What is the Algorand blockchain, and how does it work?

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What is Algorand?

Algorand is a blockchain network created in 2017 by Silvio Micali, an MIT professor who won the Turing Award for his work in cryptography. Algorand is a decentralized permissionless blockchain protocol that anyone can use to develop applications and transfer value. The Algorand protocol is powered by a novel consensus algorithm that enables fast, secure and scalable transactions.

Algorand addresses the common issues that most older blockchains have, specifically concerning scalability and consensus. The blockchain uses Pure proof-of-stake (PPoS), a consensus protocol that selects validators at random according to the weight of their stake in ALGO coins.

What is Algorand trying to solve?

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.

Security

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.

Scalability

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.”

Decentralization

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.

How does Algorand 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.

Algorand protocol structure

The Algorand protocol is built on three fundamental concepts:

  • Transactions: Transactions are the basic unit of account in the Algorand network. They are used to transfer value and are verified by all participating nodes in the network.
  • Blocks: Blocks are groups of transactions collected into a single unit and verified by the consensus algorithm.
  • Consensus: The consensus algorithm is responsible for verifying blocks and ensuring that they meet the requirements of the Algorand protocol. It also rewards users who participate in its operation.

Algorand staking mechanism: Pure proof-of-stake

Under Algorand’s PPoS approach, the influence held by a user on the choice of a new block is proportional to the number of tokens they have in the system, also called their stake. Each user has a chance to be chosen with the weight of their proposals and votes being directly related to their stake.

Users are selected randomly and secretly for the purpose of proposing blocks and voting on such block proposals. Through this approach, the network’s security is tied to the honesty of the majority of the users in its economy. As long as most of the money is in honest hands, the system will remain secure.

This approach is in opposition to other consensus mechanisms like PoW, DPoS or BPoS wherein small groups within the economy are responsible for the whole system’s security. By principle, a small fraction of users can prevent other users from transacting with these approaches.

Algorand’s approach makes it virtually impossible for holders with smaller stakes in the system to harm the whole network. Meanwhile, majority holders would also not dare to act maliciously, as such actions will result in the devaluation of their own assets and a reduction in the currency’s purchasing power.

Algorand block production under PPoS

New blocks are constructed in two phases under Algorand’s PPoS mechanism. During the first phase, a single token is selected at random. The owner of this token is the user in charge of proposing the next block.

During the second phase, 1000 tokens are selected randomly out of all the tokens in the system. The owners of these tokens make up the phase-2 committee, and they are in charge of approving the block proposed by the user in phase 1.

Related: What is cryptocurrency? A beginner’s guide to digital currency

It is possible for a committee member to be chosen more than once. This also means that a member will have more than one vote in the committee when approving the next block.

The second phase in Algorand’s block production process was put in place to combat any percentage of bad actors. By choosing 1000 tokens at random, the malicious intentions of these bad actors will be trumped by the majority and act in accordance with the rules for the welfare of the network.

Algorand’s native cryptocurrency: ALGO

The native currency of the Algorand network is called ALGO. ALGO tokens are used to pay for transaction fees and reward users who participate in the network's consensus process.

Transactions with ALGO happen in less than four seconds, regardless of how many transactions you do in a day. Transaction fees are also minimal. Unlike Ethereum, which is notorious for high gas fees, Algo transactions cost very little.

How can I buy ALGO cryptocurrency?

There are several methods for purchasing ALGO. You may buy it directly from another individual in person or over the internet, as you would with any other cryptocurrency.

Alternatively, you may look for a crypto ATM near you that offers ALGO. However, crypto ATM rates can be prohibitive, and there’s no assurance that you’ll be able to locate a counterpart willing to make the trade.

The easiest way to buy ALGO is on a cryptocurrency exchange. Some popular exchanges that offer ALGO include Binance, Kraken and Coinbase. You can buy ALGO with a credit or debit card on these exchanges.

To do so, you first need to get a crypto wallet to hold the ALGO. Some wallets that support ALGO are Pera Wallet, My Algo, Coinbase and Ledger.

Once you’ve set up your wallet, you can now fill your wallet by finding an exchange that supports ALGO.

Set up an account on the exchange if you already do not own one and get it verified. Select “Algorand” from the list of assets to begin your trade. Input the fiat amount to buy ALGO coins and preview your purchase before you finally submit.