1,000 transactions per second, and five-second finality — how does Algorand do it?
Summary
Algorand is an open-source, decentralized blockchain network that uses a two-tiered structure and a unique variation of the Proof-of-Stake (PoS) consensus mechanism to speed up transactions and achieve finality. Algorand’s block rewards are distributed to all ALGO coin holders, providing an opportunity for all ALGO holders to earn rewards rather than just block producers.
Contents
What is Algorand?
Algorand is a decentralized network designed to address the blockchain trilemma of achieving speed, security, and decentralization all at the same time.
Algorand, which was launched in June 2019 by computer scientist and MIT professor Silvio Micali, is a permissionless and open-source blockchain network that anyone can build on. Algorand is intended to be a payments-focused network with fast transactions and a strong emphasis on achieving near-instant finality — that is, it will process over 1,000 transactions per second (TPS) and achieve transaction finality in less than five seconds.
Algorand employs a Proof-of-Stake (PoS) consensus mechanism, with validator rewards distributed to all holders of its native ALGO cryptocurrency.
Algorand is capable of managing the high-throughput requirements of widespread global usage and a variety of use cases due to its strong throughput capacity and equitable community incentivization.
Algorand is currently capable of hosting decentralized application (dApp) development and providing scalability as a public smart contract blockchain that relies on staking.
Rising Ethereum gas fees have prompted many dApp developers and decentralized finance (DeFi) traders to seek alternative blockchain solutions, with some turning to Algorand as an Ethereum-alternative for dApp development and DeFi trading.
Developers can also use the Algorand Standard Asset (ASA) protocol to create new tokens or transfer current tokens to the Algorand ecosystem. Stablecoins like USDT and USDC, for example, exist as ASAs on the Algorand blockchain and have far faster throughput and cheaper transaction fees than Ethereum.
Furthermore, as central banks continue to investigate networks for hosting their central bank digital currencies (CBDCs), Algorand has emerged as a credible choice and has been selected to host the Marshall Islands CBDC.
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Algorand Protocol Structure
Algorand has a two-tiered blockchain construction that is unique. The base layer supports smart contracts, asset creation, and atomic swaps between assets. All of these procedures occur on Layer 1 of the Algorand blockchain, which aids in security and compatibility.
Platforms and users can create ASAs, which represent new or existing tokens on the Algorand blockchain, on this first layer of the Algorand network. This is similar to how ERC-20 tokens function on the Ethereum network. Simple Algorand Smart Contracts (ASC1s) execute as Layer-1 Algorand Smart Contracts (ASC1s) in terms of security.
Algorand’s second layer is designated for the creation of more complex smart contracts and dApps. Algorand’s ability to execute transactions so quickly is due to the network’s bifurcation between Layer 1 and Layer 2.
Simple transactions can be processed more quickly on Layer 1 without being slowed down by larger, more complex smart contracts, thanks to the off-chain execution of more complex smart contracts.
Algorand Staking Mechanism: Pure Proof of Stake
Algorand employs a variant of Proof of Stake known as Pure Proof of Stake (PPoS). PPoS is a highly democratized PoS consensus method with a low minimum staking requirement for joining and securing the network – only 1 ALGO token is necessary to join and secure the network.
Ethereum 2.0, on the other hand, mandates a minimum investment of 32 ether (ETH), posing a substantially higher barrier to entry for consumers. A low minimum staking requirement, on the other hand, may have a negative impact on network security since network participants may be less motivated to behave properly if they do not have a significant amount of money invested in the network.
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Algorand Block Production Under PPoS
Validator nodes are chosen at random in Proof-of-Stake networks to confirm the transaction data in a block. The PPoS consensus mechanism of Algorand employs a two-phase block creation procedure of proposing and voting.
By staking ALGO and creating a valid participation key to become a Participation Node, any member of the Algorand network can participate in the proposing and voting procedure. Relay Nodes, a sort of Algorand network node that facilitates communication among participation nodes but does not actively participate in proposing or voting, coordinate Participation Nodes.
A block leader is chosen to propose the current block during the proposal process.
Block leaders are chosen using Algorand’s verifiable random function (VRF), which is a provably random method that selects nodes at random but weighted by their stake sizes. The block leader is assigned in secret using their private participation key, which implies that only the block leader is aware of its assignment to propose the block.
The VRF provides a cryptographic proof that allows the block leader to prove its status as the current block leader in an easy and verifiable manner. Because malicious actors have no means of knowing who the randomly designated block leader is before the block is actually offered, this methodology adds to network security by minimizing the potential to target the block leader in an attempt to breach the network.
Following block proposal, we move on to the voting stage, when nodes are voted at random to a committee tasked with ensuring that no double-spend, overspend, or other errors occur in the current block.
The block is uploaded to the blockchain if a quorum confirms that everything is in order. If malicious activity is identified, the network enters recovery mode, which involves the block being destroyed and a new block leader being elected.
Slashing is not used by Algorand, which is fairly contentious.
This means that a node cannot have its staked balance reduced for proposing a bad block. Instead, the network goes into recovery mode and keeps going. While this increases speed and efficiency by quickly moving on from failures, it has been criticized by some as lacking any mechanism to punish dishonest activity on the network.
With this technique of block generation, two blocks cannot be submitted for the same slot at the same time, ensuring that the blockchain will never split. When a block emerges, it has already reached consensus, and users may trust on it right away, reducing network latency.
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Algorand’s Native Cryptocurrency: ALGO
ALGO is the native Algorand coin, and it forms the backbone of the Algorand network.
The benefits provided to validators for producing blocks are split and dispersed among all ALGO coin holders, rather than being rewarded just to block producers, as part of Algorand’s unique protocol design.
As of February 2021, all ALGO coin holders will be able to earn a 7.5 percent annual percentage yield (APY). The Algorand staking platform distributes rewards approximately every 10 minutes in order to encourage people to join and hasten the route to decentralization.
To make things even simpler, users don’t have to “stake” the coin as part of the block generation and validation process; instead, they may just keep ALGO in a non-custodial wallet or on an exchange to access their earned rewards. Algorand has reached near automation in this regard, as stakers can hold ALGO while still supporting the network.
There is a hard supply cap of 10 billion ALGO coins, which is allocated as follows:
- 3 billion ALGO to be released into circulation over the first five years (including the initial auction of 25 million ALGO coins)
- 1.75 billion ALGO estimated to be distributed over time as rewards for participation nodes
- 2.5 billion ALGO will be distributed over time to relay nodes
- 2.5 billion ALGO are reserved for the Algorand Foundation and Algorand Inc.
- 0.25 billion ALGO to be distributed for end user grants
Algorand’s decentralization of its ALGO currencies is an iterative process, similar to many other blockchain-based projects working toward an optimally egalitarian coin distribution procedure.
The Algorand Foundation now owns a substantial number of ALGO, prompting critics to assert that the protocol would become centralized in the near future. Algorand’s democratized reward distribution system, on the other hand, is designed to counteract network centralization over a longer period of time.
The Algorand Foundation
Algorand is a new protocol that was launched in 2019. The Algorand Foundation, a non-profit corporation, is in charge of Algorand Inc.’s funding and development, as well as the Algorand protocol itself. The Algorand Foundation promotes developer education in colleges and institutions. Its Global University Program comprises famous universities such as MIT and UC Berkeley, as well as other world-class schools.
The Algorand Foundation also sponsors blockchain events, hackathons, educational classes, and certifications.
In 2020, the Algorand Foundation will establish two accelerator programs — Algorand Asia Accelerator and Algorand Europe Accelerator — aimed at aiding ongoing projects and developers who want to build on Algorand. These programs give end-to-end support for potential ideas, from strategy formulation to launch, in order to help the Algorand ecosystem expand and prosper.
Algorand, a relative newcomer to the blockchain arena, has already established itself as a formidable platform with strong tech innovation, developer support, and real-world use cases. Algorand’s very egalitarian currency rewards structure and consensus method are setting a new standard in blockchain, and the project’s expectations are skyrocketing.
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