An In-Depth Guide To Algorand
The success of Bitcoin both as a currency and a tradable asset paved the way for what we today recognise as the cryptocurrency market. This started with the release of unique blockchain-based cryptocurrencies like Litecoin, Ripple, Ethereum and many others as crypto adoption gained momentum. Each of these crypto-assets offered unique solutions to the issues posed by the Bitcoin framework.
With the wide success of these altcoins and cryptocurrency market mimicking the share market in its demand and popularity, attention shifted towards the technology that was at the helm of this boom- Blockchain. The new cryptocurrencies needed to attract users and investors alike to succeed in the market. To achieve this, developers heavily experimented with blockchain technology to come up with crypto assets offering effective solutions that combated popular issues such as scalability and security, far more competently.
This was the birth of the next wave of cryptocurrencies which saw the introduction of cryptocurrency networks like Cardano, Solana, Algorand and others. So born out of a necessity to counter existing crypto issues while still staying true to the fundamentals set by Bitcoin, Algorand saw a favourable early adoption. But before we discuss the success of Algorand let’s get more familiar with what it is all about.
What is Algorand?
Algorand is a project that offers solutions to key blockchain issues of decentralization, scalability and security. Founded by renowned cryptography expert and MIT professor Silvio Micali in 2017, the project became publicly available in 2019. Like Ethereum, the Algorand network hosts an environment for developers to create defi(decentralized-finance) applications and dapps(decentralized applications).
The network has a native cryptocurrency named ALGO that is used for transactions and to finance other activities on the network, similar to that of Ether in Ethereum. Algorand is also an open-source project with its source code available in the public domain for developers to learn, experiment, and build.
Since scalability is one of the key issues associated with Bitcoin, the majority of the cryptocurrencies offer solutions to tackle this issue. Algorand too traces its origin to tackle this issue along with ensuring that the network remains decentralized. But are the solutions offered by Algorand unique? If yes, then how are they unique and to what extent? Also, what is the necessity of these solutions? Let’s start with the basics.
Age-Old Issue of Scalability
The scalability issue is simply the incapability of a cryptocurrency network to handle a lot of transactions in a short period. This stems from the basic principle of blockchain where the data on transactions taking place on the network need to be encoded on the block. This block is then added to the blockchain, thereby validating the transaction and making the record of it accessible to the members of the blockchain through that block.
Bitcoin scalability challenge initially arises from the fact that its block size is 1 megabyte and it takes nearly 10 minutes for the creation of a block. This further limits the transactions per second rate of the network to a mere 7 resulting in the following issues:-
- High transaction fees
- Delayed transactions
An average Bitcoin owner, therefore, needs to either wait for a good amount of time to get their transaction validated or needs to pay morbidly high transaction fees.
This takes us to the next part of the discussion.
Consensus Protocols in a Blockchain
Consensus protocols in a blockchain are the in-built guidelines that ensure the smooth flow of activities taking place on the network. Since a blockchain network consists of an unprecedented number of members, recognised as nodes through the devices part of the system, there are chances that some of them have malicious intentions. These protocols specify how activities such as transactions and block addition take place while ensuring that the integrity of the network is never compromised.
Bitcoin uses the ‘proof-of-work(pow)’ consensus protocol. Here miners(nodes that mine a block, in other words, add it to the Bitcoin ledger) are required to solve a complex mathematical problem and the one who solves it first gets to encode the transactions and add the block to the network. The network here rewards the winning miner a fee for the work done.
On the other hand, Algorand uses the ‘pure proof-of-stake(ppos)’ consensus protocol. Now, let’s understand how Algorand tackles the scalability issue and the importance of this consensus mechanism implemented by it.
Byzantine Agreement Protocol
The Algorand network uses a pure proof-of-stake protocol based on Byzantine Agreement protocol. The user’s stake in the system, which is the number of tokens held by him, influences the choice of the users selected to take part in the process of block selection and addition. The protocol takes into consideration all the users online during the process.
The creation and addition of a new block on the Algorand network happens in 2 steps:
- The proof of stake consensus protocol randomly selects users based on their stake to create a block. In Algorand the users stake their position using ALGO to get selected by the protocol. Interestingly, the number of ALGO staked by the users directly influences their chance of getting selected. The protocol selects the users through the process of cryptographic sortition, where each user that gets selected executes a Verifiable random function (VRF) to affirm that the protocol selected them for this round.
Next, the VRF fetches cryptographic proof that can be used to validate the user’s presence on the committee. Once a user’s presence on the committee is verified, that user can build a proposed block, embed the cryptographic proof from the VRF and send it to the network for review and analysis.
- The second step is based on Byzantine Agreement protocol where voting is done to choose from the proposed blocks. Here, the network again randomly selects a new committee through cryptographic sortition. Just like step 1, when users confirm their presence in the new committee through VRF, the committee analyzes the cryptographic proof and proposed blocks of the members of the previous committee. The new committee then votes to select the block. If a block manages majority votes then it is instantly finalized and added to the ledger.
The process of selection of the committee for both the rounds and selection of the block occurs in seconds making Algorand one the quickest crypto network out there. Not only this the presence of Byzantine Agreement protocol also makes Algorand decentralized and boosts network security. Here’s how.
Security and Decentralization
For a malicious entity to exert its influence on the network and carry out any nefarious activity, it needs a majority presence in both committees. However, the consensus mechanism of Algorand oversees the creation of committees for both rounds in an extremely random and unpredictable manner. There are no established patterns that can help determine which user might get selected next. This helps to preserve the integrity of the network in the following way:-
- The malicious entity can’t determine which user will get selected out of millions of nodes on the network.
- If the malicious entity recognises that a particular user is selected then before it can corrupt the user, the latter would have sent their proposed block owing to the rapid pace of the block creation process.
- Even if there is a large group of malicious users, the chance of them acquiring a more than 51% representation in any committee will always be next to negligible.
The protocol ensures that the network stays decentralized and can seamlessly expand the ledger on its own. The network control thus lies in the hands of the Algorand user community and not with the team behind Algorand.
Hard-fork takes place when two different blocks are mined at the same time. This results in the creation of two ledgers with similar prior blockchain. Algorand protocol ensures that two blocks can never reach a consensus in the same round. A block either gets selected and finalized in the round, or the protocols initiate a new round of block selection.
Since the block instantly becomes finalized as soon as it gets majority votes in around and will become a part of the Algorand blockchain, the protocol helps eliminate a hard fork situation.
Evolving Nature of Algorand
However, this does not mean that Algorand is a rigid blockchain network. The Algorand ledger is always evolving and the Algorand team looks forward to adapting to the demands of the user community. Just like the new block is added through a democratic consensus, change in network policies also takes place via a consensus process.
Changes can be proposed on the Algorand network where the community decides on the fate of the proposed changes. If the proposed changes are accepted by the users then the community decides the block at which these changes will be incorporated into the system. This further prevents a hard-fork situation and boosts a sense of togetherness in the Algorand community.
Algorand Solves Scalability Problem
Now, coming back to the issue of scalability. The consensus mechanisms ensure that Algorand stays secure and decentralized. It is the similar protocols that help eliminate the issue of scalability in the Algorand network.
The block selection and addition process although looks long and tedious takes place in just a few seconds. The quick pace of the block addition gives the network a speed of 3000 transactions per second. As per their records, the network can support 500,000 daily transactions.
Salient Features of Algorand
Algorand network consists of multiple salient features that help operate the network much more efficiently.
#1 Smart Contract
A smart contract is a self-executing contract. It is simply a code that executes itself once all the underlying conditions are achieved. Here, the parties involved agree on the details of the execution of the contract which are then embedded in the code in the form of conditions. In this way, neither of the parties need to execute the contract once the contract conditions have been fulfilled.
Smart contract is a key feature of the Ethereum blockchain which has made it popular among crypto proponents. Since it allows transactions or contracts to get executed between anonymous parties without the need of any third-party, smart contracts has been a sought after blockchain feature. Algorand offers the execution of smart contracts on its ledger in a faster, scalable and pocket-friendly manner as compared to prior smart contract hosting blockchain.
Algorand employs ‘Algorand Virtual Machine (AVM)’, which promotes simple and secure contracts by offering users more functionality and tools to write effective contracts. It offers more flexibility, features and states for users in the form of more opcodes and availability of robust recursions, loops and functions to promote precise and secure contracts.
#2 Atomic Swaps
An atomic swap prevents fraud and empowers two different parties to trade distinct cryptocurrency assets from different blockchains. It also eliminates the requirement of a third party to facilitate the trade. Traditional atomic swaps involve multiple steps where each party is required to access the required funds from their native blockchain and acknowledge the receipt of funds using a cryptographic hash function all within a predefined period. A failure to do this from either result in the termination of the swap. Owing to this, atomic swaps are often seen as a time-demanding process involving lock functions.
Algorand, on the other hand, empowers two users of the Algorand blockchain or sub-chains to simply exchange fungible and non-fungible assets through a single transaction. It treats an atomic swap as an ‘irreducible batch operation’, where a group of transactions are treated as a unit and all the transactions need to pass for the swap to take place. This eliminates the requirement of hashed time lock contracts thereby offering faster trade conditions.
A key feature of decentralized cryptocurrencies is accessibility to the details of transactions taking place on the ledger along with all the previous transactions that have taken place. This however complicates and makes the work cumbersome for users that need to verify new transactions. It is also a storage burden for all the existing users as well as new users who need to locally have a set amount of data on prior transactions taking place on the ledger.
Algorand uses Vault, a blockchain compression technology, that reduces the issue of storage of previous transactions. It empowers nodes to store a small amount of usable transaction data by promoting the storage of recent transactions and forgetting about previous transactions. Vault also promotes sharding to help users verify transactions despite the growing state of the ledger. Lastly, it securely guides new users to the relevant data on recent transactions when they join the ledger, eliminating the requirement of fetching and storing loads of data of previous transactions.
A user account consists of a ‘public address’, which helps identify an account publicly, and a ‘private spending key’ that helps in authenticating transactions from the public address. Traditional cryptocurrencies treat both of them not as distinct units but as a distinct pair. So in a situation where the private key needs to be changed and reset, the traditional cryptocurrencies required the user to set up a new public address which would come with a new private spending key. Hence, one needs to continuously move funds from one address to another if they periodically change private spending key for safety purposes.
Algorand offers Rekeying by allowing users to change their Private Spending key eliminating any requirement to change their Public Address. Rekeying helps a user by saving them the trouble to continuously change public addresses and updating their frequent transaction partners about this change.
Environment-friendly Stance of Algorand
The proof-of-work(pow) consensus protocol present in Bitcoin often faces scrutiny because of its undesirable impact on the environment. As discussed earlier, pow demands the users to solve a high-level mathematical problem that results in rampant usage of high computational power machinery for one to solve it the fastest. Since such devices have high energy usage, this results in a massive carbon footprint.
Algorand’s pure-proof-of-stake(ppos) consensus mechanism on the other hand eliminates the requirement of such high powered hardware thereby resulting in an extremely small carbon footprint. Further, its partnership with environmental consultant group ClimateTrade is helping the Algorand team to make their blockchain extremely energy efficient.