Algorand is a fairly new blockchain focused on improving scalability without sacrificing decentralization. This problem is common to many of the first and second-generation blockchains, such as Bitcoin and Ethereum.
To achieve this, Algorand developed perhaps its most notable feature: the Pure Proof of Stake (PPoS) consensus mechanism. The scalability, security and decentralization of PPoS has attracted many large institutions and companies to use Algorand as the infrastructure layer to solve real-world problems that require scale, speed and cost efficiency..
What Is Algorand
Algorand is a blockchain network and project founded in 2017 by Professor Silvio Micali, a computer scientist from MIT that has won the Turing Award and is considered one of the forefathers of modern cryptography. The mainnet network launched in June 2019 along with its native cryptocurrency, ALGO. As mentioned, the blockchain focuses on improved scalability and also supports smart contracts.
The Algorand network is a public, decentralized, Pure Proof-of-Stake blockchain with support for customized layer-1 blockchains. These can be used to create blockchains tailored for specific uses. The project claims it has solved the trilemma and its technology is particularly useful for financial services, decentralized finance (DeFi), fintech, institutions and the creator economy.
What Is the Algorand Foundation
The Algorand Foundation is a non-profit organization launched in 2019 that funds and develops the Algorand ecosystem. It also carries out important work in the blockchain's community, research, and governance.
For example, the Foundation has educated developers in universities and supported Algorand projects in its ecosystem with accelerator programs. However, technical development work is carried out by the private company Algorand Inc. The Algorand Foundation is also a large holder of ALGO, which it uses to fund its activities.
How Does Algorand Work?
The key to Algorand's scalability comes from its Pure Proof of Stake consensus mechanism. This protocol allows it to process many transactions quickly without sacrificing decentralization. Proof of Stake (PoS) blockchains are scalable but often at the cost of a small number of validators who have large stakes dominating block approvals.
Proof of Work (PoW) has the same issue as large mining pools almost always win the race to create new blocks.
In contrast, Algorand’s PPoS consensus mechanism chooses validators and block proposers randomly from anyone who has generated a participation key. The chance of being chosen is directly related to the proportion of the participant’s stake of the overall amount staked.
Naturally, a small holder will have lower chances of being selected than a big holder.
But unlike other PoS blockchains, Algorand doesn’t require a minimum stake, which is a significant barrier to entry for the average user. With every staker who runs a node being a possible validator, the network's security is more decentralized than with a chosen set of validators, such as in Delegated Proof of Stake (DPoS).
Currently, Algorand’s Pure Proof of Stake protocol delivers blocks with instant finality every 3.7 seconds on average, and processes up to 6,000 transactions per second (TPS).
Once users have generated their participation key, they become participation nodes with as little as 0.1 ALGO. Communication between these nodes happens through Algorand relay nodes. The block proposal phase then selects multiple block proposers using a Verifiable Random Function (VRF), considering the proportion of each validator's stake.
Once block proposers are chosen, their identity is kept secret until the new block is proposed along with the VRF output to prove their legitimacy. This improves network security as bad actors cannot maliciously target the chosen validator. Soft vote stage
Once a block is submitted, participation nodes are selected randomly to join the soft vote committee.
This stage filters proposals, so only one candidate can add to the blockchain. Voting power on the soft committee is proportional to the amount each account has staked, and votes are used to select a proposed block with the lowest VRF hash. This means that it will be impossible to preemptively attack the proposer of a block, as the lowest VRF hash is a value that is impossible to predict.
Certify vote stage
Next, a new committee is created to check for double-spending and the integrity of transactions in the block from the soft vote stage. If the committee deems the work valid, the block is added. If not, the block is rejected, the blockchain enters recovery mode, and a new block is selected.
There’s no slashing penalty for the leader who proposes a bad block, making it a controversial part of the PPoS consensus mechanism. The chance of a fork with Algorand is extremely rare, as only one block proposal reaches the certify stage at a time. Once the block is added, all transactions are then treated as final.