In-depth research: Can Algorand, a public chain that focuses on developers and marketing, be revived?

Author: DongHyun Kang, Xangle

Compiled by: Felix, PANews

This report was written by Xangle, translated and jointly published by PANews.

1. Algorand: The blockchain created by the godfather of cryptography Silvio Micali

Like Cardano and EOS, blockchain mainnet Algorand claims to be a third-generation blockchain that can solve the blockchain trilemma. The project was founded by Silvio Micali, a distinguished professor at MIT and a pioneer in cryptography. In 2012, he received the Turing Award for his breakthrough contributions to Verifiable Random Functions (VRFs) and Zero-Knowledge Proofs, techniques that are now widely used in the crypto industry. His deep expertise in cryptography has been instrumental in shaping Algorand's strong technical foundation.

However, despite the promising early days of Algorand’s launch, the growth of its ecosystem has been slower than expected. Additionally, the project has recently faced "securities" issues affecting its development speed (Note: US SEC accused ALGO tokens of being "unregistered securities"). Nonetheless, Algorand's technical strengths and Silvio Micali's reputation facilitated partnerships with various organizations and countries.

This article will provide an in-depth and comprehensive analysis of Algorand's technical advantages and challenges, and explore Algorand's potential opportunities.

2. Algorand advantage: Powerful technology helps enhance user experience

One of Algorand's key strengths is its technical capabilities, thanks to Silvio Micali's expertise in cryptography. This technical capability provides Algorand with a seamless user experience. This section takes a closer look at Algorand's techniques.

2.1. Dual-node structure improves network decentralization

! In-depth research: Can the public chain Algorand, which focuses on developers and marketing, be revived?

To solve the blockchain trilemma, Algorand employs a structure that classifies nodes according to their role in relaying, participating in the consensus process, or archiving data. First, relay nodes do not participate in block creation and consensus. Instead, it acts as a data connection point, relaying block data that completes the consensus process on participating nodes. In other words, relay nodes are responsible for facilitating communication between nodes. They also act as an archive, storing blockchain data and speeding up the process of block creation and consensus by propagating blocks among relay nodes.

Participating nodes are nodes that participate in block generation and consensus according to the rights and interests they hold. These participating nodes also connect with multiple relay nodes and submit the consensus process to the relay nodes. Unlike relay nodes, participating nodes do not archive all block data. Instead, they store the 1,000 most recently created blocks to ensure accurate verification. Indexers and record submission nodes, on the other hand, do not participate in relay and consensus; they can be set up for their specific purposes, such as on-chain data usage and transaction submission. The structure of relay nodes and participating nodes is shown in the figure below.

<Algorand 参与节点数量和 ALGO 质押量，来源：Metrics.algorand>

Additionally, node decentralization is achieved through the Algorand Foundation. Although theoretically all nodes can participate, Algorand is currently developing towards a model where participating nodes can participate autonomously, and the number of relay nodes is gradually increasing under the management of the foundation. Since its inception, the Algorand Foundation has worked on the geographic distribution of relay nodes operated by universities, non-profit foundations, financial institutions, and various other entities across multiple continents and countries. The foundation also gradually increases the number of relay nodes through the pilot relay node plan and the community relay node plan. As of Q2 2022, the Algorand Foundation is reporting 120 nodes and plans to further increase this number in the future. As of July 24th, there were 1,332 participating nodes, and this number is expected to grow over time.

2.2. The pure proof-of-stake system enhances the scalability of Algorand

Algorand uses pure proof-of-stake to improve scalability. The core cryptographic technique employed in pure proof-of-stake is a verifiable random function (VRF). A VRF takes user input and produces a randomly generated output (hash) value. The output is unpredictable from the outside, and anyone can use the VRF's public key to verify the validity of the output at any time. In other words, randomness is used to cryptographically protect selected users while still allowing others to verify the randomness.

Proof of Stake consists of four steps: 1) Block Proposal → 2) Soft Vote → 3) Attestation Vote → 4) Add to Blockchain. First, in the block proposal stage, the node responsible for block generation and proposal is selected through VRF. The selected nodes then propose a block recording transactions and state values, and use the VRF output to propagate the proposed block, proving that the account is a valid proposer.

Even with a single node elected via VRF, it is possible to propose multiple blocks at the same time due to concurrency issues or malicious nodes. To ensure that only one block is certified, the next step is to filter the number of proposals submitted during the soft voting phase to 1. First, a committee of 1,000 validators is randomly selected for soft voting using VRF. The committee then compares the VRF hashes and chooses the account with the lowest VRF hash to propose the next block.

Then comes the certification vote phase, where a new committee checks the block proposal for overspending, double spending, or any other issues. Likewise, committee members are elected using the VRF, and they vote on whether blocks are valid. Once a quorum is reached, the block is considered valid and certified by the committee, and the block is eventually added to Algorand's blockchain.

Algorand's consensus mechanism ensures instant block finalization with a block delay of approximately 3.3 seconds. Unlike other PoS chains, in the Algorand consensus protocol, blocks are not generated in slots. Instead, it completes the consensus process block by block, which allows it to achieve faster finalization than other PoS chains.

Another advantage of PPoS is that node participants are not required to lock their tokens, thus eliminating the risk of slashing. However, from a protocol perspective, no token lockup could lead to increased sell pressure, and there is no mechanism in place to punish malicious nodes.

2.3. Participation key and key update

Algorand ensures the security of node participants and the convenience of users by employing participation keys and key renewal techniques.

First, Algorand provides node participants with a set of keys for voting and proposing blocks, these keys are called participation keys. In order to participate in the consensus process, the account must be signed online, which increases the risk of the Spending Key being compromised. To address this security issue, Algorand grants participation keys to participants in the consensus process. Participants generate and register participation keys for a specific number of rounds, generate ephemeral keys each round, and delete ephemeral keys for participation after the process is complete.

Using participation keys has significant advantages, especially in securing the tokens of node participants, even if the participating nodes are compromised. In addition, each round's participation key and ephemeral key are deleted from the key file after each round is completed, ensuring the continuous security of the blockchain to prevent attacks on previous blocks.

On the other hand, rekeying is a technique that allows users to change their private keys without changing their public address. This process uses cryptographic multi-signature technology and includes the following steps:

1. First, the user generates a new key pair (public key and private key).
2. The user creates a transaction requesting rekeying to the Algorand network. The transaction includes the new public key.
3. Network participants verify key change transactions and cryptographic multi-signatures. This verifies that the transaction is valid and that the owner of the new key is the owner of the old key.
4. Once the key change transaction is authorized, the old private key is replaced with the new private key.

Algorand simplifies the key renewal process to make it more convenient for users. Users can change their private keys simply by sending a key update transaction without creating a new wallet, even if their current private keys are exposed. This feature has proven to be particularly beneficial for institutions and countries that need to change public keys arbitrarily to guarantee transaction continuity.

3. Algorand's challenge: to expand the ecosystem by cooperating with institutions and countries concerned with environmental friendliness

3.1. Cooperation between organizations and countries

! In-depth research: Can the public chain Algorand, which focuses on developers and marketing, be revived?

With Silvio Micali's background and technical advantages mentioned above, Algorand has adopted a strategy of attracting institutions and countries to expand its ecosystem. Notably, Algorand has reached out to countries and institutions that are skeptical of PoW due to environmental, social and governance (ESG) concerns by promoting low-carbon green blockchains.

Through these efforts, Algorand has achieved several important milestones, such as creating a digital currency (CBDC) for the Central Bank of the Marshall Islands in 2020, launching the sovereign currency SOV; and becoming the second blockchain to issue USDC after Ethereum. Additionally, Algorand entered into an agreement with the International Chess Federation's FIDE Online Arena to record games on the blockchain. In 2021, the Italian Society for Copyright and Publishing (SIAE) has chosen Algorand to record copyright-related records. In addition, in 2022, the Bank of Italy chose Algorand as the public chain for its banking and insurance tokenization business. One of the most noteworthy partners is the cooperation with FIFA (FIFA) in May 2022. FIFA announced that it will cooperate with Algorand to launch the FIFA World Cup NFT project FIFA + Collect. The move allows FIFA to create and sell "highlights" from previous World Cups, including Qatar 2022.

<2022 Qatar World Cup NFT Moment Example, Source: FIFA+Collect>

However, Algorand's partnerships have had mixed results, as it appears to be having challenges maintaining partnerships with certain organizations and countries. For example, the SOV (CBDC) project in the Marshall Islands has not had any major updates or progress since 2020. FIFA+Collect experienced a temporary spike in user engagement during the World Cup in Qatar, but this increase in interest did not translate into long-term sustained engagement. As for the collaboration with FIDE and SIAE, there have been no recent updates or news since the announcement, so it is difficult to confirm whether the data is actually recorded on the blockchain as intended.

3.2. Low Ecosystem Maturity

Algorand is currently facing challenges in attracting developers and users. Unlike other cryptocurrencies that employ widely accepted standards like EVM and ERC-20 tokens, Algorand uses its own state machine, AVM (Algorand Virtual Machine) and ASA (Algorand Standard Assets). The programming language used on Algorand is not Solidity, but TEAL and PyTEAL, which are unique to the platform and less familiar and easier for developers to use.

The DeFi ecosystem on Algorand even lags behind rival Cardano, also a third-generation blockchain, which has seen a massive 300% year-on-year TVL growth since 2023. In contrast, Algorand's TVL metric has declined due to various events, including the MyAlgo hack and the shutdown of AlgoFi. AlgoFi’s shutdown was particularly impactful as it accounted for 55% of Algorand’s TVL prior to its shutdown, having a significant impact on Algorand’s DeFi ecosystem.

Algorand's NFT ecosystem is even worse. Despite the existence of NFT projects such as PIXELS, MNGO, and AlgoRaccoon, Algorand’s total transaction volume currently stands at $39 million, according to CryptoSlam. This volume is similar to Solana's 7-day volume of $42 million. Even the much-anticipated FIFA+Collect underperformed with a gross of $552,000. In addition to these challenges, Algorand has recently been charged by the SEC, causing a significant drop in the price of its token and potentially exacerbating capital flight from the Algorand ecosystem.

4. Algorand's Revival: Active Marketing and Developer Primer for AlgoKit

4.1. Active marketing to expand the target market

More recently, Algorand has recognized the importance of this bottom-up ecosystem and has taken a proactive approach to marketing it. In a recent interview with Real Vision Crypto, Algorand Foundation CEO Staci Warden reflected on the company's previous belief that technical prowess alone would attract developers and users. Recognizing the need for change, the company tapped Jessica Tsai Chin, formerly of Nike, WhatsApp and Apple, as chief marketing officer, marking the start of a marketing campaign.

Algorand's recent focus on marketing is evident in its increased spending. Algorand publishes two transparency reports a year, the latest of which shows a massive increase in marketing spend, from about $1 million in 2020-21 to $34.2 million in the most recent year, an increase of about 3,400%. According to the author's research, this major investment is mainly in lesser-known projects that Algorand considers promising.

Algorand has also been actively leveraging a grant program called AlgoGrant and establishing a direct investment entity called Algorand Ventures. Instead of providing funding to dApps (which may cause problems such as Rug Pool), Algorand aims to obtain project shares through direct investment and jointly solve the capital liquidity problem of the project. In particular, the company has recently been expanding its presence in Asia rather than North America, where regulatory restrictions could hamper operations. Algorand Ventures is actively supporting startups in Asia with the launch of the Asia Pacific Accelerator Program, which will run from September 2022 to March 2023. With this initiative, Algorand aims to facilitate the growth and development of promising startups in the region.

4.2. Use AlgoKit to extend the supported languages and simplify the development process for Web2 developers getting started

! In-depth research: Can the public chain Algorand, which focuses on developers and marketing, be revived?

<Algokit，为方便 Algorand 开发者而开发，来源：Algorand 开发者门户>。

In March 2023, Algorand launched a developer tool called AlgoKit to make it easier for developers to get started. Algokit solves complex problems in Web3 by simplifying the setup process and providing various libraries and templates that can be used to easily build Algorand dApps. This approach allows existing Web2 developers to use Algorand's platform in a familiar language without learning an unfamiliar one.

AlgoKit also simplifies the development, testing and deployment process in Web3. Compared to other mainnets, where deploying a dApp requires developing a contract, testing it on a testnet, and then deploying it to the mainnet for final testing, AlgoKit provides a more efficient approach. Developers can test and deploy directly on the Algorand mainnet by temporarily opening an isolated space called a "local network". In other words, AlgoKit simplifies the otherwise complex testing process on the testnet and mainnet.

Since its launch in March, AlgoKit has been downloaded more than 9,200 times and nearly 8,000 developers have joined, according to Algorand's July announcement. Although this number is relatively small compared to the estimated 200,000 Solidity developers, it is worth noting that Algokit has only been launched for three months, indicating potential for future growth.

5. DApps worthy of attention in Algorand

This section explores some notable dApps in the Algorand ecosystem. While there are no killer dApps in Algorand yet, there are several dApps of significant value and importance to the Algorand Foundation. Two prominent dApps in Algorand are Folks Finance (the current DeFi leader in the network) and Lofty (a real estate tokenization project).

5.1. Folks Finance

! In-depth research: Can the public chain Algorand, which focuses on developers and marketing, be revived?

Folks Finance is Algorand's flagship DeFi project, especially after AlgoFi closed. Folks Finance is both a DEX and a lending platform. One of the distinctive features of Folks Finance is the use of gALGO and xALGO tokens. gALGO represents the securitized version of ALGO, users can exchange ALGO for gALGO, and gALGO can be used in DeFi applications, providing opportunities to earn both pledge and DeFi rewards. The rewards of xALGO and gALGO are obtained in the same way, but they are converted to BRC-20 and can be connected to PancakeSwap on Binance Chain.

5.2. Lofty AI

! In-depth research: Can the public chain Algorand, which focuses on developers and marketing, be revived?

Lofty AI is a US-based real estate investment platform launched on the Algorand blockchain. As a real asset-based DeFi platform, Lofty AI allows users to make small investments in real estate vetted by proprietary algorithms and on-site teams. In 2019, Lofty AI received investment from Y-Combinator, a well-known accelerator in Silicon Valley. Despite the lack of real asset-based DeFi projects, Lofty AI managed to achieve a TVL of $26 million.

6. Conclusion

This article delves into various aspects of Algorand, covering advantages, challenges, countermeasures, and promising dApps in the ecosystem. To sum up, Algorand is a blockchain with strong technical capabilities. With its decentralization feature, with the support of the dual-node structure, blocks can be confirmed in 3.3 seconds. The platform also facilitates a user-friendly experience for individuals, institutions and countries by implementing participation keys and key renewals. Despite these technical advantages, Algorand has encountered some obstacles, especially in maintaining continuous cooperation with institutions and countries, and the Web3 ecosystem is still in its early stages.

Still, Algorand is not without opportunity. The company is strategically shifting its target market to Asia with an aggressive marketing approach. AlgoKit was launched to help Web2 developers, further demonstrating its commitment to advancing accessibility. It will be interesting to see if Algorand can capitalize on these opportunities and become a significant player in the third generation of blockchains as the platform develops.