The cryptocurrency ecosystem faces a unique ‘blockchain trilemma’ – the limitations with scalability, transaction speed, and security. Blockchains evaluate transactions at slower speeds which impede their scalability. To tackle this issue, MIT professor Silvio Micali, who is also a Turing award-winning computer scientist, created a robust payment-focused blockchain–the Algorand.
Algorand is about to add ‘instant finality’ to the blockchain, which means transactions can never be contradicted, modified, or reversed. Once the ‘consensus mechanism’ validates a transaction on Algorand, it gets instantly deemed as irreversibly final and gets added to a block. This feature will significantly improve the scalability of the network – one of the three dilemmas.
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A consensus mechanism determines the authenticators on the blockchain who will approve all user-initiated transactions. There are two kinds of consensus mechanisms – the energy-intensive Proof-of-Work (PoW), which is used by first-generation blockchains like Bitcoin and Ethereum, and the energy-efficient Proof-of-Stake (PoS), which is used by newer blockchains like Cardano and Polkadot. Ethereum is on a path towards migrating from its PoW architecture to the PoS architecture.
Algorand uses the more ‘democratised’ Pure Proof-of-Stake (PPoS) mechanism, which means only a select set of miners will be rewarded for dedicating their computing power to the blockchain. They are picked randomly irrespective of the size of the assets they have pledged to the blockchain, thus solving the ‘rich-getting-richer’ conundrum.
Moreover, Algorand is a multi-layered blockchain which means it runs smart contracts on-chain as well as off-chain. Layer 2 comprises the sub-chains on the main blockchain that is layer 1. Algorand processes smart contracts on layer 2 (off-chain) and adds the scrutinised transaction data to blocks on the layer 1 main chain (on-chain). This declutters the main chain, allowing for incredible processing speeds – the second dilemma.
Such a structure also means that the tight security protocols of the main chain are retained while adding transaction speed and scalability. Moreover, Algorand has pledged to ‘offset’ its carbon footprint to become more environmentally friendly. It will do so by recording the energy consumption of all the on-chain processing as carbon credit and subsequently dedicating a commensurate amount towards green initiatives.
The Algorand blockchain has diverse applications in decentralised finance (DeFi), wherein there is no central governing authority and it guzzles lesser gas fees while being eco-friendly at the same time. Crypto enthusiasts who recognise the vast untapped potential of this blockchain are betting big on its performance in the future.
However, it is always recommended that investors carry out thorough research and perform due diligence before pumping hard-earned money into any of these crypto investments.
(Edited by : Priyanka Deshpande)