Algorand: solving the Blockchain Trilemma

Algorand: solving the Blockchain Trilemma

September 16, 2021

Algorand is a high-performance next-generation blockchain that aims to be secure, scalable and decentralized in equal strengths. It was launched in 2019 by a team led by Silvio Macali, a highly accomplished Turing Award-winning computer scientist who has been involved in many creations that have impacted cryptography including important concepts such as Zero Knowledge Proof.

Silvio recognised the tremendous potential of blockchain technology to provide fast and irreversible transactions, but realised that many of the early platforms faced fundamental challenges trying to unlock the full potential of the technology because of the way they were constructed.

The problem Silvio identified is now referred to as the Blockchain Trilemma, and Algorand proposes it has created the breakthrough solution that achieves a well-balanced blockchain protocol fit for global adoption.

What is the Blockchain Trilemma?

The blockchain trilemma is a concept coined by Vitalik Buterin that essentially states that existing blockchains can offer at most two of the following three properties:

  • Security
  • Scalability
  • Decentralization

Within the trilemma, there are no good options as Silvio explains. Without sufficient security, the public ledger is exposed to bad actors which puts the integrity of data and transactions at risk. If the system doesn’t scale, the size of the network is severely limited which means it can’t meet the demands of a global financial system. Lastly, a lack of decentralization results in an exclusive and secretive system that would resemble the financial system already in place today, leaving the transformative potential of blockchain technology on the table.

The variables in the trilemma are not independent, but rather interrelated as the combination of security, scalability, and decentralization affect important measures such as speed, security, and cost. A slow blockchain will not be able to scale. If increased costs speeds up the system, few people will likely join the network but if the cost is borne by a select few, then the system will be centralized. Centralization is inherently insecure as fewer targets are easier to attack compared to millions of targets.

How Algorand solves the Blockchain Trilemma

The Algorand blockchain achieves improved capabilities compared to earlier blockchain protocols through a number of innovations, including the unique Pure Proof-of-Stake approach used to achieve decentralized consensus. The mechanism defines how people can participate in the decentralized network, disincentivizes fraudulent behavior, and when combined with a Byzantine agreement protocol creates a single, verifiable source of truth.

Anyone that wants to participate in securing the Algorand network can signal their intent using an account that holds ALGO, the blockchain’s native token. The likelihood of being selected depends on the amount of ALGO a user has relative to others connected to the network who have also signalled their intent to participate. The protocol can tolerate malicious users as long as honest users following the instructions of the protocol represent more than two-thirds of the total stake in the system.

Additionally, Algorand is mathematically proven to be immune to forks. Forking occurs when a blockchain splits in two or more separate branches. Eventually only one branch will survive, and until that is confirmed a user would have no guarantee that a payment is truly finalized as it could end up in a non-surviving branch. On Algorand, two blocks can never be added to the chain at once because only one block can have the required threshold of committee votes. This means that all transactions are final within seconds, ensuring speed within a truly decentralized network.

To maintain speed while using complex applications, Algorand utilises a two-tiered blockchain architecture. The Layer 1 tier supports processes such as creating Algorand Standard Assets (ASA) which represent new or existing tokens on the blockchain, operating simple Algorand Smart Contracts (ASC1s), and performing atomic swaps. The Layer 2 tier is reserved for more complex smart contracts and decentralized applications, which takes places off-chain. This approach allows the Algorand blockchain to process transactions efficiently, with a throughput on par with large payment networks.

Native token ALGO

The native token of the Algorand blockchain is ALGO, which forms the cornerstone of the network’s structure. Instead of being awarded to block producers alone, rewards paid to validators for producing blocks are distributed across all accounts holding ALGO. Reward distribution occurs about every 10 mins, and on average all ALGO coin holders earn between 5% and 6% annual percentage yield.

The rewards distribution model is designed to encourage more users to join the Algorand staking platform, accelerating the rate of decentralization as the network grows. To make it even easier, users don’t have to actually stake the token themselves, but simply hold ALGO in a non-custodial wallet. Rewards are extended to our customers as well following the integration of ALGO onto the Hex Safe custody platform.

In terms of tokenomics, ALGO has a hard cap of 10 billion coins allocated as follows:

  • 3 billion ALGO to be released into circulation
  • 2.5 billion ALGO will be distributed over time to relay nodes
  • 2.5 billion ALGO are reserved for the Algorand Foundation and Algorand Inc.
  • 1.75 billion ALGO estimated to be distributed over time as rewards for participation nodes
  • 0.25 billion ALGO to be distributed for end user grants

The Algorand ecosystem

Algorand is currently capable of hosting decentralized applications (dApp) development and providing scalability for DeFi projects. Rising gas fees on Ethereum have led many developers to look for alternative blockchain solutions, with some turning to Algorand as an Ethereum-alternative.

Already, more than 500 organizations are leveraging the technology built by Algorand to create the next generation of financial products and protocols. Leading stablecoins such as USDT and USDC exist on Algorand as ASAs available for transactions at much lower fees compared to Ethereum. As central banks continue to explore strategies regarding central bank digital currencies (CBDCs), Algorand has been tapped as a viable option and has been chosen to support the Marshall Islands CBDC project. And the Algorand blockchain has also been chosen by Koibanx to develop the digital assets infrastructure of El Salvador.

Other applications integrated with the Algorand blockchain include:

  • Opulous: decentralized finance solution for artists
  • AlgoNim: a mathematical game of strategy
  • TrackAlgo: a materials tracking application
  • Tree Certificates: a project to improve forest conservation efforts
  • AIKON: secure identity services
  • Meld Gold: a digital platform to transform gold into a digital asset
  • SIAE: an efficient solution for copyright management
  • AssetBlock: tokenizing real estate assets
  • IDEX: next-generation decentralized exchange
  • Securitize: digital securities for issuing, trading and performing corporate actions
  • PARSIQ: blockchain monitoring and workflow automation platform

Pioneering new standards

Algorand has already proven to be a powerful platform underpinned by technological innovation, wide-reaching developer support, and real-world use cases. By solving the Blockchain Trilemma, it is pioneering new standards in the digital assets ecosystem which will further increase global adoption at retail and institutional levels.

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Joe C
Joe C
Head Of Marketing
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