Algorand was founded in 2017 by professor Silvio Micali, a computer scientist at the Massachusetts Institute of Technology. The Algorand mainnet network and its associated currency, ALGO, were both launched in June of 2019. The Algorand blockchain was built to deal with three common blockchain issues, namely, scalability, speed, and security while ensuring appropriate decentralization.
One major feature that Algorand leverages to solve the aforementioned issues is its ‘pure proof-of-stake’ (PPoS) consensus mechanism, which eliminates the barrier to entry for staking Algorand and allows everyone and anyone to become a Validator.
In this article, we will discuss how Algorand’s PPoS consensus protocol makes it stand out from the crowd and how these differences will influence your staking strategy.
What is Algorand?
The Algorand network is an open-source and permissionless system with a decentralized blockchain that operates a two-tiered structure to facilitate rapid transactions (1,000 per second) and achieve what the platform calls “finality” (validating transactions in less than five seconds).
Algorand’s two-tiered structure allows it to support a rapid payments infrastructure and at the same time host the development and scaling of decentralized applications (dApps). The exorbitant nature of gas fees on the Ethereum at present have made alternatives like Algorand attractive to developers and traders.
Algorand’s Two-Tiered Structure
The two-tiered approach to its blockchain is a unique iteration adopted by Algorand which serves a functional purpose:
- On Tier 1 of the blockchain, which is the base layer, support is provided for smart contracts, asset creation, and atomic swaps
- On Tier 2, the Algorand blockchain supports the more complex forms of smart contract and dApp development
The creation of two tiers and the designation of separate functions to these tiers is the reason why Algorand can process transactions rapidly and achieve finality at the speeds it does. By reserving tier two for the more complex smart contracts and dApps, the simpler transactions carried out on tier one can be executed rapidly because they will not be bogged down by more complex transactions.
The levels of speed, security, and scalability provided by Algorand’s blockchain have made it a valuable alternative to Ethereum, to the extent that it has been adopted by the government of the Marshall Islands to host its Central Bank Digital Currency.
What is ALGO?
ALGO is the native cryptocurrency of the Algorand platform. It is also the currency with which Validators are rewarded for creating new blocks. Unlike some other cryptocurrencies which support staking, holders of ALGO do not need to stake their ALGO or do anything to earn staking rewards.
The Algorand platform is designed to ensure the gains from the validation of new blocks are not restricted to a select number of people i.e. stakers. Whenever a new block is created and new ALGO coins are minted (which happens every 10 minutes or thereabouts), the reward is distributed among all ALGO holders.
Due to this approach to staking, it is estimated that all ALGO coin holders can receive an APY of between 5% to 8% as their share of the staking rewards throughout the course of a year.
The minimum a holder needs in order to participate in staking and share rewards is 1 ALGO, which means the barrier to entry is incredibly low while the passive income gains to be made can be quite significant. With Algorand, you benefit from the rewards of creating new blocks without having to Validate any blocks to earn it.
How does the Algorand Pure Proof-of-Stake Mechanism Work?
The PPoS consensus mechanism is the backbone for Algorand’s scalability, security, and speed. Unlike other proof-of-stake blockchains, which are scalable but suffer from the gradual domination of the validation process by Validators with large stakes, Algorand gives all and sundry an opportunity to become Validators.
While it’s still the case that those with larger amounts of ALGO will have higher chances of being picked by the algorithm to Validate a block or to attest to the authenticity of proposed blocks, those with smaller stakes still get to participate and benefit from the rewards even if the chances of them getting picked by the algorithm are non-existent.
The idea behind reducing the staking requirements and allowing those with small amounts to qualify to become Validators is that if all ALGO holders become stakers and have the chance of being chosen to validate a block, the network becomes truly decentralized.
This heightens the network’s level of security because it becomes impossible for a small set of Validators to dominate the block creation process. Having a small set of nodes gain a monopoly over the validation process is very risky for Algorand especially because it doesn’t have a slashing function like other proof-of-stake platforms do, which punish bad actors by ‘burning’ some of their stake.
However, this fully decentralized structure is not without its risks. One of the main reasons why platforms like Ethereum demand 32 ETH as the minimum requirement is so that validators are given incentives to execute their duties in good faith. Platforms like Ethereum reinforce that goal with the threat of slashing. With low barriers to entry and no threat of slashing, it can be argued that bad actors can behave with impunity on Algorand.
The Pure Proof-of-Stake Staking Procedure
The algorithm behind Algorand’s Proof-of-Stake system randomly chooses a participation node to authenticate the transactions that will constitute the new block.
As stated earlier, anyone with a balance of at least 1 ALGO can stake their holdings and generate a participation key that allows them to become a Participation Node. Once this is done they are able to participate in the protocol proposal and voting process.
The PPoS Proposal Phase
With users having staked their coins and become participation nodes, the proposal phase kicks-off with the Algorand Verifiable Random Function (VRF) mechanism, choosing multiple block proposers to propose a new block. The VRF function is a provably random mechanism that bases its selection of a random node by weighting given the relative sizes of the stakes placed by the different Participation Nodes.
In order to ensure further security in the process, the VRF secretly chooses the block proposers and assigns them a private participation key to propose the block. In so doing, the consensus mechanism avoids a situation where malicious actors can attack the randomly chosen block proposers and compromise the network. At the same time however, the block proposers still have the cryptographic proof that allows them to prove beyond doubt their status as block proposer.
The PPoS Voting Stage
After the block proposers submit their proposals, the voting stage begins. In the voting stage, participation nodes are chosen at random and made into a committee which is charged with reviewing the proposals made and choosing who will add to the blockchain. The committee is responsible for choosing a proposal with a block that has the lowest VRF hash.
The amount each participation node has staked also plays a role in the voting committee. The amount of voting power each node holds is allocated proportionally to their stake. Once the committee attests to the validity of the transactions in the block, the block can then go on to the next stage.
The PPoS Final Vote Stage
With a block chosen, a new committee is created to ensure the block is free from double-spend and any other problems that may compromise the integrity of the transactions in the block. Once the committee certifies the block, it is added to the blockchain. Once the block is added to the blockchain, all transactions on it achieve finality. It is widely believed that because only one block reaches the final vote stage at a time, the possibility of having a fork with Algorand is very unlikely.
However, if the committee detects malicious activity during the course of attestation, the Algorand system takes a different route from typical proof-of-stake platforms; the network goes into “recovery mode”, which means that the corrupted block will be discarded and new block proposers will be chosen again to restart the process once more.
The Algorand consensus mechanism takes this route because Algorand doesn’t make use of any slashing process, instead simply rejecting the bad actor and re-voting. If the next block leader acts in good faith and produces a block authentic enough for the voting committees to attest to, it achieves finality and the procedure for creating the next block begins.
This lack of a penalty has been a controversial issue. Although it is necessary to quickly move past errors in order to ensure speed and efficiency are maintained, the fact that there is no mechanism in place to prevent or punish bad actors represents a persistent threat to the platform.
How to Stake Algorand
My Algo Wallet
The Algorand Foundation warns against keeping your ALGOs on exchanges or in custodial wallets because you might not receive the actual rewards, depending on the terms and conditions of the platform. In order to ensure users have control over their investment, the Algorand Foundation issued its official wallet, the MyAlgo Wallet.
MyAlgo Wallet is a non-custodial wallet, meaning that you have full ownership of your funds and can earn all your rewards directly. This is great if you want to avoid having to go through KYC/AML procedures, but remember that you are in control of your own holdings, so be sure you know how to protect them before going down this route.
MyAlgo Wallet staking procedure:
- Visit MyAlgo.com
- Click on the ‘”Access My Algo Wallet’ button.
- Create a password you can remember.
- In the top-right corner of the dashboard, click “Create wallet”.
- A 25 word phrase will be generated which will serve as your mnemonic phrase. Store it somewhere safe, preferably in written form.
- Click “Continue”.
- Take the confirmation test, and then click “Create wallet”.
- Add an account to your MyAlgo Wallet.
- Purchase a minimum of 1 ALGO and you automatically start earning rewards
There are other non-custodial wallets that allow Algorand staking, such as Trust Wallet, Exodus, and even hardware wallets such as Ledger Nano. While the process will be slightly different, the general premise is the same, as are the benefits and drawbacks.
Exchanges represent an easy way of staking Algorand without having to download your own wallet, which can be a better option if you already have an account at the exchange in question. Popular exchanges such as Binance, Coinbase, and KuCoin all allow Algorand staking, although some have a minimum amount needed before you can stake.
While using exchanges may be easier than using your own wallet, the issue of who actually owns the coins persists. All coins you hold on exchanges, be it staked coins or rewards, are actually the possession of the exchange – they only become yours once you withdraw them. If you choose to stake Algorand on an exchange then, it makes sense to withdraw the rewards to a non-custodial wallet to ensure true ownership of them
We’ll use Binance as an example of how to stake Algorand on an exchange, but the process is similar for most exchanges.
Binance staking procedure:
- Ensure you hold at least 100 ALGO and they are in your ‘spot’ wallet
- Click on the “Earn” button on the right side of the ALGO row
- Choose and confirm the amount of ALGO you wish to stake
- Click on “Lock Stake” in the drop-down menu and follow the instructions
Rewards will arrive as ALGO coins in your wallet, which you can trade or withdraw instantly.
Algorand offers holders of its cryptocurrency a means by which they can all participate in the staking process and passively profit from it whatever their holdings.
Algorand offers a different take on proof-of-stake through its PPoS protocol which has a much lower barrier to entry and makes staking Algorand ridiculously easy. Projects like Algorand prove that the cryptocurrency industry has a lot to offer in terms of creative takes on existing approaches to solving problems, although this reduced barrier to entry comes with the caveat that bad actors may not be sufficiently dissuaded from attacking the protocol.