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What is Algorand and how does it aim to create a borderless economy

Home > Blockchain > What is Algorand and how does it aim to create a borderless economy

We live in an era where information is majorly free and not bound by any border. Unfortunately, the same cannot be said about our finances. Many of us have the knowledge and the capabilities to handle our assets and financial decisions, and can see the holes in the fiscal system run by central authorities, yet cannot change their decisions about our assets. As a matter of fact, a massive amount of friction exists in the present system, and unnecessary transaction costs account for 6 % of global GDP annually. Designed by Turing-award winner MIT professor Silvio Micali, Algorand is one initiative towards correcting this whole arrangement.

What is Algorand?

The Algorand Foundation is a non-profit organisation that believes in an open, public, and permissionless blockchain. It was created with the purpose of resolving the biggest issue with blockchain – the “blockchain trilemma”. Before Algorand, in a single blockchain platform, it was impossible to achieve all three – pure decentralization, scalability, and the layered security blockchain promises – in equal proportions; hence, the Blockchain Trilemma. Algorand was launched in 2019 as a global project to provide open-source public cryptocurrency and protocol with an internally developed Pure Proof-of-Stake (PPoS) Protocol to facilitate decentralized finance, focusing on transparent and permissionless access, instant authentication, and transaction management framework capable of scaling custom blockchain projects.

The technology of blockchain

Before we get into Algorand, let’s understand what is blockchain – the technology that Algorand is predicated on.

Simply put, blockchain is a sequence of time-stamped “blocks” containing digital information, stored using cryptographic principles or “chain” in a shared database. This information consists of three parts – transaction information, transaction participant information, and special information (hash) that distinguishes the blocks from each other. Below are its specific characteristics, in theory:

  • Decentralized network:

    Blockchain ledgers are controlled by a cluster of computers all running independently, acting on a peer-to-peer basis.
  • Distributed ledger:

    A “block”, containing information, is checked by theoretically millions of computers spread across the network before being added to the “chain” for every single transaction to be completed. These particular verification nodes are called “miners”, and this process is named as “mining”.
  • Cryptographic Security:

    Each member of a blockchain holds a public key which is seen by all the members in the network. However, the identity of the member shown in this information will be hidden with a unique obfuscation called “digital signature”, which can be deciphered only by the owner himself/herself with the private key given to him/her at the time of registration. This cryptographic security of user access makes it almost impossible for identities to be hacked and data to be compromised.
  • Immutability:

    Also, blockchain only supports “create” and “read” functions, which means if data in one block changes, data in all the subsequent blocks change and the whole network is notified. Therefore, once a “block” of information is added in a blockchain, it is permanent.
  • Data provenance:

    The ownership of a digital asset registered on a blockchain can only be modified by the owner itself. Therefore, the origins of the assets are traceable and therefore, are verifiable and reusable.
  • Transparency:

    Each node point in a blockchain has a copy of the entire history of all transactions, hence all data exist simultaneously in multiple places in the network. This reduces the chances of data being lost.

The most commonly used Proof-of-work mechanism and its challenges

All the popular cryptocurrencies like Bitcoin and Ethereum have been using Proof-of-Work (PoW) consensus algorithms since the birth of blockchain. A consensus algorithm is used in blockchain to validate transactions and produce new blocks to the chain. In PoW, currency miners compete against each other to solve a complex mathematical problem and get rewarded for reaching the solution to the quickest.

It has a number of advantages like removing the disparity between the rich and the poor by incentivising the capability of solving a puzzle rather than having a lot of money; as well as being incredibly secure because of the complexity of the hash functions generated.

On the other hand, the transactions in this consensus take a long time to be finalised, especially at the very common occurrence of forks (tie in solving the puzzle). Also, highly specialised computer hardware is required to solve these complex algorithms, which consume a huge amount of energy, in turn, costing a lot of money. This not only threatens the environment, but the process, this way, does get biased based on having more money, power, or some other upper hands. On top of all this, what is more concerning is that as of now, three mining pools in the world tend to control all validation processes. In fact, according to a recent study, almost 81% of Bitcoin mining is conducted in China. If these mining pools decide to become corrupt, we are left with the exact same issues that we have been facing with the traditional centralized form of currency.

The Algorand protocol

In order to solve the issues with PoW, another concept – Proof-of-Stake (PoS) came into the picture, where the decision-making power is in the hands of the network member who holds the highest number of currencies. The concept of “miners” who solve a complex mathematical problem to decide the addition of a new block is replaced by “validators” who stake their funds on the blocks that they believe to be valid. The right of this participant to validate a block of transactions is granted based on the value of the stake. There are a few types of PoS mechanisms each of which determines the validators in different ways and uses its own specific rules to define who wins the right to validate the next block and receive the block rewards.

The Algorand blockchain uses a decentralized Byzantine agreement protocol based on Pure Proof-of-Stake (PPoS), as the consensus algorithm. This means each user’s influence on the choice of a new block is proportional to its stake in the system, i.e., the number of tokens owned. In Algorand –

  • No power imbalance:

    Each of these tokens owns the exact same voting power. So even if a rich person owns a lot of coins, the strength of those coins will be the same as the strength of the coins owned by a poor person – meaning, there is no power disparity in one network.
  • The permanence of data:

    All transactions are final in Algorand and the information stays in the system forever.
  • Randomness:

    The process of confirming blocks on the platform involves two stages – proposal and voting stage. During the proposal stage, a token is randomly selected, and its owner suggests the next block to be confirmed. At the voting stage, 1000 random token owners are selected to form a committee that approves the proposed block. The chances of being selected as a validator are directly proportional to the stake each Algo member has.
  • Anonymity in production of a new block:

    Until the validators send the one message that decides the production of the new block, no one in the whole system has any idea about who these validators are. By the time they get to know, new validators are chosen, again, in a random way.
  • True decentralization:

    Every single time a new block is to be introduced, the validators change, being chosen completely randomly by the system. Each new block is generated by a separate, new committee, randomly chosen from the set of all users. At a high level, each user plays his/her own fair cryptographic lottery, at the end of which he/she is the only one to know whether he/she is a member of the committee. He/she also has a winning ticket – a digital and unforgeable proof that she is indeed the member of the committee. This ticket can be verified by anyone in the network, however, this validation can only happen once the member has completed her voting and forfeited her position as the validator. So not only can an adversary not corrupt these validators, but they themselves have no incentive in attacking the system here, since that will mean their own stakes going low.
  • Replaceable player:

    While adding a new block, each committee member sends only one message that is short and easy to compute, thus keeping the system secure. However, the number of rounds required to reach the consensus is more than one, so after one round, the member can be attacked by an adversary. In Algorand, the committee members for each such round are also varied along with being randomly selected, yet again. This makes it impossible for the adversary to reach a member before the votes are finalised.
  • An open and realistic perspective towards cheating:

    Instead of requiring 100% consensus from all the validating parties, Algorand is comfortable with a two-third of majority consensus. Rather than punishing bad actors, Algorand prefers to make cheating by a minority impossible and cheating by the majority stupid.
  • Less time for transactions:

    In the PoS algorithm, there is no computation or any possibility of forks, which means the time consumed for each transaction also gets reduced. In the current MainNet, Algorand can execute transactions at a throughput of more than 1000 TPS. In fact, with super-fast finalisation of the blocks, Algo became the first-ever blockchain to provide immediate transaction assurance.
  • Scalability:

    Proof-of-stake is more scalable as it removes the race of solving math problems as well as the need for computation. Without major computational or financial costs, the Algorand protocol scales to billions of users.

How does Algorand aim to create a borderless economy?

The current centralized system has a lot of issues which makes more or less every one of us suffer. However, the biggest issue with this system is that it favours the rich a little too much, and even more importantly, it’s very restrictive. Not only do people have to go through a series of validating procedures to be legally included in the system and be able to access all the facilities, but it requires a ton of documentation which many cannot produce, leaving them completely out of the system. Moreover, every country’s financial network is bound by the country’s borders. This also means that the natives of each country are restrained by its own central authority’s fiscal judgements, which, in several instances, have wronged its countrymen.

Algorand aims to resolve all troubles like these by creating an economic environment which is inclusive, open, permissionless, and borderless from every aspect. In its inaugural auction, the Algorand Foundation distributed 25 million Algos to global auction participants, taking the first step towards a borderless economy. Here is how the foundation aspires to reach this goal:

  • Inclusiveness:

    Since there is no need for mathematical problem solving, literally anyone with a smart computing device and an internet connection can be a member of an Algo network. This way, it removes the whole concept of borders created based on industry expertise, country origins, or anything for that matter. It essentially shows the world what a true borderless economy looks like.
  • Wide accommodation:

    As said earlier, with its extensive scalability, true decentralization, and strong security, Algorand can accommodate billions of users. This essentially opens its door to every industry that requires a central control to operate and is heavily dependent on the chain of intermediaries that support and secure transactions for a huge number of people, the biggest example of which is finance.

    The smart contracts of Algorand provide an elegant solution for powering a new generation of Decentralized Finance (DeFi) applications, from credits to stocks, exchanges, voting applications, and atomic cross-chain transfers. Almost 400 companies have entered the fast-growing Algorand ecosystem within a year after the launch of the MainNet, using the platform to develop a wide range of applications, such as investment (Republic), asset tokenization (Props), Stablecoins (Tether, USDC, MELD Gold), CBDCs (Marshall Islands), gaming (World Chess), insurance (Attestiv) and accounting (Verady).
  • Open source:

    Algorand’s platform is open, operating in a similar manner as an open-source software. Algorand is permissionless and it allows its protocol and its native currency, Algo, to be accessed by anyone and everyone from any industry to create profitable solutions of their own via decentralised applications and projects, regardless of where they are. This way, the developers hope to achieve a broad exchange of innovative ideas among a variety of user profiles.

    Several organisations have already begun to adopt Algo to create their own blockchain-based solutions. To mention a few,
  • Securitise, a supplier of digital securities regulatory technologies, uses it to issue and control digital securities.
  • The world’s first blockchain-based cloud communications network, TOP Network supplies a broad variety of communications services, all based by blockchain technology from Algorand.
  • By tokenizing assets and taking them to a global audience, AssetBlock is democratising commercial real estate.

Conclusion

Today in 2020, when we are locked inside our homes and only reliant upon our smart devices and the internet, we can finally see the world as a global population, rather than humans separated by country borders. That is exactly the worldview of Algorand, and that is exactly why the foundation was created – to have better collaboration and connection among all of us, with a truly borderless economy. Judging by the way it is already being widely accepted and applied, we can safely say that Algo is that cryptocurrency which can change the world as we know it, forever.

Ralph Kalsi

Founder and CEO, Blockchain Australia ™

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quote-marks

The internet is an ever-growing platform that encompasses every part of our daily life. Blockchain is playing a huge role in transforming it.

Ralph Kalsi
Ralph Kalsi

Founder and CEO, Blockchain Australia