Algorand 101: Algorand x The Republic Note
By: Sunita Rao, Tokenization @ Republic
The Republic Note is utilizing the power of the Algorand blockchain to create a new kind of asset. One that shares profits when startups and private equities that raise with Republic later sell or go public.
Introduction
Already a leading blockchain network, Algorand is building innovative technology within the decentralized finance ecosystem. Launched in 2019, Algorand is a far more efficient and decentralized mechanism than current standards in blockchain thanks to its adoption of a Proof of Stake consensus methodology. Algorand is a layer-1 protocol with its own cryptocurrency, the ALGO token, which has seen a more than an 800% increase in price year-to-year. As a primer, if you want a refresher on the basics of blockchain, you can read more about it in our previous blog post. Today, we’ll go through the basics of Algorand and, in particular, why we chose to build the Republic Note on the Algorand blockchain.
To fully understand the immense technological strides Algorand is making, it’s important to first understand some of the major challenges facing existing blockchains. In what’s commonly referred to as the ‘Blockchain Trilemma’, many other protocols experience issues facing fundamental issues balancing decentralization, security, and scalability.
Algorand is facilitating faster transactions, greater simplicity, and with it, increased adoption. Algorand solves for the Blockchain Trilemma with a number of key differentiators:
Fully decentralized
Algorand differentiates itself amongst the spectrum of decentralized networks as the first pure proof of stake blockchain. Other blockchains like Ethereum run on a consensus mechanism called proof of work. It’s important to note that with ETH 2.0, there are future plans to move to the proof of stake consensus method. But at this point, with Ethereum utilizing proof of work, every time a new block of transactional data is recorded to the network, the miners who solve the computational tasks underlying the network are rewarded. The proliferation of costly mining hardware and conglomeration of mining power into large-scale, energy-hoarding operations leads to a number of problems, including centralized control over block creation into the hands of a few — which results in decentralization, and thus security over the network.
In contrast, pure proof of stake protocol creates a deterministic way of establishing the creator of the new block. Miners are not rewarded. In fact, the proof of stake consensus mechanism eschews the process of mining altogether. Instead, proof of stake networks utilize validators who stake tokens for the privilege of confirming network data and earn a token reward in return. Pure proof of stake maintains a multi-layered approach, with an initial round of block determination voted upon by the majority of voters, and a second round of voting to verify and certify the transactions on the block. In applying proof of stake in this manner, Algorand created an incentive alignment mechanism that brings together the community, the economy, and network security in a powerful way.
A helpful way to summarize is one of the main differentiators of Algorand versus existing blockchains is in the number of tokens users have in Algorand as the source of block creation versus the amount of computational power needed in other blockchains. It is also important to note that one could argue that control in pure proof of stake could occur if one person bought a substantial amount of total supply and staked them. Algorand is hoping to hedge for these types of scenarios by having periodic distribution dates of Algo tokens. Now let’s dive into the details of how each voting decision in the blockchain is determined.
Formation of blocks
A major concern for many blockchain networks — one that has already been evidenced on Bitcoin and Ethereum respectively — is the incidence of forks. A network fork occurs when consensus within a blockchain network breaks down or diverges — which can occur for a variety of reasons — and a chain is effectively split in two. It’s then a race to the bottom with resolution only appearing when one is established as the dominant chain, while the other block gets abandoned. This takes up valuable power on the blockchain, thus increasing the likelihood of the block unable to keep an accurate history of all transactions and/or the blockchain decreasing in size.
On the Algorand blockchain, there is a minuscule probability of a fork occurring. This is because of the blockchain’s innovative verification system as part of its proof of stake mechanism — called a verifiable random function or VRF for short. VRF acts similar to a lottery for the multitudes of ALGO-holding Algorand network validators. The number of tokens (ALGO) a user has, the higher chance of being a lottery winner. And as a ‘winner,’ an ALGO validator earns a vote to use within the voting process to ‘approve’ a block transaction grouping.
VRF can be executed on any node for any user and sends a proof to every node as votes ‘travel’ to other nodes. When a user makes a vote, that vote is sent to other nodes in the network and over and over again. If a node gets more than one block proposal, the lowest proof block will ‘win’ and remain in that node. As votes continue and nodes get more proofs, only one ‘winning’ block will remain. You can think of this first voting process to form a block as a large webbed map (with users from all over the world) simultaneously voting at lightning speeds. As this portion of the process of block-building comes to a close, another round of voting will take place to verify and certify the block proposal.
Verification & certification
Once a block is ‘created,’ the next round of voting from participants is for verifying and certifying the proposed block. Those with the highest amount of random ‘lottery’ wins will be selected to vote on the block protocol. While this entire multi-voting process may seem extensive and burdensome, Algorand asserts that this entire process can be executed in less than 5 seconds with a throughput of about 1,000 transactions per second. In contrast, Bitcoin can take on average 10 minutes per transaction and Ethereum can handle 30 transactions per second. Undoubtedly, we are very excited about the potential Algorand proposes in terms of security and scalability.
Low transaction fees
In addition to fast transaction speeds and equitable verifiability, Algorand’s pure proof of stake consensus mechanism dramatically reduces transaction costs, more commonly known as gas fees. This is because there is no mining involved, so costs are much lower than other blockchains like Bitcoin. There is a huge benefit of simplicity when it comes to staking tokens with Algorand. You don’t need anything other than at least 1 ALGO in your wallet to start, rewards are directly added to your wallet, and the added benefits of high-speed/low-cost transactions.
In contrast, with Ethereum, transaction fees add up quickly, placing a burden on scalability, especially in the context of decentralized finance. For Bitcoin, the burden comes with transaction times and fees as well as the cost and energy required to mine bitcoin. As Republic continues building out the Note, we are committed to making the profit-sharing token be dynamic and tradeable. As a result, the Algorand blockchain will allow us to build towards that goal with its combination of security, scalability, and current transaction fees of 0.001 Algo which at the time this article is written (3/17/2021) equates to approximately $0.00117.
Conclusion
While we outlined the features of Algorand, it’s also important to understand at a fundamental-level why we chose to build the Note on this blockchain. Algorand’s blockchain allows for permissions as well as tracking of ownership natively. This is important for the issuance and management of digital securities (like the Republic Note). At Republic, we also chose Algorand due to its feature set that was most amicable for digital securities, including the facilitation of low-cost structure, high throughput volumes, and a regulated security token that trades freely among a great number of investments. We’re excited about the technology and advancement that Algorand is building and bringing to the blockchain ecosystem. With a faster, more secure and decentralized protocol, Algorand is pushing boundaries and scaling towards the future.
To learn more about the Note visit our site, follow Republic Crypto on Twitter, and join our Telegram community to get the most up-to-date information from the Republic team. We’ll be covering many more topics within the Decentralized Finance space on our Medium page so keep an eye out for our next blog post soon!
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