgo strongly advised users to withdraw any funds from mnemonic wallets that were stored in MyAlgo, following reports of a hack worth approximately $9.2 million. 

Even though MyAlgo didn’t release the estimated number, the blockchain sleuth ZachXBT stated that it is suspected that around $9.2 million was stolen at the end of February.

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MyAlgo further stated that it didn’t know the origin of the attack, yet strongly urged users to withdraw funds and take precautionary measures to protect their digital assets.  

John Woods, the CTO of Algorand Foundation, said that the attack impacted approximately 25 accounts, but that it wasn’t due to an underlying issue with the Algorand protocol.

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How does Algorand blockchain work?

Delivering some improvements, such as the Pure Proof-of-Stake (PPoS) approach, Algorand managed to outperform preceding protocols and eliminate a good deal of network latency. To find out how Algorand works, we are going to examine its main features.

Algorand's protocol structure

Algorand encompasses a two-tiered blockchain structure made of the base layer and the second layer.  

The base layer supports smart contracts, asset creation, and atomic swaps between digital assets. On this layer, users are allowed to create Algorand Standard Assets (ASA) that represent new or existing tokens on the blockchain. This is similar to ERC-20 tokens and how they function on the Ethereum network.  

When it comes to security, Algorand laid down simple smart contracts that execute as Layer 1 Algorand Smart Contracts (ASC1s), meaning that they ensure the same level of security as the consensus mechanism itself. 

Algorand’s second layer includes more complicated smart contracts and an ecosystem for the development of decentralised applications (Dapps). When complex smart contracts are accommodated off-chain, simple transactions are enabled to be processed more quickly on the base layer.

Byzantine agreement protocol 

When mixing PPoS with a Byzantine agreement (BA) protocol, the mechanism establishes how users can participate within the decentralised blockchain, deters malicious activities, and creates a single source of truth that can be verified. 

The Byzantine agreement protocol enables Algorand to reach a consensus on a new block with no forks and low latency. It uses so-called verifiable random functions (VRFs) to choose users in a random and private manner. VRF refers to a public key pseudorandom function that makes BA eligible for Algorand.

Algorand block production

On regular PoS networks, validator nodes are chosen randomly to confirm the transaction data in a block. The PPoS consensus mechanism uses a two-phase block production procedure consisting of proposals and voting. Any user on the Algorand platform can participate in governance procedures by staking ALGO tokens and generating a participation key to become a participation node.  

Remember that we mentioned relay nodes when discussing centralisation issues? These relay nodes coordinate participation nodes and facilitate communication among them. For relay nodes to connect to the Algorand platform, they need the Algorand Virtual Machine (AVM) which refers to a software that operates on both relay and participation nodes on the network.

The proposal phase

The first phase is the block proposal phase in which a block leader is selected to propose the current block. The VRF function selects block leaders by means of their private participation key. In simple terms, only the block leader knows that they have been assigned to propose a block. The VRF function is used again to supply a cryptographic proof that enables the block leader to verify their status. 

This mechanism is considered secure since malicious actors cannot know who the randomly selected block leader is before the block is proposed. Therefore, they cannot target the block leader.

The voting phase

Now we’re down to the second stage – the voting stage. In this phase, participation nodes are elected, in a random manner, to a committee accountable for ensuring that no double-spend or overspend issue occurs in the current block. If a quorum agrees, the block is added to the blockchain. In case any sort of malicious activity is found, the network goes instantly into recovery mode while the block is discarded and a new block leader is elected.  

Such a system of block production means that two blocks cannot be proposed at the same time for the same slot. Only one block can have the required threshold of committee votes. Once a block emerges, it has already obtained consensus and users can rely on it.

What is the difference between Algorand (ALGO) and Ethereum?

Algorand and Ethereum are considered direct competitors due to their similarities. Both networks provide infrastructure to support the creation and development of other blockchain-based projects, using PoS and smart contracts. On the other side, there are some significant differences between these two blockchain platforms.

Staking

Ethereum and Algorand differ when it comes to staking. While the Ethereum network requires users to stake 32 ETH to become a validator, ALGO holders are enabled to participate in the consensus mechanism just by having ALGO cryptocurrency in their wallet.  Anyone who owns a minimum of one ALGO can become a part of the validation process.

In comparison with the Algorand blockchain, Ethereum is slower and more expensive. For example, Ethereum can process a new block of transactions every 12-14 seconds while transactions processed on the Algorand platform are finalised in 5-12 seconds. Additionally, it boasts significantly lower transaction fees than Ethereum.

Reward system

When Algorand launched, it already had a reward system for participating in consensus. The Algorand Foundation funded the rewards pool which managed to pay out rewards over two years. The program ended in April 2022, and a few months later, Algorand set in place a novel system in which rewards are earned by governance participation. 

Therefore, Algorand relies on its community to make governance decisions regarding new implementations. Those who stake ALGO and participate in voting for the duration of the governance period are being rewarded. 

On the other hand, Ethereum rewards users who participate in validation according to the amount of ETH contained in the blocks being verified.

Algorand native cryptocurrency – ALGO

ALGO is the native cryptocurrency of the Algorand network and the backbone of the network infrastructure. Due to the design of the Algorand protocol, the rewards paid to validators for producing blocks are distributed among all ALGO holders instead of being provided only to block producers.  

The whole process was simplified since users don’t need to actually stake ALGO as part of the validation process; they simply need to hold ALGO tokens in a non-custodial crypto wallet or on a cryptocurrency exchange.  

The reward distribution takes place approximately every 10 minutes to encourage more users to join the staking platform and decentralise the network further.

Token distribution and economy

The token economy was explained by the Algorand Foundation stating that only 10 million units of the ALGO cryptocurrency will ever be created. The number of ALGO coins in circulation is tracked by Algorand’s block explorer.  

As for the token distribution in general, over the first five years 3 billion estimated ALGO coins shall be introduced into circulation via the first auction. Estimated participation awards equal $1.75 billion which shall be distributed over time. 

When we discussed centralisation issues, we stated a huge part of the token distribution went into the hands of the Foundation and Algorand Inc. This equals approximately $2.5 billion while $0.25 billion is estimated to be distributed over time to end-users.

Is Algorand (ALGO) a good investment?

Algorand has already demonstrated to be a strong crypto project that supports users and developers by delivering innovative technological solutions and real-world utilities. Investors may see Algorand as a good addition to their cryptocurrency portfolio if they believe that Proof-of-Stake blockchains, which can lower the cost of participating in a blockchain's operation, should obtain more success in the market.

However, it is hard to say whether ALGO is a good investment because it depends on the business and innovation course taken by the Algorand team. When it comes to crypto investments, be sure to educate yourself enough and do your own research.