Is Algorand A Good Investment? (Guide)

Algorand believes that the way to confirm more transactions without sacrificing decentralisation or the blockchain security is by entrusting the economy of the network to the majority of the network. 

Using this strategy, Algorand confirms 1000 transactions in 1 second with its decentralization and security intact. 

But how does it do this?

This article details what Algorand is, its underlying protocol and if it is a wise investment.

Let’s get into it…

What Really Is Algorand?

Algorand is an open-source decentralized blockchain. This means that its records are public and transparent, allowing anyone to download its software and fix security flaws.

As a payment-focused blockchain, Algorand processes over 1,000 transactions per second with near-instant finality.

Finality is the state where a block has been processed hence cannot be deleted, altered, or reversed. The time taken for Algorand to achieve finality is less than 5 seconds.

Algorand blockchain is a 2-layered smart contract structure. 

Layer-1, also called an on-chain smart contract, provides a fast route for processing common transactions like crowdfunding, common kinds of post-and-sale transactions, accredited-only transactions, and securitized loans. Processing atomic swaps and atomic transfers are seamless on the layer-1 structure.

Atomic swaps are transfers controlled by mutually suspicious parties where both transactions either both happen or both do not happen. It involves the quick exchange of two different cryptocurrencies running on distinct blockchain networks.

For instance, if Lucy wants to trade her Solana tokens (SOL) for Paul’s Ethereum (ETH), she would have to deposit her SOL into a contract address that acts like a safe. When the safe is created, Lucy generates a key to access it and shares the cryptographic hash of this key with Paul. (Note that since Paul gets the hash of the key and not the key, he would not be able to access Lucy’s SOL).

Paul uses this hash to create another safe contract address where he deposits his ETH. 

To claim Paul’s ETH, Lucy would have to use the key she created, and by doing so, she reveals it to Paul.

This means that if any of the parties fail to do what they are supposed to do (like sending an invalid hash) the contract is canceled and the funds would be automatically returned to its owners.

For processing atomic swaps, Ethereum smart contract requires a hashed timelock contract which is a timed multi-phase protocol that could produce disastrous results in cases of a programming error. By contrast, Algorand layer-1 smart contract provides a simple and safe solution to processing atomic swaps.

The layer-1 contract also makes provision for user-defined Algorand Standard Assets (ASA) that lets users create their currency-like token on the blockchain.

Layer-1 smart contract is written in TEAL, a stack machine language that allows programmers to implement the transaction types explained above.

Algorand’s layer-2, also called off-chain smart contracts, implements more sensitive kinds of transactions that require specialized tools. For instance; contracts that are too complex and require a higher-level programming language than TEAL, contracts that are computationally intensive, and contracts that are too big or too sensitive to be made public.

In layer-1 contract, new blocks are selected by a consensus committee that is chosen at random by Algorand’s cryptographic self-selection algorithm.

For off-chain contracts, contract calls are not directly executed by the consensus committee, instead, it is executed and validated by the contract execution committee. 

Each validator on this committee executes the contract call and generates a sequence of effects. A signed certificate endorsing these effects is produced by the contract execution committee and submitted to the consensus committee.

With Layer-1 smart contract, Algorand can process 5,000 transactions in 5 seconds.

Algorand execution of the layer-1 smart contract.

Algorand execution of the off-chain contract.

Tokenomics

ALGO is the native Algorand cryptocurrency. 

As part of Algorand’s design, part of the rewards paid to validators for opening new blocks is distributed to all ALGO coin holders. Reward distribution takes place every 10 minutes.

10 billion ALGO was minted at the genesis of the blockchain. This figure represents its fixed maximum supply which is expected to end in 2030. As of November 2020, 16% of this supply has been released into circulation through the inaugural auction in June 2019 and via community rewards, grant funding, and relay node reward.

Talking about its 10 years distribution plan, Algorand foundation released the following figures:

For community incentives:

i) 2500 million ALGO would be distributed as participation rewards.

ii) 2500 million ALGO to early backers relay nodes.

iii) 1200 million ALGO as contingent incentives.

For ecosystem support:

i) 400 million ALGO would be injected for an innovation fund.

ii) 400 million ALGO for protocol R&D and capital markets innovation.

iii) 250 million ALGO for the foundation Algo grant program (with community voting).

iv) 200 million ALGO for research and social good programs.

From initial allocation (the 16% already used):

i) 2000 million ALGO has been given to Algorand inc.

ii) 500 million ALGO to Algorand foundation.

iii) 50 million ALGO has been distributed for operations and ecosystem.

All figures total 10 billion.

Algorand 10 years distribution chart.

Founders/ Team

Silvio Michali

Silvio Michali is a professor in the Electrical Engineering and Computer department at MIT. He received a turning award (in computer science). He is a co-founder of verifiable random function (VRF).

In 2017, he founded Algorand intending to provide a platform for building products and services. He oversees all research including crypto finance and security at Algorand.

Algorand Inc.

Algorand Inc. is a Boston-based private corporation that oversees the development of the Algorand platform. It was founded by Silvio Michali in 2017.

Algorand Foundation

Algorand foundation is a non-profit organization launched in 2019 to supervise the funding and development of both Algorand inc. and the Algorand protocol.

The foundation supports developer education in universities, blockchain events, and hackathons.

Algorand foundation has launched accelerator programs across Europe, Asia, LATAM, and Draper University.

These accelerator programs aim to support entrepreneurs and developers in building applications on the Algorand blockchain.

Investment

Since its establishment in 2017, Algorand has secured the following investment:

i) $4 million seed funding from pillar and Union Square venture in February 2018. This fund was to help expand the team and develop its open-source consensus protocol.

ii) $62 million funding from a broad global investment group in October 2018.

iii) $100 million fund to invest in disruptors building on the Algorand platform in December 2018.

iv) It’s first auction sale in June 2019 which marked the launching of its official MainNet. 25 million ALGO were made available at a starting price of $10.00 and a reserve price of $0.10.

Is It Fully Decentralized?

Decentralization refers to the transfer of control from a central entity to a distributed network. 

Algorand proves to be decentralized first by its blockchain technology and then by its consensus protocol.

Blockchain technology is a decentralized technology. Developers and innovators believe that it is the right technology for a borderless economy where the control of financial transactions is diffused from central authority (banks) to a distributed network.

Blockchain is a public ledger where transactions are organized into blocks. These transactions can be written by everyone, read by everyone, and no one can alter the transactions in the blocks or change their order.

But blockchain technology does not make a network fully decentralized by itself. The way new blocks are added to the network and who controls the verification of these blocks establishes the decentralization of the network.

Algorand’s Approach

Algorand uses a variation of Proof-of-Stake consensus called pure Proof-of-Stake (PPOS) built on Byzantine Consensus. The addition of new blocks with this protocol occurs in two-phase:

The first phase is the proposing phase where a user is randomly selected to propose the next block.

The second phase is the voting stage where 1000 users are randomly and secretly selected to be part of a committee that approves the block proposed by the first user.

The probability that a user would be chosen and the influence of its proposal and vote is proportional to its stake(the number of tokens the user has in the network).

If Algorand’s developers are in charge of choosing the members of this committee, it wouldn’t be decentralized as a central entity has control over who gets into the committee and who does not, hence controlling the network.

If the users vote who gets into the committee, then they would be transferring their authority to a fixed group of people who can influence the network as they please. 

So who randomly chooses the committee?

Algorand takes an unorthodox approach: the committee members select themselves.

To be part of the committee, users run a cryptographically fair lottery for each of their ALGO coins in isolation. The lottery is cryptographically fair, meaning that no one can alter the chances of being selected (not even a nation with huge computational resources).

For instance, if Lucy wants to be part of the committee to approve a block and she has 100 ALGO coins, she would run a cryptographic lottery on her laptop for each of her coins (with Algorand’s technology,  she can run a single lottery that would bring the result for each of her coins and not 100 lotteries).

One of two cases occurs, either one of her coins wins the lottery or some k>1 of her coins wins the lottery. In this case, she wins a winning ticket which is proof that everyone can easily verify that she has k votes in the committee. 

She then propagates two things through the network:

i) The winning ticket proving that she has k votes.

ii) Her opinion about the block.

If a majority of the committee agrees that the proposed block is accurate, the block is added to the blockchain.

Pure Proof-of-Stake Vs Proof-of-work

Proof-of-work is an approach where users compete to solve complex mathematical puzzles, this process is called mining. The first one to solve this puzzle wins the right to add a new block to the network and is rewarded with a newly minted coin.

This approach is expensive and only professional miners who can afford the capital expenditure can expect to make a profit from mining.

Since mining is not open to all users (because of its cost), the economy of the network is controlled by a small part of the network (the miners): this is centralization.

Also, two users can solve the puzzles at the same time leading to the addition of two blocks to the network simultaneously. This is called a fork.

A fork can persist with more blocks added to each branch. Eventually, the branch with the shortest number of blocks disappears.

Forks cause delay and uncertainty in the network. If a payment made to you appears in the present block, you can not consider yourself paid. You would have to wait for more blocks to be added to the present block to minimize the chance that the block with your payment will not end up on a dead branch.

Algorand’s pure proof-of-stake approach is different. Every user on the network can participate in opening new blocks. The approach is cheap as the minimum amount of coin needed to be staked is 1 ALGO. Also, it is mathematically impossible for Algorand to be forked.

Pure Proof-of-Stake VS Bonded Proof-of-Stake

Bonded proof-of-stake (BPoS) is an approach where users who want to participate in selecting new blocks are required to lock up part of their stake (called a bond) for a certain time. Their voting power is proportional to their jobs and not the entire amount of coins they have in the network (as opposed to PPoS).

Also, deposits made as bonds cannot be spent until the selected time has passed and dishonesty on the part of the user results in them forfeiting their deposit along with the privilege of participating in the consensus process.

In PPoS however, users are free to use the deposit in their bond at any time. Users’ bonds are not slashed as a result of dishonesty.

What Problem is Algorand Solving?

One of the main challenges of blockchain’s first decade was the inability to solve a three key component called the blockchain trilemma, which includes; decentralization, scalability, and security.

Every blockchain network at this time solved one or two of the components by sacrificing another key component.

Bitcoin has a scalability problem. The process of confirming and finalizing transactions is slow and expansive.

Ethereum was built as an alternative: transactions could be confirmed in 15 seconds as opposed to Bitcoin’s 10 minutes. Ethereum solved the scalability problem by sacrificing its decentralization. Wealthy node operators have more power over the network.

Altorand offers a way to solve blockchain trilemma simultaneously. Micali believes that employing randomness is the key.

Scalability

The focus is on validators to propose and vote on new blocks. Altorand lets validators choose themselves in a random and secretly played the cryptographically fair lottery. The time taken for a user to run this lottery is roughly a microsecond.

Even though Algorand requires a 1000 member consensus committee to vote (confirm) a block at a time, the lottery played by each user runs simultaneously, independent of each other.

If a user gets a winning ticket, she propagates a short message containing her vote on the block and her winning ticket as proof that she was selected.

This means that a maximum of 1000 short messages concerning a block is propagated through the network in about a few microseconds.

With this, Algorand confirms 1000 transactions in 1 second and 5000 transactions (one block) in 5 seconds. 

Does this solve scalability? Yes!

 Decentralization

There is no fixed 1000 member committee in charge of approving blocks. Immediately a block is approved, the committee is dissolved and another committee is randomly and secretly selected using the same lottery approach. 

Also, every member in the network has a chance of participating in the lottery.

Security

The selection of the committee is done secretly. It becomes open to the entire network when the user sends her a short message containing her vote and winning ticket proving that she was selected.

 At this point, it is too late for anyone to corrupt a member of the committee as their vote has already been cast. The committee is invulnerable to the DoS attacks and bribes.

How To Stake ALGO

Algorand does not require users to lock up ALGO coins in a special wallet or account to stake them. By holding ALGO crypto wallet (where it is accessible to sell and buy) you generate rewards.

The amount of rewards a user receives is proportional to their stake.

To stake ALGO:

  1. Create an account: Algorand has an official wallet with an account to hold ALGO.
  2. Deposit and buy ALGO
  3. Start earning.

Where Is ALGO listed?

Listing in crypto shows that a currency has passed the exchange market requirement and is ready to be traded on.

ALGO is listed on the following exchanges: Binance, Coinbase, Coinbase Pro, BitMax, CoinEX, and Kraken.

ALGO is listed for exchange with fiat currencies like USDC and Tether, and other cryptocurrencies like ETH and BTC.

How To Buy ALGO

  1. Open an account:

Open an account on an exchange that supports ALGO. To simplify the buying process, look for exchanges that support both fiat and cryptocurrencies as deposit options.

Most exchanges require an email address, phone number, and an ID for registration.

  1. Deposit funds into your account: 

You can do this directly via bank transfer or pay with a credit card, debit card, or cryptocurrency.

  1. Buy Algorand.

Where to buy ALGO

  1. Binance: Accepts deposits as

bank transfers, cryptocurrency and with the transfer. The fiat currency on this exchange is USD.

  1. Coinbase: Accepts deposits

as PayPal, bank transfer, wire transfer, and Apple Pay. Fiat currencies on this exchange include USD, EUR, GBP, and 17+ more.

  1. SoFi: Accepts bank transfer 

as deposit and USD as fiat currency.

  1. Coinbase Pro: Accepts bank 

transfer, crypto currency, PayPal, and wire transfer as deposit and USD, EUR, and GBP as fiat currency.

Prediction For The Next 2-4 years

PricePrediction.Net predicts that ALGO would reach a minimum level of $2.39 and a maximum level of $2.91 in 2022. In 2023, they expect its minimum level to be at $3.45 and its maximum level at $4.17. ALGO price is predicted to hit $4.86 as its minimum level in 2024 and $6.06 as its maximum level.

According to Coin Arbitrage Bot, in the next 3 years, the highest level of ALGO would reach is $10.47 and its lowest price would be $1.005. They predict it to be around $2.894 at the end of 2022 and $4.683 at the end of 2023.

According to WalletInvestor, ALGO would be at $5.49 by 2025 and $6.155 at the end of 2026.

Conclusion

Now the question comes again, is Algo a good investment? Even though Algo is relatively new, it has shown the potential, with a solid team and a promising future. I believe Algo is a good investment in the long run. This is not financial advice, as the saying goes, you should not invest what you can not afford to lose.

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