What Is Algorand Network and ALGO Token?
With its mainnet and ALGO token launched in June 2019, Algorand is a blockchain that addresses scalability and consensus issues that commonly plague first and second-generation blockchains. Algorand's key feature is its Pure Proof of Stake (PPOS) consensus protocol that randomly selects validators based on their staked ALGO coin.
Participating users have an opportunity to propose and validate new blocks, which are then verified by a randomly-selected committee. Once a block is added to the blockchain, all transactions are confirmed. In the event of a bad block, a new validator is selected, and the process starts anew.
The decentralized nature of Algorand's system is its major strength, where any staker can potentially become a validator. Apart from consensus, ALGO is also used for network transaction fees.
Basics
Algorand is a blockchain that prioritizes scalability while maintaining decentralization, which is a challenge for many first and second-generation blockchains like Bitcoin and Ethereum. Algorand addresses this issue through its PPoS consensus mechanism, which is its most notable feature.
Many large institutions and companies have been drawn to Algorand due to the scalability, security, and decentralization of the PPoS mechanism. Algorand serves as an infrastructure layer that provides scale, speed, and cost efficiency, allowing companies to solve real-world problems.
What Is Algorand Network?
Founded by Professor Silvio Micali, a renowned computer scientist from MIT and winner of the Turing Award, Algorand is a blockchain network and project that launched its mainnet in June 2019, along with its native cryptocurrency, ALGO. The blockchain's primary focus is on improving scalability and supporting smart contracts.
Algorand is a public, decentralized Pure Proof-of-Stake blockchain that supports customized layer-1 blockchains. These blockchains can be tailored to specific uses, making the technology particularly useful for financial services, decentralized finance (DeFi), fintech, institutions, and the creator economy. The project claims to have solved the trilemma, balancing security, scalability, and decentralization and provides a solution that addresses the needs of various industries.
What Is the Algorand Foundation?
Launched in 2019, the Algorand Foundation is a non-profit organization that focuses on funding and developing the Algorand ecosystem, as well as community, research, and governance work.
The Foundation has supported Algorand projects in its ecosystem with accelerator programs and has also educated developers in universities. However, Algorand Inc., a private company, handles the technical development work. The Algorand Foundation holds a significant amount of ALGO, which it uses to fund its activities.
How Does Algorand Work?
Algorand's Pure Proof of Stake consensus mechanism is the cornerstone of its scalability. Unlike other blockchains that sacrifice decentralization for scalability, Algorand can process numerous transactions quickly while maintaining its decentralized architecture. For instance, Proof of Stake (PoS) blockchains can scale, but a small number of validators with large stakes can dominate block approvals, and Proof of Work (PoW) blockchains have similar issues as large mining pools often win the race to create new blocks.
In contrast, Algorand’s PPoS consensus mechanism randomly selects validators and blocks proposers from anyone who has generated a participation key. The probability of being selected is proportional to the participant's stake in the overall amount staked. Although a small holder will have a lower chance of being selected than a large holder, Algorand does not require a minimum stake, which is a significant barrier to entry for the average user. The network's security is more decentralized than that of other PoS blockchains, such as Delegated Proof of Stake (DPoS), where a selected set of validators controls the network.
At present, Algorand's Pure Proof of Stake protocol can deliver blocks with instant finality every 3.7 seconds on average, processing up to 6,000 transactions per second (TPS).
Proposal Step
Algorand’s Pure Proof of Stake consensus mechanism is built on several phases. Users generate their participation key to become participation nodes with as little as 0.1 ALGO. Communication between these nodes is achieved through Algorand relay nodes.
The block proposal phase then employs a Verifiable Random Function (VRF) to select multiple block proposers, choosing them based on the proportion of each validator's stake. The proposers’ identity is kept secret until they propose the new block, along with the VRF output, to prove their legitimacy. This enhances network security as bad actors cannot maliciously target the chosen validator.
Once a block is submitted, participation nodes are randomly selected to join the soft vote committee. This stage filters proposals so that only one candidate can be added to the blockchain. Voting power on the soft committee is proportional to the amount each account has staked, and votes are used to select a proposed block with the lowest VRF hash. This ensures that it is impossible to predict the lowest VRF hash and preemptively attack the proposer of a block.
Certify Vote Step
After the soft vote stage, the block proposal with the lowest VRF hash is considered valid, and a new committee is formed to ensure the integrity of the transactions in the proposed block and prevent double-spending. If the committee approves the block, it is added to the blockchain. However, if the committee rejects the block, the blockchain enters recovery mode, and a new block is proposed. Unlike other consensus mechanisms, there is no penalty for the block proposer who submits an invalid block, which is a contentious issue with the PPoS protocol. The risk of a fork in the Algorand blockchain is rare, as only one block proposal reaches the certify vote stage at a time. Once added, all transactions in the block are considered final.
ALGO Token and Its Use Cases
Algorand's native token, ALGO, has a maximum total supply of 10 billion coins to be distributed by 2030. It serves three primary purposes. Firstly, it can be used to pay transaction fees on the Algorand Network, which is much cheaper compared to networks like Ethereum and Bitcoin, with a minimal fee of 0.001 ALGO.
Secondly, ALGO can be registered to have a chance of being selected as a block proposer or validator. This helps maintain the decentralization of the network and provides an opportunity for users to earn rewards.
Finally, ALGO can be used to participate in the Governance Program and vote on important measures regarding the future of the protocol. This feature provides a significant incentive for the average user to invest in ALGO as they can easily participate without the need for decentralized applications (DApps) to register their coins for Governance.
Additionally, Algorand publishes a list of projects that adopt the blockchain's technology, and many of these require ALGO to be used.
Conclusion
Algorand, like other alternative blockchains to Bitcoin and Ethereum, is designed to prioritize scalability, speed, and decentralization. However, what sets it apart is its Pure Proof of Stake consensus mechanism, which employs Verifiable Random Functions (VRFs) to ensure security and avoid potential attacks. This unique approach has attracted many users who are interested in blockchain technology that is more decentralized and secure.