Chapter 2:
Cryptocurrencies
Did Algorand Truly Solve the Blockchain Trilemma?
Did you know that Algorand is one of the few cryptocurrencies dubbed as "Ethereum Killers"?
easy
11 minutes
In this section, I’m going to answer the question of “What is Algorand crypto?”, explain what is ALGO coin, and we’ll figure out what is Algorand used for!
Algorand is not simply a blockchain with ALGO as its native token. There are thousands of cryptocurrencies, but there are only a few legit reasons why some specific projects gain attention, and see their value grow, as a result. And there’s a reason why ALGO is, and has persistently stayed, on the list of top cryptocurrencies for years. It’s not merely a faceless cryptocurrency, after all.
Today, my mission is to get Algorand explained to you. This project has already proved to be among those who stand out from the crowd for their forward-thinking stance, and showing character when it comes to actually making difficult decisions, and sticking with the plan. Algorand’s even been dubbed “The Ethereum Killer”! You’re about to learn why.
In this section, we’re going to dive into the Algorand universe and answer the question of “What is Algorand crypto?”. Then, we’ll be able to take a look at the landscape of Algorand projects and see by ourselves what is Algorand used for.
Let’s get to it!
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Video Explainer: Did Algorand Truly Solve the Blockchain Trilemma?
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What is Algorand? ALGO Coin Explained With Animations
What is Algorand Crypto?
You couldn’t say that Algorand had humble beginnings, since it wasn’t founded by some inexperienced crypto enthusiasts. Quite the contrary - Algorand was founded in 2017 by Silvio Micali, a professor at MIT, and a cryptography pioneer. It was created to carry out a vision, which, according to Algorand themselves, sounds like this: “a world where everyone creates and exchanges value efficiently, transparently, and securely.”
And so, having this vision as their guiding star, Silvio Micali and his team created Algorand. But, whenever Algorand (ALGO) is mentioned, it refers to two things. It’s both a digital currency, and a cutting-edge blockchain platform.
It was designed to handle a high volume of transactions with remarkable speed, so that the blockchain industry could really begin resembling efficiency levels that people are used to seeing in the world of traditional finance. Algorand had a very precise goal - to actually challenge such leading payment processors like Mastercard or Visa. Understanding this is a great start to begin answering the question of “What is Algorand crypto?”
One way of rising to prominence and achieving such aims was Algorand's commitment to transparency and collaboration. It’s an open-source blockchain, therefore, as such, the platform invites individuals from all corners of the world to explore its code and contribute their expertise so it could be further improved. This fosters a community-driven ecosystem, and does so fruitfully.
As of today, there are many projects that use Algorand as the construction site for their decentralized applications (dApps). Be it something related to DeFi, NFTs, Music, Gaming, Bridges, Oracles, or anything else, you’ll find it in the Algorand land. The number of these active projects is over 700, and it’s constantly growing!
But there’s something else that makes Algorand different from other mainstream blockchain projects. It’s the consensus mechanism that supports the Algorand system, and defines the answer to the question “What is Algorand crypto?”
As a reminder, a consensus mechanism is like a set of rules that every network participant agrees to act upon. It’s just like the rules of a game, let’s say, basketball. There are things that are allowed, and others that are prohibited. But every player agrees upon them before starting a game.
To learn more about consensus mechanisms, be sure to check out other chapters in this Crypto 101 Handbook. For example, there's a section that concentrates specifically on Proof-of-Work and Proof-of-Stake.
But when it comes to Algorand, its consensus mechanism is something different. It’s known as Pure Proof-of-Stake, or PPOS. Through this mechanism, the network selects validators from the pool of users to secure and validate transactions.
PPOS operates in a certain way, so that the influence wielded by each user in the selection of a new block is directly proportional to their stake, measured by the number of tokens they hold in the system. This unique approach ensures a fair and inclusive process, where users are randomly chosen, while keeping their selection a secret, to propose blocks and participate in voting on block proposals.
Every online user has an equal chance of being selected to propose and vote, with the probability and impact of their participation determined by the extent of their stake.
The usage of PPOS allows users to understand the values on which the Algorand project was built. Unlike other approaches, where a small subset holds the power to dictate security, Algorand's strength lies in the collective honesty of the majority.
This dynamic ensures that the system remains secure as long as the majority acts with honesty and good faith. In this model, the security of the whole economy rests on the shoulders of the honest majority, reinforcing the trust and stability of the Algorand ecosystem.
The actions of a minority hold no power to disrupt the network or hinder transactions. Moreover, those who possess the majority stake have no incentive to misbehave, as doing so would undermine the value and purchasing power of the currency, ultimately devaluing their own assets. Such architectural principles safeguard the integrity of the Algorand system, fostering an environment where users can transact with confidence and trust in the stability of their assets.
As I’ve mentioned earlier, Algorand was dubbed as the potential “Ethereum Killer.” In order to receive such a label, something truly game-changing has to be offered. And all of the innovations that Algorand has brought to the table were dictated by their goal of solving the infamous blockchain problem, known as the “Blockchain Trilemma.” And, as Algorand claims, their innovations and technological advancements have put the project on its way to solving this problem.
But before I elaborate on that further, you need to understand what “Blockchain Trilemma” even is, to begin with.
Blockchain Trilemma
The blockchain trilemma is an intriguing concept that lies at the heart of decentralized technology. And, in order to have Argoland explained, this chapter is crucial.
It refers to the three fundamental properties that blockchain networks strive to achieve: scalability, security, and decentralization. The catch, however, is that it's immensely challenging to achieve all three of these properties simultaneously. It's akin to a delicate balancing act, where emphasis on one aspect often comes at the expense of the others.
Here’s a simple analogy. In life, most people can’t have all three of these luxuries at once: time, money, and energy. Young people may have time and energy, yet they aren’t financially independent. Adults may make enough money to get by, and enough energy to use it in the ways they prefer, but they must take a day off for that. And finally, the elderly may have enough savings and time to enjoy their lives, but, in this case, the energy is no longer there. That’s a life trilemma. The blockchain trilemma is a similar concept.
Let's dive deeper into the three pillars that constitute it.
First of all, we’ve got scalability. Blockchain scalability refers to the network's ability to handle a high volume of transactions swiftly and efficiently. It's like a busy highway that can accommodate numerous vehicles without congestion. Achieving high scalability ensures that blockchain networks can support mass adoption and widespread usage. However, scaling solutions often involve trade-offs, such as sacrificing decentralization or compromising security.
On that note, security forms the bedrock of blockchain technology. It ensures that transactions are trustworthy, tamper- and malicious attack-resistant. A secure blockchain inspires confidence and trust among its participants, making it a reliable platform for various applications. However, implementing robust security measures can hinder scalability or require significant computational resources.
Lastly, decentralization is the essence of blockchain tech, liberating it from centralized authorities and empowering participants with control and autonomy. A decentralized network is like a vibrant ecosystem, where power is distributed among its users. It fosters transparency, censorship resistance, and resilience against single points of failure. Yet, achieving true decentralization can pose challenges, as it may hamper scalability or introduce vulnerabilities.
So, as you can see, the blockchain trilemma is something that no blockchain project can avoid. It’s waiting for everyone who dares to venture into this market. The minds behind Algorand knew this. So, they prepared a solution to this problem.
Their answer to the problem of scalability was the implementation of the PPOS consensus mechanism.
The answer to the problem of security was ensuring that the security of the entire project’s economy was tied to the integrity of the majority. By aligning the interests of the majority with the network's security, Algorand fostered a robust and resilient ecosystem.
And, what concerns the problem of decentralization, Algorand’s open-source approach ensured transparency and collective participation.
Algorand’s outspoken way of approaching this fundamental problem caught the community’s attention. Such innovative and daring decisions were the reasons behind the project’s success and the blockchain being branded as the potential “Ethereum Killer.”
What is ALGO coin?
By now, the question of “What is Algorand crypto?” is partially answered. But in order to see the whole picture, it’s time to address the other, inseparable part of the Algorand project - the ALGO coin. In Spanish “algo” means “something.” But in crypto… it means something way more interesting!
At its core, ALGO serves as the native cryptocurrency of the Algorand blockchain, playing a pivotal role in securing the network and facilitating seamless transactions. It operates as the lifeblood, fueling the vibrant ecosystem that Algorand has constructed.
Tokenomics-wise, ALGO follows a supply model with a total fixed supply of 10 billion tokens. This means that once 10 billion ALGO coins are created, the issuing of new coins will stop forever.
Up until now, these tokens have been gradually released into circulation through such programs as participation rewards. Over time, additional ALGO tokens have been released through various other mechanisms, such as staking rewards and ecosystem growth initiatives.
Now, let's explore the multifaceted role that ALGO plays within the Algorand system. First and foremost, ALGO serves as a means to pay transaction fees on the network. Whether it's validating transactions, executing smart contracts, or engaging with decentralized applications, users rely on ALGO as the medium of exchange, ensuring the smooth functioning of the Algorand ecosystem.
Furthermore, ALGO plays a crucial role in ensuring the network’s security. Token holders can actively contribute to it by staking their ALGO, adding to the security and integrity of the blockchain. By staking their tokens, participants have the opportunity to earn rewards in the form of additional ALGO, incentivizing active engagement and long-term commitment to the Algorand network.
Beyond its utility within the Algorand blockchain, ALGO has garnered recognition and adoption beyond its native environment. It has emerged as a prominent digital asset within the broader cryptocurrency landscape, finding its place in various exchanges and digital asset platforms. This widespread adoption has further solidified the relevance and versatility of ALGO in the crypto sphere.
Wrapping Up
So, having said all of this, I would hope that the questions of “What is Algorand crypto?” and “What is Algorand coin?” have been settled. It’s an ambitious project that not only talks the talk, but walks the walk. Actually, committing to solving the notorious blockchain trilemma is not something that every project out there dares to do.
As you can see, after hearing Algorand explained, this knowledge really is an asset in itself. It will allow you to look into what this project and its ecosystem has to offer, maybe even encourage you to embark on exploring and interacting with various Algorand projects on your own.