02
Jun
20

No Forks and Pure Proof of Stake - Algorand (ALGO) | Full Guide

Today we are going to introduce you to one of the most exciting blockchain projects in the space – Algorand. They have made a lot of noise recently after acquiring several high-value partnerships. At its core lies an innovative consensus protocol called pure proof-of-stake (PPOS). The protocol allows developers to build scalable blockchain-native solutions for real-world use cases and aims to boost DeFi adoption. The Algorand Foundation is based out of Singapore and it has the following three core properties:

 

  • No Forks: The unique PPOS consensus algorithm ensures that the blockchain doesn’t fork. Each new block formed receives complete finality by default.
  • Medium of Exchange: Protocols like Bitcoins require a 10 min block-time to ensure that its transaction history won’t get muddled by finality problems. Algorand imparts 100% finality by default. As such, it can provide faster block times and be a better medium-of-exchange.
  • All-round Tokenization: Algorand will allow users to tokenize a wide variety of assets like real estate, distributed computation, etc., with maximum scalability, fairness, and transparency.
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    Silvio Micali – The man behind Algorand

     
    This image shows a middle aged man - Silvio Micaeli - in a suit. He is the man behind the Blockchain project Algorand.
     

    Before we go any further, let’s introduce ourselves to the brains behind the project. Silvio Micali is one of the greatest cryptographers who has ever lived. In 1989, along with Shafi Goldwasser and Charles Rackoff, he created zero-knowledge proofs. Along with that, he is known for his work on public-key cryptosystems, pseudorandom functions, digital signatures, oblivious transfer, and secure multiparty computation. Some of his doctoral students have been legends in their own right like Mihir Bellare, Bonnie Berger, Shai Halevi, Rafail Ostrovsky, Rafael Pass, Chris Peikert, and Phillip Rogaway. Micali was awarded the Turing award in 2012 for his contribution to cryptography.

     

    Algorand – Pure Proof-of-Stake

     

    Since there are no central authorities, such as a board of directors, who make decisions on the protocol directions. How does anything get done in a decentralized system? This is where consensus mechanisms come in. The idea is to have an algorithm that collects consensus from the entire network regarding a particular query. As long as most of the network gives their thumbs up, the query is good to go.

     

    Bitcoin achieved consensus with a method called proof-of-work (POW). This is how it works:

     

  • Specialized nodes called “miners” buy mining equipment called ASICs to solve cryptographically hard puzzles.
  • These puzzles are challenging and force them to spend a lot of computational power.
  • If a miner successfully adds a block to the blockchain, they get awarded with a block reward.
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    While it’s hard to argue against the security provided to the Bitcoin blockchain, the problem with POW is that it is highly unsustainable. The main problems being:

     

  • POW is a very wasteful process that requires you to spend a lot of your computational resources.
  • Your chances of mining blocks increase exponentially when you have better quality and more expensive ASICs. This creates a centralization of resources since richer organizations can buy more ASICs and monopolize their control over Bitcoin.
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    This is why the newer protocols are opting for a more virtual consensus mechanism that doesn’t require you to spend real-world resources. One of the most popular forms of these virtual consensus algorithms happens to be proof-of-stake.

     

    What is Proof-of-Stake?

     

    This is how proof-of-stake or POS works:

     

  • Validators (instead of miners) lock up a stake within the network.
  • They then sign-off on the block that’s next going to be added to the chain.
  • The validators finally get a block reward that proportional to the stake.
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    Algorand’s consensus is a slight variation of the traditional POS, called pure proof-of-stake (PPOS).

     

    What is pure proof-of-stake?

     

    In traditional POS systems, your stake acts in the same way as your hashing power does in POW systems. However, the problem with this approach is that it embraces the “rich get richer” concept. The validators who already own a large number of tokens in the system will get more chances to mine blocks and get richer.

     

    PPOS enables Algorand to adopt a more egalitarian approach. ALGO token holders are randomly and secretly chosen to add blocks to the main blockchain. The holders are chosen irrespective of the size of their stake. This method ensures that:

     

    The security of the overall economy is tied to the whole network instead of a wealthy few. This increases the overall decentralized quality of the network and ensures that the system is as secure as possible and safe from potential 51% attacks. In Algorand:

     

  • The owners of a small fraction of money can’t harm the whole system.
  • The holders who actually own a large stake will not want to act against the interest of the overall network since it will devalue their stake.
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    PPOS vs BPOS

     

    BPOS stands for bonded proof-of-stake, which is a system where people lock up a stake in the ecosystem and:

     

  • They get a block reward that’s proportional to the stake.
  • Their individual voting power is also proportional to the stake.
  • If the validators act maliciously against the interest of the system, they will get their stake slashed off.
  • Once they have put in the stake, it can’t be removed until a specific amount of time has passed.
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    The main advantage of PPOS over BPOS is that it doesn’t hold your stake hostage. Users are free to spend their stake anytime they want since it’s stored in their wallets. On the other hand, in BPOS, users have to set aside their stakes and completely forget about it during the consensus process.

     

    PPOS vs DPOS

     

    Another interesting POS approach that has become quite famous is delegated proof-of-stake. Championed by EOS, delegated proof-of-stake emphasizes speed over decentralization by choosing certain delegates in the network who are in charge of the consensus process.

     

    In EOS’ case, 21 delegates/block producers are voted from the network and they take care of the overall network health. Block Producers are voted into power by the network users, who each get several votes proportional to the number of tokens they own on the network (i.e., their stake).

     

    The biggest problem here is pretty obvious. If you have a limited number of block producers who know each other, what stops them from joining forces and taking over the whole system? DPOS is inherently centralized. PPOS, on the other hand, is the most decentralized variation of the POS algorithm.

     

    Properties of Algorand

     

    #1 Algorand Standard Assets (ASA)

     

    The native token of the Algorand ecosystem is ALGO and the projects built on top of it will have tokens that follow the ASA system. When you create applications or assets on top of other blockchains, you’ll need to put in additional code or shift the asset to layer-2, which can be a logistical nightmare.

     

    With the ASA feature, you just need to create a simple Layer-1 token, which will have the following properties:

     

  • The tokens you inherit will have all the same features, security, transaction finality, and performance of the primary token (ALGO)
  • The standard assets are configurable and can be allowed to represent virtually anything.
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    #2 Atomic Swaps

     

    Atomic swap is a protocol that allows you to exchange or swap one cryptocurrency for another, without having to go through a centralized platform. Algorand’s layer-1 atomic swap has the following properties:

     

  • Multiple transactions can be grouped into one operation. To reduce failure probability, if one of the transaction fails, the entire set is declared null and void.
  • Atomic Transfers can also be used in conjunction with any asset on the blockchain (ASA or Algo).
  • Being a layer-1 feature, it is a lot more secure than the standard atomic swaps which usually happen via state channels (layer-2).
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    #3 Algorand Smart Contracts Layer-1 (ASC1)

     

    Unlike other protocols, Algorand executes its smart contracts in layer-one, which makes it a lot more secure. Algorand uses an innovative new language called “TEAL” or Transaction Execution Approval Language to code ASC1s. The type of smart contracts that can be created using this protocol are:

     

  • Post-and-sale transactions: Automate your sales to purchase items without being directly involved in the process.
  • Securitized loans: Allow borrowers to cash in collateralized loans. If they fail to pay back their loans, they automatically lose their collateral.
  • Automated Crowdfunding: Execute an automated crowdfunding campaign and collect funds without getting directly involved in the process. The project creator needs to set a funding target beforehand; otherwise, the contract refunds all the money raised.
  • Accredited-Only Transactions: You can also create contracts that limit the investors entering your contract without having to monitor each transaction personally. For example, you can create accredited contracts where only qualified investors can execute a particular transaction type.
  • Multi Multi-Sig Wallets: A multi-sig wallet is a special form of cryptocurrency wallet which can be maintained and used by multiple people. Multi multi-sig wallets are a special class of multi-sig wallets that can be managed by multiple group sets.
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    #4 Algorand Co-Chains

     

    Public chains aren’t efficient for enterprise use since they need to carefully monitor who all can access the stored data for compliance and privacy reasons. The Algorand co-chain is a special, permissioned version of the Algorand blockchain. A permissioned blockchain allows enterprises to:

     

  • Provide access control to their users and restrict entrance.
  • It’s interoperable with the public blockchain, which reduces the risk of user-isolation. Due to this interoperability, enterprises can experience the best of both worlds – isolate and control sensitive data, while safely interacting with the outside world.
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    Co-chains have the following features:

     

  • Works independently from the public chain
  • It is interoperable with the main public chain.
  • Easily and securely interact with other co-chains.
  • Leverage rigorous fine-grained control.
  • Data inside the co-chain shielded from outsiders.
  • Chooses its own validators.
  • Runs its own consensus algorithm.
  • Automatically inherits all the improvements and upgrades that will be added to Algorand’s permissionless protocol.
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    #5 The Mule Framework

     

    Algorand developers created a framework called “Mule,” which generalizes the concept of a unit of automation. The properties of Mule are as follows:

     

  • Automation decoupled from project repositories: Users can define automated tasks as python scripts in one centralized location without any need for scripts in the application repositories.
  • Automation can be consumed conveniently: The framework provides a simple way for you to organize their execution through an intuitive, declarative yaml format.
  • Automation consistently executed by both users and their CICD process: The Mule provides a “cli” that can consume any valid mule yaml file and executes the automated tasks deterministically.
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    #6 ALGO Grants Program

     

    The grants program aims to accomplish Algorand’s vision of creating a borderless economy by attracting developers into the ecosystem. The 250 million ALGO (around $43 million) grants program will be allocated to deserving developers across four major categories:

     

  • Innovative research.
  • Development tools for the Algorand blockchain.
  • Use cases for decentralized applications.
  • Education and community initiatives.
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    Fangfang Chen, Head of Operations at the Algorand Foundation, said:

     

    “We believe that a public, permissionless, pure proof-of-stake blockchain with an open-source approach is fundamental to delivering on the vision of a borderless economy. As part of its vision of enabling a broad and active blockchain development community, the Algorand Foundation is committed to supporting that community as they explore the opportunities for innovation that exist within the Algorand blockchain ecosystem.”

     

    These 250 million tokens will be distributed based on the quality of the project submitted. As of now, the Foundation is conducting the initial evaluation of the projects. Later on, the community will get to decide on which projects should receive grants via voting.

     

    #7 Algorand Wallet

     

    The Algorand Wallet is the Algorand’s official mobile wallet that allows users to hold, transact, and request Algos or any ARC-01 asset. The wallet allows you to access your various accounts along with their respective public and private keys.

     

    Using the wallet will provide an additional security layer towards:

     

  • Authenticate and authorize transactions.
  • It integrates with the Ledger Nano X to store your Algorand Wallet private keys. Transactions can be easily signed with Nano X’s Bluetooth capabilities.
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    Algorand partnerships

     

    It’s impossible to talk about Algorand without mentioning some of the partnerships that they have made in recent times. Let’s take a look.

     

  • Marshall Islands: Algorand will help create the CBDC for Marshall Islands called “SOV,” which will help them operate efficiently in the global economy. The government of the Marshall Islands will oversee SOV and its supply will grow at a fixed rate of 4% each year to keep inflation in check.
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  • Meld: Algorand will be partnering with Meld and the Australian gold industry to host a new stablecoin to track the supply chain between users and partner members.
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  • DUST Identity: Diamond Unclonable Security Tag (DUST) has partnered up with Algorand to provide scalable and tested methods to authenticate physical objects and validate genuine transactions on the blockchain. DUST uses nanoengineered diamonds to create an unclonable identity layer on any object.
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  • World Chess: A London-based media company and the official broadcaster of the World Chess Federation events. It has partnered up with Algorand to open the first-ever Museum of Blockchain in Hamburg.
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  • Italian Society of Authors and Publishers (SIAE): Algorand and SIAE will collaborate to create a new platform for decentralized copyright management. They are both going to develop and fortify copyright management tools and services.
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  • IBMR and ARCC: The ARCC (Asia Reserve Currency Coin) is a stablecoin that plans to promote financial inclusion in South East Asia. The International Blockchain Monetary Reserve (IBMR) and Algorand will collaborate to work on this project.
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  • CERN: PlanetWatch is a blockchain company that spun off from CERN’s partnership program. They are building the world’s first immutable air quality ledger utilizing the Algorand blockchain and IoT technologies.
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    Conclusion

     

    This guide should inform you about everything that you need to know about Algorand. Its consensus protocol and underlying technological offerings have made it one of the most successful new projects in the space. Backed by a brilliant team and with a plethora of high-value partnerships, this is a project that you must look out for.

     

    disclaimer

    CHAIA.iO is not a registered investment, legal or tax advisor or a broker/dealer. All investment/financial opinions expressed by CHAIA.iO or the authors of the respective articles on www.chaia.io are from personal research and experience of the owner of the site or the authors and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors or misprints may occur. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise.

    Rajarshi Mitra
    Blockchain Researcher