Algorand (ALGO) is a high-level blockchain project, designed by cryptographer Silvio Micali, focused on high-speed transaction processing and high-level smart contracts for decentralized finance (DeFi).
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Uno of the most recent projects in the world DeFi and DApps (decentralized applications) is Algorand (ALGO). The objective of this network is very clear: be a network designed and built to be scalable, economical, extensible, and highly programmable. And, currently, this network is one of the third-generation blockchain projects that has grown the most in recent years.
But what exactly is Algorand? Does it really deliver what it promises? Well, we will answer this and much more below.
Origin of Algorand
The history of Algorand begins in 2017, when the company was created by Silvio Micali, a well-known MIT professor, Turing award winner, and crypto specialist. Micali, who has been part of the crypto community since 1980, has significant work in asymmetric cryptography, and is co-creator together with Shafirira Goldwasser of the zero knowledge tests (ZKP).
Micali, who has always been a researcher, knows the tecnología blockchain y Bitcoin (BTC) in 2015, and is interested in it. At that point, Micali began working on his personal crypto project, determined to improve the specifications of Bitcoin and the well-known Ethereum. This led him to partner with Nickolai Zeldavich, a colleague at MIT who served as Head of Distributed Systems at this institution, and who was involved in the Computer Science and Artificial Intelligence Laboratory (CSAIL).
Nickolai's first impression led to a large-scale experiment to test Micali's initial proposal. The test was carried out using Amazon servers and forcing the system with up to 500 thousand concurrent users on the network. The tests were successful for being an unpolished version of the system, and this led them to the next stage: the creation of Algorand. In principle, a total of 11 people participated in the team, who met at Micali's house to carry out their work.
His first successes
The work yielded its first fruits when a seed capital of $ 4 million was achieved with investors Pillar and Union Square Ventures, in February 2018. Later, another round of financing of $ 62 million would arrive in October 2018, from the hand of other investors. That same month, Algorand named Steve Kokinos (a serial entrepreneur, founder of two more than $ 700 million companies) as its CEO and Sean Ford (former CMO at LogMeIn) as its COO. The message of these hires was clear: hire people who can scale the business.
The work was made public in May 2019, with the arrival of the testnet network. But along with his presentation, a parallel work was started to ensure a program of university participation in the project. Thus, in June 2019 the Global University Program was born, in which the best universities in the United States, Canada, Europe, the Middle East and China were invited to be part of the inaugural university research program.
Founding members include Massachusetts Institute of Technology, Peking University, Sapienza University of Rome, Stony Brook University, Tel Aviv University, Tsinghua University, University of California, University of Berkeley, the University of the Italian Svizzera and, the University of Waterloo.
In addition to this, the first ALGO token auction was held, and a week later the main exchanges of the crypto community would add the token to their peers. Thus began Algorand's long journey as a new cryptocurrency and blockchain development platform.
Algorand's goal
The main objective of Algorand is to become a platform dedicated to offering decentralized applications (DApps) y DeFi high-speed services that are available to everyone. To achieve this, Algorand is a "permissionless" blockchain. In this way, anyone can be part of it, within a transparent system in which everyone can achieve success through decentralized projects and applications.
On the other hand, to face the Blockchain Trilemma, Algorand is based on a powerful and fast consensus protocol that can be used by any user with minimal computational power, who owns $ ALGO and is online. All these elements give you the right to be chosen to participate in the Algorand block consensus, which is a derivative of the system of Proof of Stake or Proof of Stake.
But along with this, Algorand focuses its development on creating tools that facilitate the deployment of decentralized applications and all the infrastructure necessary for their operation.
How does Algorand work?
As we discussed a moment ago, Algorand is a permissionless type blockchain and network. This first point is vital to eliminate any type of barrier in the use and evolution of the protocol. The main idea behind this principle is to ensure a high level of decentralization, scalability and security.
Second, the operation of Algorand is based on a consensus protocol derived from Proof of Stake (called Pure Proof of Stake- PPoS). This system is created in order to guarantee the full participation of those who are part of the network, providing protection and speed. The use of PPoS is framed in achieving speed of production of blocks measured in a few seconds, which would allow a high scalability of the network, thus serving thousands of users concurrently, with very short waiting times and, above all, with Very low commission costs.
Additionally, the Algorand development team has come up with new consensus algorithms, Byzantine fault-tolerant systems, and a completely new hashing and digital signature system, focused on enabling the greatest possible scalability.
Pure Proof of Stake, Algorand's mainstay of high speed
The main pillar of Algorand's scalability and speed is its Pure Proof of Stake or Pure Proof of Stake (PPoS) protocol. This protocol is a derivative of the well-known Proof of Stake (PoS) of other cryptocurrencies such as Ethereum 2.0. The idea of this protocol in Algorand is to allow sufficiently secure Byzantine fault resistance, while providing high speed in the generation and validation of blocks within the network. At the same time, PPoS is able to support a large number of users concurrently and scale correctly as the network increases in its number of validators.
Result? Algorand is capable of handling in its current network state about 2 thousand transactions per second without problems. In fact, Algorand's highest usage peak occurred on March 04, 2021, when on that day alone it was able to handle more than 39 million transactions (about 451 TPS on average, with a peak of 1153 TPS). To this we can add a block generation time of 4 seconds on average, which leaves us one of the fastest blockchains that can be counted on today.
PPoS, an algorithm where everyone participates
One of the main features of Algorand is that any user who is online and owns ALGO tokens can participate in the PPoS system. That is, PPoS removes the barrier that PoS imposes on making a staking hard, where it is necessary to retain a certain amount of tokens to participate in the process of selection, generation and validation of transactions and blocks.
This further diversifies and decentralizes the generation process making PPoS a much more decentralized system than PoS (and more like Proof of Work - PoW). In addition to this, PPoS eliminates the need for its users to expose their spending keys (that is, the keys they use to spend participation) to achieve consensus. Instead, a user who wants to participate in the protocol generates and registers a participation key. With this key, an account can participate in proposing and voting blocks. Using participation keys ensures that a user's algorithms are secure even if their participating node is compromised.
A safe and random selection process
Another point in favor of PPoS is that the selection of the new validator is made thanks to a seed that is indicated in each new block generated. The role of this seed is to serve as a starting point for the selection process of the next validator node within PPoS.
When the seed reaches the network, the nodes take it, calculate its value and reveal its secret. The secret is the selection, that is, the seed indicates the list of nodes that has been chosen for the next validation cycle. This secret is protected by a self-verifying cryptographic function (VRF) that relates the node's participation key to the selection seed. Thus, each node must only take the seed, its participation key, and by applying the VRF function, it will know if it has been chosen for the next generation cycle. All this process happens in less than a second for a hardware as little powerful as a smartphone.
At this point, the chosen nodes begin the block generation process. To do this, the nodes propose a block and a voting committee is selected to vote on the block proposal. If a large majority of the votes are from honest participants, the block can be certified. In this sense, this process requires:
- Propose the block (Block proposal by the chosen nodes)
- Vote the block (Soft Vote)
- Certify the vote (Certification and final validation of the block)
It is these three steps that ensure that the new Algorand block does not have double-spend transactions, or any other malicious action that affects the consensus.
A triple process to guarantee safety
The first process, as we have already seen, begins with the chosen nodes and the creation of their block proposal with the transactions to be validated. But the second process, known as Soft Vote (or Block Vote) is a well-defined and vital process for Algorand.
At this point, each node chosen by the selection seed will have a vote weighted by the number of ALGO tokens within the selection group. That is, if a node has been elected, its voting power will be greater the more ALGO tokens it has in its possession. Thus, when the voting point is touched, the nodes will have different voting power. The first voting process is carried out until the necessary quorum is reached to reach the certification process.
The third process or certification of the vote is carried out by a certification committee, chosen from among the selected nodes. The function of these nodes is to verify that the nodes that previously voted have done so correctly, also ensuring that there are no double expenses or other malicious operations. This verification process is a final line of defense against attacks. If the block is finally certified, then a certificate is issued for that block, a new selection seed is created and the block is definitively sent to the blockchain, so that the process then begins again.
At this point the participants of the process receive their reward for the work done. These rewards are proportional to your participation for each block that is committed in the chain. Currently, the reward per block is set at 41,5 SOMETHING per block. You can see in this link a rewards calculator if you are interested in what Algorand can offer you.
Structuring the network of Algorand nodes
Another additional point in Algorand's innovations is related to the way in which its network of nodes is managed. The PPoS algorithm needs a somewhat special organization for its operation and this has led Algorand to create two types of nodes:
Relay nodes or relay nodes
These are nodes whose main function is to act as connection points with other nodes. They are in some way, distribution points that allow to connect different points of the network quickly. If, for example, a node sends a message to the network, this message will go to the nodes connected to that node and to the relay node of that node.
Once the message reaches the relay node, it forwards the message to the rest of the nodes connected to it and, in this way, the message reaches the rest of the network much faster. The idea is simple, to minimize the amount of data retransmissions on the network, saving bandwidth and maximizing the speed with which messages reach all their points.
In addition to this, the relay nodes perform message deduplication processes, signature verification and other validation steps, to more efficiently propagate messages. The best of this? Anyone can install and operate a relay node.
Participation nodes or participation nodes
These are nodes whose function is to be part of the group of nodes that will do their work in generating, voting and validating the blocks in Algorand. In a way, they would be the equivalent of PoW miners or PoS staking nodes.
Vault, a new form of blockchain accounting
Other important innovations in Algorand are related to the way in which its ALGO token is generated and managed on the blockchain, both at the account and token generation level, as well as cryptographically.
Let us remember that in blockchain it is necessary to know how a currency is generated to know its origin, and at that point, to know what its route is throughout its period of use. In Bitcoin, this is possible thanks to the Coinbase (that generates bitcoins) and UTXO (They tell us where they come from and where the coins go). However, Algorand does not use any of this. Instead, Algorand has created Vault, a completely different bootstrapping or initial coin creation system.
Vault is a system that allows you to unlink the tracking of account balances and transactions. Thus, Vault only creates a recent history of operations, where the oldest operations have no relevance.
On the other hand, Vault also allows to use sharding for;
- Fragment the account status between nodes, so that each node does not need to store the status of all the accounts.
- Allow all transactions to be validated by all nodes, using a merkle tree to store the balance information for each account.
- Adaptively cache the upper layers of the Merkle tree so that the bandwidth cost of transferring Merkle evidence grows logarithmically with the number of accounts.
This ingenious system prevents an account from being made coins out of thin air, helps create a layer of defense against double spending, streamlines coin accounting within the network, and finally, makes the Algorand blockchain more efficient in terms of space than other options like Bitcoin or Ethereum.
To this is added a system of cryptographic certificates that seeks to reduce the cost of convincing new users of the validity of a block. To avoid cheating, this certificate system is verifiable at the network level, which prevents third parties from injecting invalid certificates into the network, which could create non-existent balances in new accounts (generate coins from scratch).
As a result, an Algorand blockchain with 500 million transactions would only take up about 500 MB of hard drive space. The same equivalent in Bitcoin, on the other hand, would occupy a total of 5 GB. This is a 90% reduction in the size of the blockchain, without diminishing, as they defend, security.
Surprised? Well, in Bitcoin they are currently looking to create something similar with the project UTReeXO which we talk about here at Bit2Me Academy. With this project, the size of the blockchain could be greatly reduced for new nodes that start on the network.
Smart Contracts, the great asset of Algorand
Algorand is also a blockchain created in order to bring to its maximum expression the smart contracts. For this, Algorand has created the Algorand Smart Contracts 1 (ASC1). These smart contracts are designed to exploit all the possibilities of Algorand as a network. To do this, the ASC1 make use of the TEAL or Transaction Execution Approval Language, or its binding in Python, PyTEAL.
TEAL is a language based on stacks (stacks) that is translated into a bytecode injected into Algorand transactions, where the transaction parameters can be checked and the transaction approved as if it were a signature. Programs have read-only access to the transaction to which they are bound, to the transactions in their atomic transaction group, and to a few global values. Also, programs cannot modify or create transactions, only reject or approve them.
TEAL programs need to be short and run quickly, as they run online along with signature checking, transaction balancing rules checking, and other checks during assembly and block validation. Thanks to this feature, it is possible to create useful applications in less than 100 instructions, which, together with a high-speed blockchain, makes them run very quickly. In fact, on average a smart contract written in TEAL takes on average about 5 seconds. Another point in favor of TEAL and the way it works is that it is very economical to run. A smart contract can cost around 0,001 SOMETHING to run.
Below, you will see an example from TEAL, where an HTLC smart contract is written for Algorand. In comparison, the same HTLC smart contract written for Bitcoin using Python, since writing it in Bitcoin Script is much more complex (although shorter in terms of writing).
In addition to this, other functions that can be exploited in Algorand with its smart contracts are:
- Creation of escrow accounts (escrow payment)
- Loan payments and commission foreclosures
- Limited orders
- Subscriptions
- Guaranteed obligations
- Regulated and automated disbursements
- Scheduled recurring commissions / recurring debt
- Delegated management of high security accounts
- Interface with off-chain data providers
- Atomic transfers between chains
- HELOC (Home Equity Line of Credit)
- Decentralized Exchanges (DEX)
- Refund validation
- Cross-chain Atomic Swaps.
Finally, smart contracts in Algorand can also be designed in other programming languages such as JavaScript, Java or Go, which allows a wide range of options to program smart contracts in this platform in a much easier way. Of course, all of this is translated into TEAL and its byetcode.
Main characteristics of the project
The main feature of this project is the open source public blockchain. Algorand's consensus mechanism promotes performance, security, and openness of a decentralized network. That said, Algorand's transaction performance is poised to compete with popular payment and financial systems.
According to the development team, these are the key properties of the Algorand protocol:
- Low calculation requirements: no need for mining farms consuming a lot of energy.
- Quick agreement: The entire community agrees to the next block and confirms transactions with latency in about a minute while scaling to many users.
- Delegation: Token holders can delegate their tokens if they want to participate in the consensus.
- Extremely low forking probability - users can trust a new block as soon as it appears. Even if the network is temporarily partitioned, Algorand ensures that no user has divergent views of the confirmed transaction.
- True decentralization: the network is not controlled by a few miners or a group of validators, as the proponents and committees are randomly selected.
- Governance: Community token holders can propose changes to the protocols and agree on their ability to evolve.
- Using Scientific Research and Influential Business Partners: Algorand collaborates with trusted business leaders who work at world-famous companies.
- Total token distribution: 10.000 billion ALGO tokens.
- Estimated circulating supply of ALGO tokens to be injected into the market (initially via auctions) during the first 5 years (600 million c / year), for a total of 3.000 million.
- Estimated reward per participation (distributed over time): 1.750 billion ALGO tokens.
- Relay nodes or retransmission brokers: 2.500 million ALGO tokens.
- Algorand & Algorand Foundation, Inc. (distributed over time) 2.500 billion ALGO tokens.
- End-user grants (spread over time): 250 million ALGO tokens.
DeFi, the strong point of Algorand
In addition, at the end of 2019, this project proposed two new solutions to implement on Layer 1 of its platform:
- The generation of new fungible tokens
- The execution of multiparty atomic transfers (AMPT).
- These solutions are also part of the consensus protocol, maintaining the original characteristics of the blockchain. The proposed solutions are fundamental for the development of DeFi applications such as the tokenization of financial assets; such as derivatives, options, swaps and other securities.
In addition to this, something called FutureFi or Future Finance is being carried out. FutureFi is nothing more than maximizing DeFi capabilities. To do this, it seeks to create a Layer-2 (an off-chain system) that allows scaling the network's smart contract capabilities, together with a decentralized data storage system, and much more.
This is the future of Algorand, one that is under construction and that is supported by various companies, universities, and communities that make life in the crypto world.
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