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Video lesson

Algorand

Algorand: Bridging the Blockchain Trilemma

In the intricate landscape of blockchain technology, Algorand shines as a unique solution aimed at resolving the notorious blockchain trilemma: balancing security, decentralization, and speed. Traditionally, blockchain networks often sacrifice one of these attributes for the sake of the others, leaving us wondering whether a perfect solution exists. Enter Algorand, a platform launched in 2019 that promises to elevate the way transactions are handled while supporting decentralized applications.

Core Concepts

1. Blockchain Trilemma

Definition: The challenge of achieving optimal security, decentralization, and scalability (speed) in a blockchain.
Traditional Finance Parallel: In finance, striking a balance between risk, return, and liquidity is crucial. Analysts often have to choose which two aspects to prioritize.
Relevance in Crypto: Understanding this trilemma is essential for anyone venturing into the crypto space as it helps you identify the strengths and weaknesses of various blockchain platforms.

2. Smart Contracts

Definition: Self-executing contracts with the terms of the agreement directly written into code.
Traditional Finance Parallel: Similar to traditional contracts, but these automate processes and eliminate intermediaries.
Relevance in Crypto: Grasping smart contracts enhances your ability to interact with platforms like Algorand and Ethereum, making your transactions more efficient.

3. Proof-of-Stake (PoS)

Definition: A consensus mechanism where validation rights are assigned based on the amount of cryptocurrency a user holds.
Traditional Finance Parallel: Similar to a shareholder voting system where stake translates into say.
Relevance in Crypto: Knowing how PoS functions, especially in Algorand’s unique variation of pure proof-of-stake, equips you to make informed decisions regarding participation in networks.

4. Pure Proof-of-Stake

Definition: A variant of PoS where anyone can participate without locking up tokens and without a minimum investment.
Traditional Finance Parallel: This eliminates the barriers for entry akin to reducing the minimum investment required in mutual funds.
Relevance in Crypto: Understanding pure proof-of-stake empowers you to engage with Algorand’s unique model of decentralization.

5. Tokenomics

Definition: The economic model of a cryptocurrency that outlines its utility and supply metrics.
Traditional Finance Parallel: Similar to corporate finance where the governance and incentives drive company value.
Relevance in Crypto: Familiarity with tokenomics helps in assessing investment opportunities across various cryptocurrency platforms.

6. Algorand Standard Asset Protocol (ASAP)

Definition: A straightforward framework for creating tokens on the Algorand blockchain.
Traditional Finance Parallel: Comparable to issuing stocks where a company registers its shares.
Relevance in Crypto: Understanding ASAP allows you to create tokens without deep technical knowledge, widening opportunities for innovation.

7. Governance Rewards

Definition: Rewards for participants who propose and vote on changes to the Algorand blockchain.
Traditional Finance Parallel: Similar to earning dividends from shares for participation in company decisions.
Relevance in Crypto: This knowledge equips you to engage actively and earn in the Algorand ecosystem.

Key Steps

1. Understanding the Blockchain Trilemma

Key Points:
- Algorand aims to balance security, decentralization, and speed.
- Sacrifices in one area can lead to vulnerabilities in another.
- Examples from different blockchains show varying degrees of success.
Detailed Explanation: Algorand’s approach to the trilemma revolves around ensuring that each element can coexist without major sacrifices. For instance, while Ethereum offers robust security and decentralization, its transaction speeds lag, sometimes taking minutes (or longer) to confirm. Algorand aims to offer all three traits, which may revolutionize transaction dynamics.

2. Algorand’s Unique Structure

Key Points:
- A two-layer framework to separate transactions and more complex smart contracts.
- Layer 1 handles basic transactions and Layer 2 manages more complex interactions.
- This separation speeds up the system while maximizing security.
Detailed Explanation: Think of Algorand’s architecture like a well-organized library—Layer 1 serves as the main floor where quick transactions take place, while Layer 2 is a specialized section for complex research. This structure allows greater efficiency and security without bottlenecks often witnessed in other platforms.

3. Consensus Mechanism: Pure Proof-of-Stake

Key Points:
- Participants verify transactions without locking up tokens.
- Random selection process for validating blocks.
- Empowers individuals, regardless of coin holdings.
Detailed Explanation: In Algorand, anyone with even a single ALGO token can participate. This democratizes the validation process, steering clear from issues tied to centralized control systems. The essence of a lottery here emphasizes fairness, as larger stakeholders essentially enjoy more lottery tickets, but it never excludes the “small guys” from participating.

4. Creating Tokens: Algorand Standard Asset Protocol

Key Points:
- Easy token creation without technical hurdles.
- Users simply fill out a form.
- Benefits from the blockchain’s characteristics.
Detailed Explanation: Algorand makes token creation as simple as ordering a pizza. All you need is a few forms, and voilà! You’re now a token issuer. This accessibility encourages innovation and broader usage for everyone who has a concept but lacks coding skills.

5. The Role of Governance

Key Points:
- Participants earn rewards through governance.
- Staking isn’t required; users can commit different amounts.
- Governance fosters a community-driven approach to development.
Detailed Explanation: Your voice matters in Algorand. By proposing and voting, you actively shape the project’s future. And unlike shares where a hefty investment is often needed, any amount of ALGO can earn governance rewards, making participation accessible to everyone.

Blockchain Architecture

Each of these steps above plays a critical role in shaping the ecosystem of Algorand. Understanding how to balance speed, security, and decentralization not only enhances your grasp on Algorand’s unique features but also provides insight into the limitations of traditional cryptocurrencies.

Historical Context

Since 2019, Algorand has made significant strides in becoming a staple in the blockchain arena. The platform has even attracted attention from central banks, such as the Central Bank of the Marshall Islands, which chose to build its national digital currency on Algorand to help combat cross-border fees and inflation.

Cause and Effect Relationships

The design of Algorand’s consensus model and layered architecture directly affects transaction speeds and scalability. Faster transactions lead to a smoother user experience, facilitating wider adoption. Additionally, the emphasis on decentralization prevents manipulation or control by a select few, hence fostering trust.

Challenges and Solutions

Challenges

Balancing decentralization with performance can be tricky.
Ensuring active participation from users is vital for system health.

Solutions

Algorand’s pure proof-of-stake model enhances participation accessibility, encouraging a larger community.
Layered architecture distinctly manages complexity without sacrificing speed or security.

Key Takeaways

Algorand strives to solve the blockchain trilemma without compromising security, decentralization, or speed.
It features a two-layer system separating routine transactions from complex operations.
Pure proof-of-stake allows everyone to participate without having to lock up coins.
Token creation is user-friendly, facilitating broader participation in innovation.
Governance rewards empower community engagement, with no large investments required.
Understanding tokenomics is vital for identifying valuable blockchain projects.
The successes of Algorand pose a direct challenge to established networks by emphasizing speed and efficiency.

Discussion Questions and Scenarios

How do traditional financial systems prioritize security, decentralization, and speed?
In what ways might the Algorand model redefine how transactions are handled in both crypto and traditional realms?
Consider the impact of decentralized governance systems on a cryptocurrency’s future. What are the potential benefits and drawbacks?
How does the ease of token creation on Algorand compare to that of other platforms like Ethereum?
What could hinder participation in a network like Algorand, and how might these issues be addressed?
Compare and contrast traditional banking’s security with Algorand’s decentralized approach to security.
Imagine Algorand’s future in five years; what possibilities do you foresee, especially regarding mainstream adoption?

Glossary

Blockchain Trilemma: The challenge of balancing security, decentralization, and scalability in blockchain networks.
Smart Contracts: Contracts executed automatically when agreed upon conditions are met.
Proof-of-Stake (PoS): A consensus mechanism where validators are chosen based on the amount of cryptocurrency they hold.
Pure Proof-of-Stake: A version of PoS without the need for locked tokens and with open participation.
Tokenomics: The study of a cryptocurrency’s economic model and its use cases.
Algorand Standard Asset Protocol (ASAP): A framework enabling users to create tokens easily on the Algorand blockchain.
Governance Rewards: Incentives given to users for participating in the decision-making processes on the blockchain.

As you conclude this lesson, it’s imperative to remember that deeper engagement with these blockchain technologies opens new avenues that could transform your approach to finance and investment. Continue on with the next lesson in the Crypto is FIRE (CFIRE) training program to further enhance your journey in this exciting world!

Read Video Transcript

What is Algorand & How it Actually Works? | ALGO Explained with Animations

https://www.youtube.com/watch?v=gu0XEFi7pHw

Transcript:

Algorand is a blockchain that is trying to solve something called the blockchain trilemma. So what does that mean? Well, there are three good characteristics we need in a blockchain, which are security, decentralization, and speed. The problem here is that we often have to choose only two out of these three characteristics, it is kinda similar to how hard it is to work, have a good night’s sleep, and a good social life, most of the time, you need to prioritize two out of these three choices.

So it is very similar in blockchains, for example, a blockchain can be very secure and also decentralized, but it is very slow at processing transactions. Another blockchain can be very fast and very secure, but the control of the blockchain is in the hands of few companies and individuals, so it is not decentralized.

Finally, we can have a very fast blockchain that can handle thousands of transactions per seconds, while still being decentralized, but it is not that secure and may be vulnerable to malicious attacks. So, what is Algorand and how does it actually work trying to solve this trilemma? Well, that is exactly what you will know in this video. Welcome to Crypto Bee where we explain cryptocurrencies and DeFi topics in the most simple and beginner-friendly way. In this video, you will know what it is Algorand, how it actually works, and then Let’s dive in.

So what is Algorand? Algorand is a blockchain that supports smart contracts, which simply means that it is a platform for building decentralized applications, just like Ethereum, but with cheaper transaction fees and faster transactions. For example, the Ethereum blockchain can process around 13 transactions per second, and the transaction can take up to 5 minutes to get confirmed, with a fee that can get as high as $50, sometimes even more. But on the other hand, the Algorand blockchain can process around 1,000 transactions per second,

and a transaction takes less than 5 seconds on average to get confirmed. You here also pay less than a penny in fees for each transaction. Algorand was launched in 2019 by Silvio McCauley, a professor at MIT, who won the Turing Award in cryptography for his work on the zero-knowledge proofs and the verifiable random functions, which are two very important inventions in cryptography.

An interesting point we should mention here is that in 2020, the Central Bank of the Marshall Islands wanted to launch their national digital currency to help reduce cross-border trading fees and control inflation. So, they chose to build their digital currency called Sov on Algorand. As they see it as a fast, secure, and decentralized blockchain, while also allowing the central bank to have the level of control it needs over the currency to be compliant with the regulations. So, as you can see, Algorand seems to be a very promising project, but now, let’s see

how it actually works trying to achieve speed, security, and decentralization. So first of all, the Algorand blockchain has a two-layer structure. The first layer is the main most secure one. It processes everyday payments and supports simple smart contracts, tokens, NFTs, and multi-signature wallets.

But layer 2 on the other hand handles more complex smart contracts, tokens, NFTs, and multi-signature wallets. But layer 2 on the other hand handles more complex smart contracts and applications that have large databases and require more computing power.

So, the transactions of these complex smart contracts are processed on layer 2, outside of the main layer 1, and then the effects of these transactions are sent to layer 1. This is done to avoid slowing down the main Algorand blockchain with these complex transactions. Now let’s talk about the consensus mechanism of Algorand. So, Algorand uses a mechanism called pure proof-of-stake.

In pure proof-of-stake, any user can participate in verifying transactions and adding new blocks to the blockchain. So, there are no miners and no small group of validators controlling the network. In the original proof-of-stake mechanism, usually, there is a minimum amount of tokens you need to lock up for a long period of time to be able to participate in verifying transactions.

In Ethereum, for example, you need to lock up 32 Ethereum coins and you can’t use or spend these locked-up coins coins if you intentionally try to attack the network or your computer goes accidentally offline then you will be slashed which means that you will lose some of your locked up tokens but in the pure proof of stake mechanism there is no minimum amount of coins you need to lock up in fact there is no locking up coins at all in algorand anyone can participate with even just one algo coin

and you can use or spend your algo coins anytime you want. To participate in verifying transactions on Algorand, you just need to set up a computer, also called a node, and then send a transaction to let the network know that you want to participate. If you have been enjoying the video so far, hit the like button, as a new channel it really supports us.

You may be wondering, how does the network choose who adds the next blocks of transactions to the blockchain? Well, like some other proof of state variations, the selection is done randomly, but the more coins you have, the higher your chance of getting selected. It is kinda like a lottery, and each coin you have is like a lottery spin, so the more coins you have, the more spins you get, and the higher your chances of winning.

So what happens is that each participating user will run something called a verifiable random function or VRF, which is equivalent to spinning the lottery in our analogy. After that, a small group of participating users will find out that they have won and have been selected to add the next block. Each one of them will then get two things, a cryptographic proof to prove to the other users that they have been selected and a priority number, which determines the priority of a user’s block compared to the other blocks of the other selected users.

After that, each of these selected users will begin to gather some transactions and build a block, and then send it to the other computers on the network along with the proof and the priority number. An important point here is that these lottery-winning users are selected privately, which means that no one on the network knows who has been selected until they had already sent their blocks.

This is to prevent attackers from knowing who will produce the next block. The other computers on the network will receive many blocks from the selected users like what we said. So the computers will first check the cryptographic proofs sent to see if these users have been actually selected or not. After that, all the computers on the network will run the VRF again to see if they have been selected to vote on the received blocks or not.

Here also, the more coins you have, the higher your chance of getting selected. So, a group of computers will be selected to vote. This group of computers is called the soft vote committee. After that, the selected computers will compare the priority numbers of the received blocks. Then, they will vote for the block with the highest priority to be the next block.

After that, we reach the final step where all the computers on the network will run the VRF again to select a new committee. The selected computers in this new committee will check the chosen block to make sure that everything is okay and there is no double spending or fraudulent transactions in the blocks and then they will vote on it.

If fraudulent transactions were found, then the block is rejected, and a new block will be chosen. But, if the block is accepted by the committee, it will be added to the blockchain. And once a block is added to the blockchain, you can consider it final, as it can never be reversed, unlike in bitcoin for example, where blocks can be reversed.

You may be thinking that these are a lot of steps, but actually, all these steps happen in under 5 seconds. Now there are three important points we should mention. First, there are no rewards for setting up a node, and participating in verifying transactions on Algorand. There are some governance rewards, which we will talk about later, but here, the people running the computers and participating are people who are genuinely interested in the project and want to help it succeed.

Also, there is no slashing or penalties for misbehaving on Algorand. So, if your computer goes offline accidentally for example, you won’t lose any coins. But the question here is what about attackers? Well, the idea of Algorand is that attackers with small amounts of ALBO won’t be able to harm the network, as they have very very small chance of being selected by the network.

On the other hand, individuals who have large amounts of ALGO won’t try to attack the network as this can cause the price to crash, which will make their coins worthless. The third point you should know here is that the computers that build and vote on the blocks, also called participation nodes, cannot communicate directly with each other.

So, there is a special type of nodes called relay nodes that gathers and transfers messages between participation nodes. Anyone can run a relay node to help the network, but currently, there are about 120 relay nodes, and most of them are operated by several entities in different countries all over the world, and also by some early investors in the project.

But it should be mentioned that the Algorand Foundation are working to better decentralize the relay nodes in the future. Now let’s talk about creating tokens on the Algorand blockchain. So, Algorand has something called the Algorand Standard Asset Protocol, which allows anyone to easily create a token on the Algorand blockchain. It is actually just like the ERC-20 standard on the Ethereum blockchain, but on Algorand, it is much easier as you don’t need to write any code or have any technical experience.

All you need to do is just fill out a form stating the name of your token, its website, and the total supply, and just like that you will create a token that benefits from the speed and security of Algorand, without writing any code. Before we end the video, let’s talk about the tokenomics of the AlgoCoin.

First of all, the AlgoCoin has two main uses, paying for transaction fees on Algorand, and participating in governance. Currently, you can earn around 7% APR for proposing and voting on changes to the Algorand blockchain. To be able to claim these rewards, you need to commit your Algo coins for 3 months voting period.

There is no minimum amount you need to commit, so you can commit any amount you want, but you should make sure that you don’t withdraw from the committed coins during the 3 months period as if you do that, you won’t be able to claim the rewards. coins during the three months period, as if you do that, you won’t be able to claim the rewards. As for the Algo coin, it has a maximum supply of 10 billion coins, all of them were minted at launch but they unlock gradually over time, so, right now, Algo is an inflationary coin, and currently there are around 6.8 billion Algo coins circulating in the market.

In 2019, there was an ICO and 25 million ALGO coins were sold at $2.40 per coin. But shortly after the ICO, the price declined below the ICO price and the investors were very mad. So, all of these sold coins were bought back from the investors and burned, which means that they have been removed from the supply.

The distribution of ALGO kept changing over time, but currently there are around 3.2 billion coins that will be gradually unlocked and released into the market. Their distribution is as follows, 363 million coins will go to the Algorand Foundation, 1.7 billion coins will be given to users as governance rewards, and 1.17 billion coins will be allocated to supporting the Algorand ecosystem through grants, events, and R&D projects.