Algorand is a new public blockchain, meaning its technology, while novel, has not yet seen much testing under real-world market conditions.
What Is Algorand?
Algorand is an open-source, decentralized blockchain network that leverages a two-tiered structure and a unique variation of the Proof-of-Stake (PoS) consensus mechanism to increase transaction speeds and achieve finality. Algorand’s block rewards are distributed to all ALGO coin holders, offering all ALGO holders an opportunity to earn rewards instead of just block producers.
How Does It Work?
What sets Algorand apart from other blockchains is its use of PPoS, a consensus algorithm that employs a Byzantine agreement protocol. Should a node be compromised, staked the native token ALGO owned by participants in the network would automatically be protected with unique keys.
Bitcoin’s consensus mechanism, proof-of-work (PoW), requires large amounts of energy and computing power to create and validate new blocks. PPoS, on the other hand, allows the creation and validation of new blocks in a faster and more efficient manner. This is done by randomly selecting ALGO holders to validate and approve each block in the chain. A new group, or committee, is selected for each new block.
Through the PPoS protocol, only users with large holdings of ALGO can theoretically engage in malicious activities that could potentially compromise other users’ security. However, since the system is based on codependency among participants, malicious activities would also result in a deterioration of their ALGO. Hence, such malicious activity would not be rewarding for any majority holder.
Algorand can process 1,000 transactions per second and all transactions will be final and instantaneous. Algorand also has a fixed supply of 10 billion tokens to add an inflation-resistant mechanism to the network. The majority of these tokens are currently locked up and have yet to be distributed.
The Algorand protocol is designed to solve three of the biggest problems most blockchains face: security, scalability and decentralization. Dubbed as the “blockchain trilemma,” the Algorand network claims to address the following three major issues.
The Algorand protocol is secure against malicious attacks, making it ideal for transacting, holding high-value assets and building secure enterprise applications. It maintains security on both network and consensus protocol levels and protects individual users’ accounts.
The Algorand protocol can handle a large number of transactions per second, making it a more scalable solution than Bitcoin or Ethereum. Algorand’s consensus protocol does away with the need for computational power used in Bitcoin to solve cryptographic problems.
Instead, the protocol’s computation cost per user is only used to generate and verify signatures, as well as operations requiring simple counting. According to Algorand, it can “scale to millions of users and sustain a high transaction rate without incurring significant cost to participating users.”
Algorand is entirely decentralized with no central authority or singular locus of control. Transactions are verified by participating nodes in the network and each node has an equal say in decision-making. This makes Algorand a very decentralized system.
Everyone on the network also has a chance of being part of the committee of users that approve each block because the selection is both random and confidential. There is no fixed committee and its nodes are run by people from all over the world.