Founded in late 2017, Algorand is the brainchild of renowned Italian MIT professor Silvio Micali. The 2012 Turing Award winner, who is praised for his contributions to cryptography by establishing zero-knowledge proofs, designed the ideas behind the network in hopes of solving blockchain security issues proposed by Ethereum co-founder Vitalik Buterin. The decentralization and scalability trilemma.
Although the network’s mainnet launched in June 2019, the invented protocol didn’t become popular until 2020, with the network’s major upgrade being Algorand 2.0. The network’s revamp unlocks important capabilities needed to support the creation of complex use cases, such as DeFi services, in line with the thriving ecosystem on comparable smart contract-based blockchains.
Algorand is governed by the Singapore-based nonprofit Algorand Foundation, which simultaneously delegates to Boston-based for-profit software company Algorand Inc. to support the network’s development. Algorand’s native token, ALGO, has lagged behind other large crypto assets in the current secular bull run due to its controversial token economics and its once-restricted base layer — two aspects that have been addressed in the course of 2021.
Algorand’s ability to provide high transaction throughput (1,000 TPS) and nearly instant transaction finality (approximately 4.2 seconds) is supported by two network designs that help make this reality possible.
The first is the blockchain’s unique two-tier architecture, which separates computationally demanding processes by locating them in the off-chain layer of the network (layer 2), while designating the on-chain layer (layer 1) to host relatively simple smart contract-based transactions. The network’s two-tier architecture helps prevent any bottlenecks from arising. The second is a scalable and randomness-predicting iteration on the PoS consensus mechanism, called pure proof of stake.
architecture
Algorand supports a two-layer architecture. Algorand’s on-chain layer 1 is where the core activity takes place. Incorporated into the base layer is a set of features that equip the blockchain with the qualities needed to power its own DeFi ecosystem and complex real-world use cases. Some of these components include the Algorand Standard Asset (ASA), Algorand’s Virtual Machine (AVM), key update functionality, and atomic transfers.
ASA is the network’s solution for creating four different types of standardized tokens that benefit from the ease of use, compatibility, and shared security of the underlying network because they are embedded into the blockchain layer itself rather than presenting smart contracts through add-ons. The proposed system, seen as Ethereum’s ERC counterpart, aims to standardize the token creation process, allowing for the creation of: fungible in-game points, system credits, loyalty points; non-fungible identities, in-game items; restricted fungible securities, government-issued fiat currencies; restricted non-fungible tokens (real estate, regulatory certifications). To create one of these, developers simply fill out a form with their basic details, including the asset and unit name and the total supply to be deployed, rather than compiling code. This approach can protect against certain poor token designs that could compromise the security of assets, as demonstrated by the billions of dollars lost in hacks in the Ethereum DeFi ecosystem in 2021.
In addition to homogenizing the tokenization process, ASA also provides asset spam protection (ASP) for trading individuals and so-called role-based asset control (RBAC) for token issuers. ASP protects users from acquiring assets that carry reputational or legal risks unless they explicitly agree to receive tokens - a reality that comes with the interpretation of the committee that they may have violated securities laws in places such as the United States, where citizens are excluded from airdrops due to the regulations of the US Securities Exchange. RBAC, on the other hand, mandates token managers to isolate certain accounts under investigation or introduce a whitelist model in which only a discrete set of users are eligible to trade, which is very similar to the scheme of controlled financial environments prevalent in traditional finance.
Prior to the release of the AVM, Algorand was initially limited to supporting the creation of stateless smart contracts (ASC1) through its non-Turing-complete language, Transaction Execution Approval Language (TEAL), which limited the introduction of complex logic in applications, as TEAL programs were mainly focused on running basic operations, such as returning true and false when used to approve and analyze transactions. After the upgrade, Algorand's operating system is now able to host DApps built in high-level languages such as Python, Reach (simplified JavaScript-like), Clarity, and GO, facilitating the implementation of more complex use cases and simplifying the maturity of the ecosystem.
Atomic transfers strongly position Algorand's main layer as a reliable financial ledger, as they enable frictionless exchange of assets between untrusting parties, almost instantly. Due to Algorand's nearly instant finality, transactions are merged together and either fully executed or rejected and funds returned to the original user. This feature opens the door to facilitating fast, interleaved multi-party and multi-asset transactions that can extend beyond the realm of the Algorand ecosystem.
The rekey feature is Algorand’s final attempt to harden the blockchain into a user-facing network tailored for seamless use. The feature preserves a public address while exchanging private keys without making any structural changes to the accounts that oversee them, which in turn means that reassigning ownership of a contract is now as seamless as sending a transaction.
Although computation and settlement can run on both layers, as evidenced by the rich functionality of Layer 1 smart contracts, computationally intensive DApps are offloaded to Algorand’s off-chain layer (Layer 2) to prevent bottlenecks. For example, a contract that processes a private equity placement and needs to reference an external database of accredited investors is best kept off-chain, as it is costly to keep large amounts of data on-chain. Other contracts that use privacy-oriented libraries such as zk-SNARKs that require considerable computational power are also redirected to the off-chain layer.
Algorand’s mechanism for linking the off-chain layer with the security of the main network is by randomly selecting a committee of nodes that have already participated in block validation and calling them when more complex contracts need to be executed. In this way, scalability will be incorporated into the core functionality of the blockchain.