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Blockchain Explained

The Algorand Blockchain Explained


Rob Behnke

June 29th, 2021

Algorand is a public, permissionless blockchain platform.  Its goal is to solve the “blockchain trilemma” by providing decentralization, security, and scalability.  It supports smart contract development and has the goal of achieving rates of 1,000 transactions per second while finalizing blocks within 5 seconds.

The Structure of the Algorand Blockchain

One of the primary goals of Algorand is to allow rapid transaction processing.  Blockchain platforms like Bitcoin and Ethereum commonly get bogged down, making transactions slow and expensive to perform.

One of the ways in which Algorand attempts to improve the speed and cost of transactions is by implementing a two-tier platform:

  1. Layer 1 of the Algorand platform is designed to allow rapid execution of simple operations.  This includes creating Algorand Standard Assets (equivalent to ERC-20 tokens), performing atomic asset swaps, and running simple smart contracts.
  1. The second layer of the Algorand platform is designed to support the execution of more complex contracts, such as the ones that would exist in DeFi projects.  These smart contracts take up more resources and can slow the execution of the blockchain platform.  By running these off-chain, Algorand makes normal, Layer 1 operations run more quickly.

How Algorand Implements Block Creation

Another way in which Algorand achieves its goals of speed, security, and scalability is by using a variation of the Proof of Stake (PoS) algorithm called Pure Proof of Stake (PPoS).  With PPoS, a user only needs to stake a single ALGO token to participate, which is much less than the 32 ETH required by Ethereum 2.0.

Like all PoS blockchains, Algorand pseudorandomly selects the creator of the next block.  Algorand’s verifiable random function (VRF) is designed to only tell the block creator that they are the one supposed to make the next block.  This protects them against attacks designed to delay the creation of blocks on the blockchain.

When the chosen block creator builds a block, they include a proof that shows that they are the selected block creator.  This block is then analyzed by a randomly-selected committee of participation nodes.  These nodes check the block for double-spend attacks or other issues and then vote on its validity. If the block is approved, it is accepted and the network moves on to the next block.  Otherwise, the network enters recovery mode, where a new block creator is selected to build the next block.

Algorand’s PPoS voting process is quick and provides near-instant finalization, enabling it to approve transactions within the desired five-second interval.  

Algorand also distributes block rewards to all coin holders, rather than just the block creator.

Algorand: A More Decentralized Blockchain

The original goal of blockchain was to create a fully decentralized financial system.  However, many blockchains have become increasingly centralized as participants create mining pools or acquire large amounts of staked assets.

Silvio Micali, the Turing Award-winning creator of Algorand, designed it to be a more decentralized system than existing blockchains.  By lowering the price to participate in consensus and decoupling block rewards from block creation, Algorand eliminates many of the incentives to accrue power in the system, encouraging decentralization.  

This, along with its multi-tier design that supports fast transaction speeds, makes it a potential competitor to other smart contract platforms like Ethereum.