What Is Algorand (ALGO) and How Does the Network Work?

What Is Algorand (ALGO)?

Algorand is a permissionless Layer 1 blockchain. That means it’s a standalone network where users can make transactions, create digital assets, and use smart contracts without needing permission from a central party.

The network’s native crypto is called ALGO. ALGO is used, among other things, to pay transaction fees and take part in the network’s consensus.

Consensus is the way participants in a blockchain agree on which new block is valid and gets added to the blockchain.

Algorand uses Pure Proof of Stake for this, often shortened to PPoS. With this system, participants do not need to lock up their ALGO or delegate it to a validator. Accounts that are registered for consensus can be randomly selected based on how much ALGO they hold to propose a block or vote on one.

Algorand uses cryptographic lottery for this. For every new block, participants are selected again. The more ALGO someone has online and participating in consensus, the higher their chance of being selected.

One important feature of Algorand is instant finality. Once a block is approved through the consensus process, it is considered final. That means there is no need for several more blocks to be built on top of it before it gets extra confirmation.

A maximum of 10 billion ALGO can exist. All 10 billion tokens were created when the network launched. Not all tokens entered circulation right away: the circulating supply grew later as previously created ALGO were released according to different distribution schedules.

Key Takeaways

• Algorand is a standalone Layer 1 blockchain for payments, assets, and smart contracts.
• ALGO is the native crypto used for transaction fees and participation in consensus.
• The network uses Pure Proof of Stake instead of mining.
• Participants are selected through cryptographic lottery for consensus roles.
• ASAs make it possible to issue your own tokens directly on Algorand.

How Does Algorand Work?

Algorand collects transactions into blocks. Then participants in the network have to agree on which block is valid and gets added to the blockchain.

To do this, Algorand uses Pure Proof of Stake (PPoS) together with a Byzantine Agreement protocol. PPoS determines which accounts have a chance to propose a block or vote on one. The Byzantine Agreement protocol then makes sure the selected participants agree on one valid block, even if some of them make mistakes or do not behave correctly.

Accounts that are online and have registered valid participation keys can be selected to propose a block or vote on one.

A participation key is a separate key for taking part in consensus. It is separate from the private key used to send ALGO. Because of that, the private key you use to manage your tokens does not need to be on the node that participates in consensus.

Algorand decides who gets selected with a Verifiable Random Function (VRF). You can think of this as a cryptographic lottery. An account performs a local calculation that lets it determine whether it has been selected for a certain role. Other participants can then verify whether that selection is valid.

The chance of being selected depends on how much ALGO an account has online and participating in consensus. The more online ALGO an account has, the higher the chance it gets selected and the greater its possible voting weight. Smaller accounts can also be chosen.

For every block, participants are selected again to propose a block and vote on it. That means it is not fixed far in advance which participants will decide the next blocks.

The consensus process roughly happens in several steps. First, selected accounts can propose a new block. Then selected committees vote again on which proposal they prefer and whether that block can ultimately be certified.

A block is approved when enough of the selected voting power supports the same proposal. The security model assumes that more than two-thirds of the participating stake acts honestly.

Once the consensus process has certified a block, that block is final. Algorand therefore has instant finality: there is no need for several new blocks to follow before a transaction is considered final.

Algorand (ALGO) Overview

How Does Pure Proof-of-Stake Work on Algorand?

With Pure Proof-of-Stake, online stake determines which accounts have a chance to get a consensus role. Stake here means the amount of ALGO that counts toward participation. You do not need to lock up that ALGO to take part.

For each step in the consensus process, an online participation account runs a VRF locally. This lets the account check whether it has been selected to, for example, propose a block or review a block. The VRF also creates a proof that other participants can verify.

Algorand chooses new pseudorandom committees for each consensus step. A committee is a group of selected accounts that votes on a proposal. Because these groups keep changing, it is not publicly known in advance which accounts will play a role.

The process roughly has three steps: proposing a block, confirming the proposal, and certifying the block. If enough selected voting power supports the same proposal, the block gets certified.

The word Pure does not mean everyone has the same influence. The chance of selection and the voting weight stay tied to the online ALGO balance. So someone with more online ALGO has a better chance of getting a role in consensus.

Taking part in consensus does not automatically mean every ALGO holder receives a reward. Eligible block proposers can receive a block payout when their proposed block is actually added to the blockchain.

For that, an account must meet the requirements and use an active, reliable validator node. If an account appears to be insufficiently reliable online, it can be suspended from these payouts.

Algorand uses heartbeats for this, among other things. These let a participant show that the account and its node are still online and available.

What Role Do Smart Contracts and Algorand Standard Assets Play?

Smart contracts are programs on a blockchain that run according to preset rules. On Algorand, this happens through the Algorand Virtual Machine (AVM). This virtual machine executes smart contract code as part of transaction processing.

Developers can write smart contracts using Algorand Python and Algorand TypeScript, among other tools. This code is compiled into code that the AVM can run. To call a stateful smart contract, an Application Call transaction is used. Stateful means a smart contract can store and update data on the blockchain.

If a smart contract execution does not meet the required conditions, the transaction fails and the related changes are not permanently recorded on the blockchain.

In addition to smart contracts, Algorand supports Algorand Standard Assets (ASAs). These are digital assets that can be created directly through the Algorand protocol. An ASA can represent a fungible token, but also a unique digital item.

An ASA is not the same as ALGO. ALGO is the native crypto of the Algorand network, while an ASA can be issued by a user, developer, or organization.

You create an ASA with a special transaction on the Algorand blockchain. In that process, you can set different addresses, each with its own management role, for example for general management, reserve, freezing, and clawback.

The clawback address can take tokens back from an account and send them to another address. That is only possible if such a clawback function was set when the ASA was created.

Before an account can receive an ASA, it normally has to first ‘’opt in’’ to that asset. For every ASA that an account creates or holds, the required minimum balance increases by 0.1 ALGO.

Smart contracts on Algorand also have limits on how much computation they can do per execution. A single Application Call gets a default opcode budget of 700 units. An opcode is an instruction that the AVM executes.

With multiple Application Calls in one transaction group, these budgets can be combined. There are also techniques that can make extra execution budget available. So the 700 limit does not mean every complex smart contract always has to be split across multiple blocks.

What Is the Difference Between Algorand and Bitcoin?

Algorand and Bitcoin are both standalone blockchains, but they were designed for different goals.

Algorand is a Layer 1 platform where users can, among other things, run smart contracts and create digital assets. Bitcoin was originally designed as a peer-to-peer electronic cash system.

One important difference is how both networks reach consensus:

• Algorand uses Pure Proof of Stake: Accounts that participate in consensus online can be pseudorandomly selected based on how much ALGO they hold to propose a block or vote on one.

• Bitcoin uses Proof of Work: Miners use computing power to produce valid blocks and secure the network.

• Algorand has instant finality: Once a block is certified through the consensus process, it is considered final.

• Bitcoin works with confirmations: A Bitcoin transaction gets more and more certain as new blocks are added on top of the block containing that transaction. That is why users often look at the number of confirmations.

The way applications and digital assets work is different too. On Algorand, users can directly create Algorand Standard Assets (ASAs) and interact with stateful smart contracts through Application Call transactions.

Bitcoin uses a UTXO model. In that model, a transaction uses existing outputs as inputs and creates new outputs. Bitcoin Script can set conditions for spending bitcoin, but it does not offer the same options for stateful smart contracts as Algorand.

The issuance of the native crypto is different too. A maximum of 10 billion ALGO can exist, and these tokens were created when the network launched.

Bitcoin issues new BTC gradually as a reward for miners. That block subsidy is cut in half about every four years, until eventually almost the entire maximum supply of 21 million BTC has been issued.

How Did Algorand Start?

The idea for Algorand emerged in 2017 in Cambridge, Massachusetts, around cryptographer and MIT professor Silvio Micali. He is the founder of Algorand and was the driving force behind the Pure Proof-of-Stake consensus mechanism.

Algorand’s public mainnet launch followed on June 19, 2019.

The early technical foundation of Algorand was described, among other places, in research by Jing Chen and Silvio Micali on a secure and efficient distributed ledger system. Jing Chen was therefore important to the foundational research behind Algorand, while Silvio Micali is considered the project’s founder.

What Are the Benefits of Algorand?

Algorand has a number of clear benefits:

• No lock-up or slashing for consensus participation: ALGO does not need to be locked up to take part in consensus. Algorand also does not use slashing, where tokens are taken away as a penalty.

• Instant finality: Once a block is certified, it is considered final. So there is no need for several new blocks to follow for extra certainty.

• Changing consensus roles: Block proposers and voting committees are selected again and again in a pseudorandom way. That means it is not fixed far in advance which accounts will decide the next blocks.

• Native assets and smart contracts: Algorand supports both Algorand Standard Assets and stateful smart contracts directly on Layer 1.

• Atomic transaction groups: Multiple transactions can be executed as one group. If one required transaction fails, the whole group does not go through.

What Are the Downsides and Limitations of Algorand?

Algorand also has a few important things to keep in mind:

• Influence is stake-weighted: Accounts with more online ALGO generally have a greater chance of getting consensus roles and can represent more voting weight.

• Active participation requires technical steps: Just owning ALGO is not enough to take part in consensus directly. You need participation keys and a reliable node.

• Staking rewards are not automatic: Not every ALGO holder receives a reward. Solo staking has extra requirements, including a minimum online balance.

• ASAs require extra minimum balance: For every ASA that an account creates or holds, the required minimum balance increases.

• Smart contracts have technical limits: The AVM has limits for things like execution budget and program size. Developers need to keep that in mind when building applications.

Conclusion

Algorand is a standalone Layer 1 blockchain for transactions, digital assets, and smart contracts. ALGO is the network’s native crypto and is used, among other things, for transaction fees and participation in consensus.

At the core of Algorand is Pure Proof of Stake. Online accounts with participation keys can be selected through cryptographic lottery to propose blocks or vote on them. Once a block has been certified through the consensus process, it is immediately final.

Algorand also supports native Algorand Standard Assets and stateful smart contracts through the Algorand Virtual Machine.

There are trade-offs too. Consensus influence is tied to the amount of online ALGO, active participation requires a node and participation keys, and both ASAs and smart contracts have practical and technical limits.

Algorand therefore combines a stake-based consensus model without lock-up or slashing with instant finality and built-in support for assets and smart contracts.