When the process of building IBFx – the digital crypto of IBF Net – began, it faced an immediate stumbling block. We had to choose our developers from a rather small community that were well-versed in Algorand protocol. I had to constantly explain to some why we should be using this protocol and not Bitcoin or Ethereum; why I was and continue to be fascinated with Algorand. Perhaps with my background as a university professor I display some bias in favor of an entity founded and led by an award-winning MIT professor known for his seminal research work in cryptography. In addition to the founder Prof Silvio Micali, the Algorand team has a galaxy of stellar scientists and economists including the Nobel-laureate economist Paul Milgrom (known for his general theory of auctions) as an advisor. Perhaps, I am biased because Algorand has been among the few blockchain giants to seek Shariah compliance that clearly displays its respect for plurality and cultural diversity. Perhaps I am biased because Algorand seems so cool and unperturbed in a speculative market with its undiluted focus on enhancing its intrinsic value by building its own ecosystem and community. Perhaps I am biased because of my conviction about auctions being the best tool for price discovery of an asset. Perhaps I am biased because Algorand provides an alternative (consensus mechanism) to one that involves “mining”, a term that has always been associated with environmental disasters! Perhaps I am biased because of a perceived connection of the name Algorand with algorithm and alkhwarzimi!
Perhaps I am biased because Algorand seems so cool and unperturbed in a speculative market with its undiluted focus on enhancing its intrinsic value by building its own ecosystem and community.
I don’t want you to be biased, however. So, let me underline some factors that clearly demonstrate the technological superiority of this protocol.
Algorand are a scalable secure and decentralized cryptocurrency and smart contract platform. They’ve developed their own consensus mechanism that is a variant of proof of stake called pure proof of stake. The main benefit of this is that Algorand’s technology finalizes blocks in seconds and provides immediate transaction finality while preventing forks. Furthermore, Algorand offers highly customizable smart contracts, asset tokenization and atomic transfers built directly in layer 1. Perhaps I am going a bit too fast. Let me simplify then and deal with the above one by one.
Algorand aims to create an ecosystem that gives everyone the opportunity to participate. It is built on the driving principles of superfast transactions, performance simplicity and adoption. It claims to have resolved the well-known blockchain trilemma of scale, decentralization and security. This is indeed one of the most formidable challenges in the blockchain sector. Let’s see how.
Without scalability a protocol may attain popularity but will not see mass adoption. Ethereum and bitcoin are great examples of this. Even though these are popular names in the crypto community they’ve yet to reach mass adoption. The reality is that they’re either too slow in terms of transaction speed (far slower than Visa for example); or are incredibly expensive. For example, Ether transaction fees increased by over 35,000% in the past year alone forcing several projects to close down. The technology behind the Algorand blockchain allows for high throughput, meaning more transactions can be processed per second than on other comparable blockchains. Algorand can process more than 1,000 transactions per second (TPS), compared to Ethereum’s TPS of fewer than 15.
What is it that ensures scale, fast transactions and low costs? The protocol used by Algorand is specifically built for speed. It has created a way to finalize a block through just a single voting round. It matters a lot. When every block is instantly completed the number of transactions per second (TPS) the network can handle increases significantly. This means that transactions on Algorand are settled almost instantly — in less than five seconds. And, rather than having to endure a hefty $39 average, fees can be as low as $0.001 per transaction — regardless of the transaction size.
Achieving scale, decentralization and security are all great targets in themselves. However, problems arise when these are found to be highly interrelated and intertwined. One cannot easily scale while at the same time increasing decentralization. One cannot scale in a decentralized way without compromising the security of the network in some way or other. So here is this problem where one cannot scale in a decentralized and secure manner – the blockchain trilemma. This trilemma remains unresolved for most popular blockchains including Bitcoin and Ethereum. But the question is, why?
The answer lies in the nature of the consensus mechanisms associated with a protocol. Two of the primary ones are proof-of-stake and proof-of-work. As some of you may be aware, the proof-of-work (pow) as a consensus mechanism of bitcoin, ethereum and a number of other protocols, requires some amount of centralization where most of the hashing power is controlled by large mining farms. They’re also not the most secure as there are a number of blockchains that have been attacked through double spend attacks (e.g. the ethereum classic). They’re also not very scalable with transactions being settled at snail’s pace, but with sky-high related costs in the form of gas fees. Of course, ethereum 2.0 with its transition to proof-of-stake should overcome part of the challenge.
Are all proof-of-work mechanisms equally good? Consider the variant called delegated-proof-of-stake (dPoS), for example. The DPoS consensus algorithm is used by some cryptos, such as, Bitshares, Steem, Ark, and Lisk. Under this mechanism the community will empower a number of users as the delegates to choose the next block. This does create concerns around centralization. There are a fixed number of delegates and these delegates can be viewed as having centralized control in a DPoS blockchain. The delegates may own a tiny fraction of the total money in the system yet the whole blockchain is secure if and only if the majority of delegates are honest. Further, even if all the nodes were honest these nodes can easily be identified and attacked. They can run denial of service attacks that stop consensus and hence bring down the blockchain itself.
Another variant of the proof of stake system is bonded proof of stake (introduced by Cosmos). Here the users will bond tokens at stake in order to vote on blocks. The thinking goes that they will never vote against their own interests as they could lose that stake. The only problem with this is that it allows a well-heeled adversary to overtake the network. There are many occasions where an attacker could get more value from bringing down a network than they could lose with money bonded in stake.
In contrast Algorand has developed its secure proof-of-stake mechanism. It operates on this simple principle. It makes cheating by a minority impossible and cheating by the majority stupid. Unlike with other bonded proof-of-stake mechanisms that rely on punishing bad actors with the funds staked, Algorand has developed a mechanism so that those with small stakes cannot cheat. Moreover, those that have a large stake in the network won’t cheat as it will completely devalue their holdings and make no economic sense. It follows therefore, as long as two-thirds of the majority are honest the protocol will work just fine. It also differs with other mechanisms in that the money does not have to be bonded for a particular period of time. Money is always in users’ wallets ready to be spent and used in other ways on the network. Blocks are constructed in two phases through lotteries known as cryptographic sortition, a mechanism where consensus on blocks is established through two stages – a proposal stage and a voting round. Who does what in the ecosystem is completely random and hence impossible to manipulate. Hence, there is fast finality. The random nature of the sortition ensures that it is immediately decentralized and secure as well, given that there’s no way for adversaries to know who is voting on the next block.
To sum up, achieving scalability should not directly sacrifice security or decentralization. A successful blockchain will take care of all three factors. Algorand aims to implement all three into its platform which hopefully would address the blockchain trilemma.
To be continued