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What is Algorand & How Does it Work? - ALGO for Beginners

By Saad Ullah - Updated 11 May 2023
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Algorand is a public blockchain network that was created by MIT professor Silvio Micali. The development started way back in 2017, and the mainnet was released in 2019.

Using the same basic principles as any other public blockchain, Algorand has been designed to solve different issues plaguing current networks. The blockchain has its own native coin, the ALGO, which acts as a medium of exchange. Equipped with faster transaction speeds, lower costs and using a combination of energy-efficient consensus Proof of Stake and Byzantine Fault Tolerance protocol, ALGO has become a major altcoin today.

Why Was Algorand Invented?

Called the blockchain trilemma, cryptocurrencies and their networks are normally able to solve two of three issues, namely decentralisation, scalability and security. To increase one means compromising on the other. Bitcoin, for example, is highly secure due to the high hashing power dedicated to the network, but it is facing scalability issues.

Many developers have attempted to solve this trilemma but with limited to no success. Silvio Micali, an Italian computer scientist with years of experience in information security such as cryptography, believed he had found the solution.

By a careful and mathematical approach to these problems, Silvio and the Algorand Foundation has been able to create a blockchain network that approaches all three issues simultaneously without compromising any. Smart contract functionality and the ability to create digital assets much like Ethereum gives Algorand an edge over its competitors and the network today hosts major projects including the largest stablecoins Tether (USDT) and USD Coin (USDC).

How Does Algorand Work and What Technology is Behind It?

Like all modern cryptocurrencies, Algorand runs on decentralised blockchain technology. Offering the ability to forgo the need of middlemen such as banks and other financial institutions, the ALGO token makes it extremely attractive to use it. 

Within blockchain technology, ALGO uses an energy-efficient consensus mechanism called the Proof of Stake (PoS) rather than the heavy Proof of Work (PoW). This considerably brings down the carbon footprint of ALGO. It also takes care of the security problem as the entry barrier to becoming a node is also lower on PoS systems.

Traditional PoS can reduce decentralisation as it opens up the possibility of one or a collection of parties to come together with a large amount of staked coins to influence the network. Algorand uses a variation called Pure PoS which employs cryptographic sorting to randomly and secretly select block producers. In this, the staked tokens only increase the chances of being selected. 

This allows for smaller participants to be able to create blocks and ensure valid transactions are only noted in the ledger. Even the block producers are not aware of their selection until the block has been created and appended to the chain.

Scalability in the network is solved using a two-layered solution, where the first layer caters to basic functionalities for the creation and running of Algorand based tokens and plain smart contracts such as atomic swaps. The second layer is used to run complex smart contracts, typically like the ones you will find in DEXs and DeFi platforms.

These features have given Algorand and its ALGO token several advantages, such as a high TPS of 1,000 which is much higher in comparison to Bitcoin’s 5 and Ethereum’s average of 15.

Is Algorand Real Money?

The ALGO coin still lacks many of the characteristics associated with fiat or real money, but only in a traditional sense. People can (and do) exchange the tokens instead of money as it is faster, secure, cheaper and easier to do so. The only difference is that fiat is backed by a regulatory authority and ALGO is not.

While Algorand may not be so popular like other coins when it comes to mainstream acceptance, the ALGO token does have its uses, mainly acting as the fuel that powers the Algorand network much like Ether (ETH) is to the Ethereum ecosystem.

ALGO uses the same economic principle of supply and demand as any precious bullion or other assets. Like many major cryptocurrencies such as Bitcoin, there is a fixed supply of tokens. There are a total of 10 billion ALGO that were minted on its genesis block creation. Apart from the initial distribution, the rest of the tokens are held by the Algorand Foundation. Each block producer is awarded ALGO from the custodial service. The finite amount of tokens and increasing demand creates a deflationary effect that pushes the price upwards.

The crux is, if two parties are willing to exchange value using ALGO, it is no different from using any other fiat currency like the US Dollar or Euro.

Fees and Expenses of Algorand

A higher TPS, block finality of around 4 seconds, and using PPoS that doesn’t require an insane amount of computing and electrical power to run the nodes, mean that the transaction fee within the Algorand blockchain is extremely low, averaging around $0.001 per transaction, which hasn’t changed so far.

In times of high activity, the lower TPS and large time between block production can result in the transaction fee rising considerably in other blockchain networks. The fast block creation and high TPS of the ALGO ecosystem have so far not witnessed any stress and the transaction fee remains the same.

While this is a very good advantage, if you are going to deal in ALGO, you must keep yourself aware of other charges that you might be subjected to, especially if you are going to buy and sell ALGO through brokers and exchanges. 

These platforms carry different charges, depending on if you want to deposit, trade or withdraw. Major platforms usually do not charge for deposits, but withdrawals do vary, ranging from 0.002 ALGO to as high as 2.2 ALGO. The trading fee will depend on your trading volume and if you are a maker or a taker (varying from 0.5% to 0.1% per trade).

If you are going to use fiat to buy ALGO, there might be extra charges levied by your service provider too.

What Are the Benefits of Algorand?

As a next-generation cryptocurrency, ALGO has been created by a team of professional scientists and mathematicians to not only offer a better solution than fiat but to be more effective as crypto than other tokens.

As a blockchain asset, ALGO uses the peer to peer approach and therefore eliminates the need for financial institutions to process the payments. Where it can take minutes and even days to transfer fiat, ALGO and Algorand based assets can change hands in a few seconds.

As the Algorand blockchain is more like an ecosystem, it allows for different tokens to be created and deployed to run on it. The extremely fast speed, high level of security and low transaction costs has attracted several projects to create an Algorand version of their tokens. In times when larger networks are congested, slowed down and nodes and miners asking exorbitant fees, ALGO becomes a good alternate choice to transact on.

The Foundation has also decided to make Algorand a DAO (Decentralised Autonomous Organisation) through the Algorand Governance Program. This will allow users of the platform to influence its roadmap, development, and government decisions.

Can Algorand Be Used Anonymously?

Yes and no. Sending ALGO from one wallet to another records no more information than the sender’s and receiver’s wallet along with the amount sent. The long string of characters that make up the wallet addresses don’t hold any information about the people behind it, preserving anonymity, something blockchain’s creator Satoshi Nakamoto embedded into the very fabric of the technology.

However, when it comes to the internet, nothing is anonymous. There have been instances where IP addresses have been linked to specific wallets and the users traced.

Secondly, if you are going to use a reputable platform to buy the Algorand tokens to send (or deposit received ones), the transaction will be linked to you as regulated and reputable platforms will comply with regulations and will know about you (name, address, bank details etc.).

How Safe is Algorand?

Immutability is a term that is often associated with blockchain systems. This simply means that any transaction noted on the ledger is permanent and cannot be altered. This means your assets will remain safe. Though there is always a concern of centralisation of power (if a majority of nodes agree to change the data, it can be done), the random selection of block producers eliminates that possibility.

Private keys, the long string of characters that act as a password to the wallets, are near impossible to break. If you keep your keys safe from prying eyes, no one can access your assets on Algorand. The Algorand Foundation is constantly working on improving security and even has a bounty program where vulnerabilities in the ecosystem can be reported for incentives.

What Teams Are Working On Algorand Development?

Currently, all development of the ALGO and its network is being handled by the Algorand Foundation. This includes Silvio Micali as the founder, a person who has years of experience in cryptography and even formally teaches it at MIT, and David Garcia as the CEO, who is heavily involved in different blockchain initiatives.

Recently, the Algorand Foundation has passed a resolution in which they will be shifting from a centralised development of ALGO to a DAO, expected to transition at the end of this year. This will enable ALGO token holders to propose changes and improvements to the network.

Which Financial Institutions are Invested in Algorand?

Algorand and the ALGO coin have been created through a very thought out and mathematically proven design. As such it has garnered a lot of interest and there are many VCs and other corporate investors who have backed the ecosystem. Following are a few of the major ones:

  • Nirvana Capital

Nirvana is a fintech investment firm that aims to promote the use of blockchain and decentralised technologies. It has backed Algorand from the start. Its portfolio includes big names such as Ethereum. 

  • Youbi Capital

Founded by experienced Wall Street professionals, Youbi Capital is a blockchain investment firm that specialises in finding the best projects. One of its members also owns one of the largest BTC mining pools.

  • Union Square Ventures

Backing startups since 2013, USV has helped more than 130 mainstream and fintech companies to grow including Twitter, Tumblr, Coinbase and Algorand.

  • Pillar

Pillar is another mainstream VC firm that is always on the lookout for startups that have the potential to disrupt markets. From robotics to the health sector, its portfolio is vast. Pillar is one of the first firms that took part in the Algorand seed round.

Algorand Mining

All ALGO tokens were pre-mined at the launch of the network and therefore, there is no mining involved. Algorand uses PPoS, a modified version of the Proof of Stake consensus system in which entities who commit their ALGO tokens to the network can get to write blocks and reap the rewards.

To ensure that heavy ALGO investors don’t gain an upper hand by virtue of the ALGO tokens they hold, the PPoS randomly selects validating nodes for each block. This allows small staking nodes to partake and at the same time, guards against taking over the network or even a fork.

Algorand Wallet

If you are a regular trader of ALGO, your trading platform will provide you with an in-built web wallet to store your tokens. However, holding a sufficient quantity or long term storage is inadvisable on these custodial wallets.

There are several ALGO wallets that you can use. A few popular ones include:

  • Algorand Wallet: The official mobile wallet by Algorand, it is available on both Android and iOS. The wallet also supports all other cryptos that are running on its network.

  • Ledger Nano S: A USB hardware wallet, it is the most secure option since it can be physically disconnected from the network, protecting your assets even if your wallet keys are stolen or compromised.

  • My Algorand Wallet: A privately developed wallet for the Algorand ecosystem, it caught the attention of the Algorand Foundation and even has received the Development Award from the foundation. It comes in both web and mobile versions.

Is Algorand Worth the Investment?

Though nothing is set in stone and the future is uncertain, trends of ALGO have shown that it is a token worth looking at. A committed and strong team that has attracted heavy investors, both from the mainstream and crypto sphere is a reflection of their confidence. Though the developers are not as quick in creating more innovative opportunities as other platforms, they take their time to thoroughly test out each upgrade and it shows in the security and speed of the network, which has had no major glitch so far.

On the other hand, ALGO is a volatile asset (like all cryptocurrencies). This brings in risks of losses. However, you can also use the price volatility to your advantage by buying the dip and selling it when the price rises. We would caution you to commit funds after doing proper research and you should also invest only what you can afford to lose.

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Frequently Asked Questions

Where can I buy Algorand?
There are several platforms that you can register to and use your crypto and fiat to buy ALGO tokens. Always prefer to use reputable platforms to avoid scams.Check out our full Algorand Buying guide here.
Is investing in ALGO a viable option?
While ALGO has shown to be profitable in the long run, it is still a volatile asset. You should carefully evaluate it before investing in it.
How many ALGO tokens do I need to become a validator?
Unlike other blockchains that require a large staked amount, anyone with at least 1 ALGO (Less than $0.90 at the time of writing) can stake to become a participating node.
I have staked ALGO as a participating node, but I am not getting any block rewards.
A collection of participating nodes are selected at random to confirm a block. You just have to wait your turn. You can increase the chances of being selected by increasing your staked amount though.
Can I use ALGO for DeFi options?
Yes. There are many DeFi platforms such as Opulous and IDEX that run on the Algorand ecosystem.
What is a Byzantine Fault Tolerance and why is it so important to Algorand’s security?
It’s a complex mechanism by which Algorand can continue to work, even if some nodes are delivering faulty data.
If I sell my ALGO for profit, am I liable to pay tax on it?
Yes, most countries tax capital gains from crypto but you should refer to a tax expert in your jurisdiction to have clarification on this aspect.
Can I use my current wallet to store ALGO?
You will need to check with the wallet developers to know if it is compatible with ALGO tokens.