One of the most interesting blockchain projects is Algorand, a proof-of-stake project that raised $122 million during the heady ICO days of 2017 and formally launched in 2019. It was designed to solve some of the primary technical barriers at the time in existing blockchains, such as scalability, speed, security, and decentralization.
The protocol was conceived to enable the construction of decentralized applications (dApps) and protocols that could perform at high speeds with a large volume of transactions, and not consume a huge amount of resources. The goal is to be able to compete as a payments processor with the larger, established centralized TradFi processors.
Algorand is open-source and its native token, also called Algorand ($ALGO), has a fixed total supply of ten billion coins. It currently supports a large variety of projects in the DeFi, NFT, gaming, oracles and bridges, and infrastructure space. Like Ethereum, Algorand can run smart contracts.
Algorand’s founder is Dr. Silvio Micali, who’s a rock star among the cognoscenti of the crypto sector. A long-time member of MIT’s Electrical Engineering and Computer Science faculty, Micali is a Turing award winner, Gödel prize winner, and co-inventor of probabilistic encryption, Zero-Knowledge Proofs, Verifiable Random Functions, and many other foundational protocols of modern cryptography. Backing Micali is a team of internationally recognized researchers, mathematicians, cryptographers, and economists.
Algorand's core innovation is something they call a “pure proof-of-stake” (PPoS) consensus mechanism that's designed to be secure, scalable, and decentralized. In PPoS, the network selects a user to propose a block. All users can propose blocks and vote on block proposals, but the likelihood of a user being chosen is proportional to the number of tokens the user has staked. The assumption here is that the more tokens a user holds, the greater the financial interest in the honest operation of the blockchain. PPoS offers security because a malicious party must control a significant portion of the total ALGO tokens to have influence, making attacks economically unfeasible.
This is how PPoS creates blocks:
Blocks are produced in two phases, via a proportionally-weighted lottery known as cryptographic self-selection. This method facilitates an instant choice, so that users don’t have to wait for many confirmation procedures to ensure that a transaction has been executed.
The first phase of the block production process is the Proposal Phase, during which a single token is selected at random; its owner proposes the next block. This selection is done randomly, secretly, and continuously.
The second phase is the Voting Round, in which 1000 random tokens are selected, and their owners then approve the block proposed by the first user, the lottery winner. Randomly selecting these voters and keeping their identities secret improves the network’s overall security and defends against attacks and breaches. New participants are selected in each round of block selection.
According to Algorand, new blocks are written every 3.3 seconds, and in June of 2023, it set a speed record of 10,000 transactions per second. Since the creation of the first blockchain, founders and users have understood that transaction speed and scale would be crucial in order to compete with TradFi transaction processors (such as Visa). Algorand’s recent speed record not only competes, but it also wins.
Algorand uses PPoS to randomly select users to propose and validate blocks. This process ensures that any user, regardless of the size of his stake, has a chance to participate in the block validation process, although as we mentioned above, your probability of being chosen is proportional to your total token holdings. This process promotes decentralization and also ensures a higher level of security, as it would require a large amount of computational resources to launch a successful attack.
DeFi and TradFi have typically operated in different spheres due to inherent differences in operation and regulatory/compliance frameworks. However, Algorand's scalable, secure, and compliant-ready blockchain platform, combined with its initiatives to collaborate with various financial institutions, has positioned it uniquely to bridge the gap between DeFi and TradFi.
As we noted, a fundamental issue that has limited the use of blockchain in TradFi is the problem of scalability. Most TradFi financial operations require a high transaction throughput; Visa, for instance, executes 1,700 transactions per second, or 150+ million per day. That is, by far, out of the range of most blockchains. But, Algorand’s recent 10,000 transaction per second mark makes it faster than Visa and competitive with anyone. As a result, it clears the main TradFi hurdles of speed and scalability.
Algorand's Standard Assets (ASA) feature allows for the creation of various types of assets, including stablecoins, fungible tokens, and non-fungible tokens. This broad compatibility facilitates easier integration and interoperability with existing financial systems.
Algorand has a high level of security, a critical requirement for TradFi institutions. Additionally, its ASA functionality allows for assets with embedded compliance logic. For example, it can enforce AML and KYC rules about who can hold an asset or in what jurisdictions, which can help to meet various TradFi regulatory and compliance requirements.
Finally, Algorand's smart contracts make it easy for developers to create complex financial applications. This enables TradFi firms to more easily adopt and integrate Algorand’s blockchain technology into their existing systems.
Algorand has been actively partnering with various financial institutions to bridge the gap between DeFi and TradFi. Notable partnerships include agreements with Circle, Capital One, and others. These partnerships help to build new financial products that combine the strengths of blockchain and traditional finance.
Circle, the creator of the world’s second-largest stablecoin, USDC, chose Algorand for USDC because of its high throughput and low transaction fees. Stablecoins like USDC play a vital role in bridging traditional finance with crypto economies; USDC’s current market cap is $27 billion. Circle supports digital dollar stablecoins that are interoperable with USDC, enabling customers of Circle Business and Circle APIs to easily move funds between TradFi banks and card networks to digital dollars on the Algorand blockchain.
According to Fangfang Chen, COO of the Algorand Foundation, “As more financial institutions and enterprises look to build decentralized financial applications, they need a well-suited infrastructure and a compliant, regulated, and widely accepted stablecoin; We are excited to partner with Circle to provide financial institutions with the tools they need to leverage the unique benefits of USDC and offer enterprise-grade solutions to build real-world use cases.”
At the end of 2022, Algorand was selected to be the public blockchain that will support an innovative digital guarantees platform in Italy. The company joined the Bank of Italy, the Italian insurance authority IVASS, and more than 30 financial institutions at an event in Milan to illustrate how bank and insurance guarantees can be issued on the blockchain. This is part of an Italian effort to develop a blockchain-based open “Digital Sureties” platform that will serve the needs of Italy’s banking and insurance markets. It is the first time an EU Member State has enabled the use of blockchain technology for bank and insurance guarantees.
Among other TradFi household names using Algorand is Capital One, which is using Algorand to develop a platform for fraud detection and prevention. Spanish bank, Banco Santander is using Algorand to develop a platform for issuing and managing digital assets. Global consulting firm Deloitte is using Algorand to develop a platform for supply chain management. State Street is using Algorand to develop a platform for asset tokenization. British Bank Standard Chartered is using Algorand to develop a platform for trade settlement trade, the issuing and management of letters of credit, and supply chain finance.
Amberdata provides Oracle solutions to Algorand via its partnership with Algoracle. Algoracle is the first decentralized oracle built on the Algorand blockchain; its goal is to provide oracle solutions that assist Algorand dApps with off-chain data.
Finally, while it’s not exactly a TradFi firm, it's nonetheless quite noteworthy that FIFA, the international governing body of soccer, recently chose Algorand for its FIFA+ Collect platform for fans to buy and trade World Cup collectible NFTs.
Algorand’s unique features and capabilities position it to become a bridge between DeFi and TradFi (or the entry road to what some are now calling “FutureFi". It's overcome the most significant limitations of other blockchains, and its increasing number of real-world, brick-and-mortar users and partnerships, along with its carbon-neutral operation make it very much worth watching.
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