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DeFi Decrypted: What Is Algorand and ALGO?

algorand cryptocurrency blockchain

Over the last few years, we have seen the rapid rise of Layer 1 blockchain protocols created to offer a better alternative to the slow and expensive Ethereum experience. While the majority of DeFi applications and total value locked (TVL) remains based on Ethereum, competitors such as Binance Smart Chain, Solana, Terra, and Avalanche are slowly catching up. 

While it was already launched in 2019, Algorand has recently started making serious headway and is now a serious contender in the race to Layer 1 dominance. 

What is Algorand?

Algorand was launched in 2019 by Silvio Macali, a highly accomplished computer scientist involved in many cryptography creations such as Zero-Knowledge Proof. Silvio recognized the potential of blockchain technology to provide fast and irreversible transactions but also saw the fundamental challenge we now refer to as the Blockchain Trilemma.

Coined by Vitalik Buterin, the blockchain trilemma states that existing blockchains can offer at most two of the following three properties:

  • Security
  • Scalability
  • Decentralization

Algorand has created a breakthrough solution, making it a high-performance blockchain that is secure, scalable and decentralized in a well-balanced way. One design that enables the Algorand blockchain to solve the trilemma, is the unique Pure Proof-of-Stake approach used to achieve decentralized consensus. The mechanism defines how people can participate in the decentralized network, makes fraudulent behavior unprofitable, and combined with a Byzantine agreement protocol creates a single, verifiable source of truth. Anyone that wants to participate in securing the Algorand network can signal their intent using an account that holds ALGO, the blockchain’s native token.

Interestingly, the Algorand blockchain is mathematically proven to be immune to forks. Forking occurs when a blockchain splits into two or more separate branches. Because only one branch is allowed to survive, a user would have no guarantee that a payment is truly finalized as it could end up in a non-surviving branch. On Algorand, two blocks can never be added to the chain at once because only one block can have the required threshold of committee votes. This means that all transactions are final within seconds, ensuring speed within a truly decentralized network and creating one of the fastest block finality speeds available on the market.

To maintain high speeds at all times, Algorand uses a two-tiered blockchain architecture. The Layer 1 tier supports processes such as creating Algorand Standard Assets (ASA) which are tokens based on the Algorand standard, operating simple Algorand Smart Contracts (ASC1s) and performing atomic swaps. The Layer 2 tier is reserved for more complex smart contracts and dApps.

Native token ALGO

ALGO is the native blockchain token for the Algorand blockchain and forms the cornerstone of the network’s structure. Unlike most other blockchains, instead of only sending rewards to validators for producing blocks, all accounts holding ALGO are technically eligible to receive these rewards – depending on the type of wallet you use to hold the ALGO token. The rewards distribution model is designed this way to further the decentralization of the Algorand blockchain by encouraging more users to join the Algorand staking platform. Reward distribution occurs about every 10 mins, and on average all ALGO coin holders earn between 5% and 6% APY.

Staking ALGO will however be phased out in 2022, as the project moves to a decentralized governance model. This will allow holders of Algorand (ALGO) to participate in the ecosystem’s decision-making process, as well as earn governance rewards. Once the Algorand governance program begins, any Algorand address can commit to serving as a governor. In order to do so, you have to both pledge some of your ALGO to the program for a three-month period as well as vote in the growth and development of the Algorand ecosystem. Once the three-month period is complete, governors are rewarded for their service by being allowed to claim governance rewards, which are deposited into their governing address

Even though ALGO began circulation after crypto winter had thawed, its price trajectory has followed a trend line similar to tokens launched right when the market cooled down at the end of 2017. ALGO first traded around $2.16 in 2019, only to drop considerably down to $0.10, after which it traded in a band never breaking through the upper $0.70 limit. 

That changed in early 2021 as the Algorand universe began to expand and include more decentralized applications built on the blockchain. Just this year, the ALGO token has gained 402%, starting on a markedly steep incline in August as the project gained market relevance, reaching its all-time-high at $3.28 and currently trading at around $1.75.

Today, more than 500 organizations are using Algorand to create the next generation of financial products and protocols. Algorand has even been tapped as a viable option for governments to launch CBDCs and has been chosen to support the Marshall Islands CBDC project. And the Algorand blockchain has also been chosen by Koibanx to develop the digital assets infrastructure of El Salvador

As more financial institutions finally move into the crypto space, and more governments look into CBDC projects or commit to real adoption like El Salvador has, Algorand is looking at a very promising future.

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