Summary

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I. Financial Prospects of the Network

Tokenomics

Each blockchain has a native currency that plays a critical role in incentivising good network behaviour. Algorand’s is ALGO. By holding ALGOs, one can participate in consensus to propose and vote on new blocks. But ALGO is also a utility token. When building an application, you need ALGOs to pay transaction fees or serve as minimum balance deposits if you want to store data on the blockchain. The cost of both is very low, often fractions of a penny.

10 billion ALGOs were created for the initial coin offering (ICO) in 2019, but only 25 million (0.25%) were available to the public. Roughly 20 million were bought back by the development team, meaning just 5 million reached retail investors during Algorand’s formative stages. And ALGOs are still concentrated in a small number of users. 69% are held by the top 157 addresses (wallets of size 10mm-1bn ALGO). Only 4.48% of all wallets hold under 10,000 ALGO – US$2,100 at current price. Token distribution is heavily lopsided to the development team and early investors, which has likely suppressed the price. This increases risk for small investors, since ALGO is susceptible to unpredictable price moves if a large holder trades. With utility in mind, concentration also slows community growth, as restricted distribution attracts fewer developers.

Algorand mediates inflation by combining maximum supply with a temporary inflation distribution plan. This plan releases tokens to wallets staking ALGO, increasing the circulating supply by 6% per annum. The total supply will be fully distributed by 2030, at which point inflation will end. Since the number of tokens will remain fixed, market capitalisation will only fluctuate if buyers and sellers bid for ALGO.

Current inflation is high, particularly as Algorand’s biggest competitor is already applying a deflationary mechanism to provide long-term value for Ether (ETH) holders. In theory, though, inflation adds value by encouraging participation. A lack of inflation removes incentives to stake or build on Algorand as there are no rewards but, if stakers are attracted by 6% distribution, Algorand’s security will improve.

Revenue Streams

To achieve widespread adoption, a network should be developed with mass appeal and utility. Fee volatility can be a deterrent, particularly for first-time users or developers; a reoccurring complaint during Ethereum’s lifespan. The Algorand Virtual Machine, which executes programs associated with Algorand transactions, enables transactions of any complexity to be executed affordably at 0.001 ALGO per transaction. Though fees fluctuate during congested periods, they are immaterial compared to other networks, increasing utility.

The blockchain averages US$2,000 in fees each day. For investors, this should dent perceptions of Algorand’s value. Over the last 30 days, Algorand has collected fees of US$54,160, but other Layer-1 platforms have collected far more: Ethereum with US$222mm and Solana with US$50.47mm. Fees allow us to estimate how much users are willing to pay to interact with the chain so, with Algorand generating low fees, we can assume a significantly smaller user base that compounds the effect of its fee structure. Long-term, this may harm Algorand’s prospects as it will not generate enough revenue to operate sustainably. When the maximum supply is reached, Algorand must find a way to entice validators into continued maintenance of the blockchain.

Network	Fees (L30D, USD)	Fees (annualised, USD), 30d% Change
Algorand	$54.16k	$658.94k (-29.8%)
Avalanche	$1.93mm	$23.48mm (-14.1%)
BNB Chain	$21.22mm	$258mm (+3.2%)
Ethereum	$222mm	$2.7bn (-37.8%)
Solana	$50.47mm	$614mm (+114.5%)
Tron	$126mm	$1.53bn (-8.7%)

Lastly, Ethereum promotes security by requiring 32 ETH tokens as collateral from validators. Those with skin in the game are incentivised to behave appropriately, improving resilience against malicious actors. Algorand has low barriers to participation, to the detriment of security.

Financial Metrics

8,119,817,319 ALGO are in circulation: 80% of the maximum supply. Normally, the higher percentage in circulation, the more decentralised the distribution. As presented above, this is not the case for Algorand, but it is in the upper tier of networks for circulating supply which makes wider distribution possible in future.

Algorand has a market capitalisation of US$1,949,682,033 as the 59th most valuable blockchain. However, with daily fees of US$2,000, Algorand’s annualised revenues stand at US$1,000,000. The fair value of ALGO is currently 2,000x higher than the economic value captured by the network. Ethereum’s ratio is 93x; Solana’s 155x. Algorand appears overvalued.

Total Value Locked (TVL) on Algorand is US$95.15mm, significantly lower than other networks. Cardano, for example, sits at US$396mm. However, this is only part of the story. In Q4 2023, Algorand’s TVL grew by 109% and in the last 30 days it is up 43%. Increasing TVL is a strong indicator of trust in a decentralised finance (DeFi) protocol and Algorand’s recent performance is noteworthy. Growth suggests users increasingly engage with DeFi applications built on the ecosystem, indicating improved utility.

The chart below maps the historic price, volume and volatility of ALGO across the last 90 days. Volatility has been low, displaying a standard deviation of 0.04, whilst 68 million ALGO are traded daily. This is outsized compared to other cryptoassets (e.g., ETH), but can be attributed to Algorand’s lower price. The daily value traded (volume * price) is US$14.3mm, substantially lower than other tokens.

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II. Network and Usage

Network Metrics

Algorand is a Layer-1 network that employs a unique consensus algorithm known as Pure-Proof-of-Stake (PPoS). Leveraging Byzantine Agreement, this model is optimised for high performance at scale, enabling rapid transaction throughput to be suitable for a wide range of applications.

The PPoS algorithm has a straightforward principle. While it enables every user to become a block validator by staking ALGO (typical of Proof-of-Stake blockchains), the protocol selects block validators randomly and privately. It can tolerate malicious users and achieve consensus without a central authority, provided two-thirds of the stake is in honest hands. Since all users have an equal chance of being selected, the network is fully decentralised as no one knows who the next validators will be. The first block proposal leads to the immediate first vote when participants receive the block, meaning once the block is disseminated to all nodes, it is approved after just one round of voting.

• Real-time TPS: 17.96
• Maximum recorded TPS: 3,227
• Theoretical maximum TPS: 6,000
• Block sizes: 5MB
• Block time: 2.88 seconds

Algorand stands out with large block sizes, low block times and high TPS, demonstrating successful implementation of scalability. The network is also committed to sustainability, key in the decision to use PPoS. Each final transaction on Algorand uses roughly 0.0000004 kg of CO2; in contrast, a single Bitcoin transaction emits 369-669 kgCO2. In total, Algorand uses the energy needed to power about seven houses for one year.

Algorand offsets its carbon usage by buying carbon credits through smart contracts. Contracts automatically allocate a percentage of every transaction fee to offset Algorand’s emissions, achieving not just carbon neutrality but, at times, becoming carbon negative. This is an attractive feature given Bitcoin’s and other networks’ energy usage.

User Adoption

The greater the number of active users, the more valuable the network. According to InTheBlock, 21 million addresses hold ALGO, up 23% in the past year. The trajectory has shown a steady increase since October 2022 where, after a significant drop in December 2021, the number of holders reached its previous peak of 16 million. The number of daily active addresses stands at 56,000, giving the network an active address ratio of 0.45%. Throughout March 2024, the number of active addresses frequently breached 100,000, even reaching 206,000 on 19 March. However, typically Algorand sits between 30,000-40,000 daily active users. This is relatively low compared to other cryptoasset networks and is symptomatic of Algorand’s reduced utility to developers and users.

To promote decentralisation, Algorand encourages staking, allowing token holders to earn rewards whilst enhancing network security. The minimum requirement for staking is 1 ALGO, enhancing accessibility. Users with limited resource can participate, contribute to decentralisation and receive annual percentage yield (APY) from 6.12%-14.05%.

Algorand focuses heavily on partnerships to drive adoption which is key in an assessing its long-term potential. It has helped developing nations establish self-sovereign digital identities for individuals and has created tokenised traceable commodities for investors, such as gold. For example, Algorand was chosen by the Marshall Islands to power its digital currency, the SOV (sovereign), which cited speed, scalability and security in its decision. The currency will be programmed to grow 4% per year in a trial to prevent inflation rising abnormally.

Smart Contracts and dApps

DappRadar identifies over 500 projects on Algorand. Several successful DeFi applications have already been built, including IDEX, Republic, Meld and Yieldly. Tinyman looks key as a DeFi exchange, deploying an Automated Market Maker to support liquidity and trading. In 2024, Algorand Ventures invested in Gora Network, an oracle built on the blockchain. Oracles are pivotal, bridging to external systems so smart contracts can react to real-world data. Investment in Gora aims to deliver reliable and secure offline data.

Algorand also partnered with FIFA to provide digital collectibles for the 2022 FIFA World Cup and bought Napster to support decentralised music distribution.

In a blow, Algofi, the largest DeFi protocol in Algorand boasting a TVL of US$32.36mm and accounting for nearly 55% of the ecosystem’s value, wound down in 2023. But Algorand welcomes dApps with the goal to facilitate interoperability throughout Web3. If achieved, this would enable value to be exchanged across any chain, setting up solid infrastructure for mass adoption.

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III. Comparison with Traditional Finance Alternatives

Cost-Benefit Analysis

Venture firm Borderless Capital launched a US$500mm fund in 2021 focused on projects built on Algorand, building on their initial US$200mm ALGO fund from 2019. This came at the same time that Hivemind Capital singled out Algorand for special focus in their US$1.5bn fund.

We believe that Algorand is the preeminent blockchain protocol that allows institutional and corporate users to connect with the decentralized economy. With the explosive growth of the digital asset space, people tend to forget how early the crypto economy still is. We want to team up with partners who have the patience to build an enduring business…We are also in active discussions to form partnerships with a number of other leading layer-1 networks. The goal is to build a multi-chain world to let our investors see the best opportunities across the entire crypto ecosystem.

Matt Zhang, Hivemind Capital Partners

Why has Algorand been so attractive? We have discussed the technology at length and turn now to the founding team – often a key factor in venture investment decisions. Founder Silvio Micali has helped pioneer many technologies that help power blockchain today, being co-inventor of probabilistic encryption, Zero-Knowledge Proofs, Verifiable Random Functions and working on numerous cryptography innovations. Micali has been awarded the Turing award for computer science, the Godel Prize for theoretical computer science, the RSA prize for cryptography and has been a faculty member of MIT’s Electrical Engineering and Computer Science Department since 1983.

Algorand has extremely strong foundations on which to build a computer network. No doubt this guided the decision to launch Algorand Ventures, which invests in the most promising dApps for the ecosystem. Algorand Ventures supports pre-seed projects via accelerator programs, seed projects via partner funds (more recently becoming a Limited Partner in Borderless Capital) and supports scale projects via direct investments. As venture firms must, Algorand Ventures works with founders to elevate products both on Algorand and in the web3 universe.

As of April 2024, Algorand Foundation is technical partner in the Frontech Accelerator program of CDP Venture Capital. This again highlights Algorand’s focus on digital transformation, with ten startups selected each year for three years to receive a €120,000 investment and six-months of mentorship focused on strengthening their proposals.

Clearly, there are economic benefits for users of Algorand, with the opportunity for investment and guidance in project development. We suggest this directly increases the utility of Algorand – investment should encourage idea generation and productive development.

That said, the founding team has failed in one key aspect: marketing. Focusing less on hype and more on building a technologically-sound network is valiant and, one would expect, should lead to long-term utility, but this strategy has hampered adoption. The reason meme coins gain traction, in the absence of technological fundamentals, is extensive marketing, and many competitive blockchains use prolific marketing to generate support. It is almost cult-like, but categorically contributes to the otherwise irrational presence of Dogecoin featuring in the top 10 most valuable cryptoassets by market capitalisation. Algorand’s lack of marketing has likely hurt adoption and, indirectly, network value.

‍Security and Trust

Blockchain platforms are fallible to the blockchain trilemma: a trade-off between security, scalability and decentralisation. Developers have worked hard to tackle this with a PPoS consensus.

Algorand has paired PPoS with a Byzantine Agreement protocol which disincentivises fraudulent activity and produces a single source for verification. Byzantine Agreement achieves scalability by assigning each step of the protocol to a small group of representatives (the committee), privately and randomly selected from all users by verifiable random functions. This ensures enough committee members are truthful and, once a member submits a message, they cannot submit further messages, meaning a corrupt user cannot leverage that committee member (e.g., by impersonation) to attack the network. In this way, the protocol protects against Sybil attacks. The mechanism scales to incorporate many users and allows consensus to be reached on a new block with low latency and no forks. The agreed block is confirmed and transmitted using digital signatures from selected verifiers. Because only one block can have the required threshold of committee votes, two blocks can never be added at the same time.

Algorand uses a two-tiered blockchain design to maintain speed while running complicated applications. Layer-1 facilitates the creation of Algorand Standard Assets (ASA): new or existing tokens on the blockchain and simple Algorand smart contracts. Layer-2 operates more complicated smart contracts and dApps that run off-chain, enabling Algorand to handle transactions at speed. The network is run by ~100 relay nodes, with the highest concentrations in North America and Europe. It is supported by 1200 participation nodes. Since launch, four years of uninterrupted operations have given Algorand credible reliability. In addition, the ledger is resistant to forks, meaning it will never fracture into separate projects.

Forks, also known as partitions, are a common occurrence in distributed environments where a slip in communication channels causes validator nodes to simultaneously produce different blocks, triggering the chain to split. These disruptions invite malicious actors to subvert the system for monetary gain, such as through double spending. Algorand made a conscious decision to prioritise consistency over availability. In the event of a partition, the network halts, stopping any activity until the fork is resolved. The blockchain will not entertain double-spend or challenge transactional immutability.

Algorand’s focus on tackling the trilemma has led to an objectively secure, decentralised network that is also able to scale sufficiently for current network throughput.

Accessibility and Inclusivity

Through 2023, 676 new developers wrote code for Algorand, placing it outside of the top 20. Avalanche, for example, attracted 2,440 new developers; Polygon, 6,208. This indicates Algorand is not deemed attractive for new code deployment. BNB Chain, Ethereum, Polygon, Arbitrum, Base, Avalanche and Optimism all supersede Algorand, damaging its utility.

Elsewhere, the Foundation is dedicated to fulfilling Algorand’s drive to support monetary supply economics and open-source ecosystems. In 2023, the Foundation was selected to deliver a Blockchain Academy to 22,000 employees of the United Nations Development Programme (UNDP) employees – an organisation focused on ending poverty, inequality and climate change. The curriculum launches in 2024 to provide staff with knowledge of blockchain technology and practical applications for sustainable development. It is a focused push for credibility by upskilling UN practitioners globally.

The Foundation has also made strides into India. A huge proportion (11%) of India’s population are unbanked, which restricts opportunities, increases risk in livelihoods and excludes people from the economy. Algorand offers opportunities to integrate these individuals and elevate their standard of living by supporting access to a range of financial services. The initiative, AlgoBharat, announced:

• A partnership with T-Hub (a tech incubator) to launch Startup Labs for 20 Web3 startups.
• A partnership with NASSCOM to provide training and assessment to support the employability of people with Web3 developer capabilities.
• A partnership with TiE Bangalore with the key objective of fostering the Indian Web3 ecosystem through strategic educational and training initiatives.
• A collaboration with Mann Deshi to develop a blockchain-based credit score card and identity system for Mann Deshi Foundation’s women entrepreneurs.

Algorand has made efforts to drive community engagement and support global economics. Given the size of India’s population, there is potential for Algorand to capture value, with increased adoption, economic opportunities and technical expertise contributing to its evolution.

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IV. Future Utility

Roadmap and Development

Algorand has an ambitious roadmap. Two upgrades are being applied in 2024 to increase decentralisation: first, the introduction of consensus incentivisation, and second, the transition to a peer-to-peer (P2P) gossip network. Other changes include the following:

• Dynamic round times (effective 17 January 2024)
  • Increasing network performance, meaning higher throughput and lower block times.
  • Block times will average less than three seconds and builders will benefit as this enhances the efficiency and scalability of Algorand.
  • End-users will experience quicker confirmations for timely interaction with the blockchain.
• Non-archival relays (effective 21 March 2024)
  • Algorand initially required all nodes responsible for spreading information across the network to be archival (store a complete copy of the ledger).
  • To conserve energy, only some relay nodes need to maintain a full copy. The update will transition a proportion of nodes to non-archival status, making the network greener and significantly reduce costs.
• Consensus incentivisation
  • Upgrade to directly incentivise participation by rewarding block producers.
  • Incentivising consensus should increase the amount of staked ALGO and increase the number of consensus nodes in the network, increasing security and decentralisation.
  • A portion of the consensus incentives will come from transaction fees. As adoption increases, transaction fees should be able to sustain the security of the network alone.
• AlgoKit 2.0
  • To encourage widespread adoption, Algorand is integrating Python into AlgoKit, removing the need for specialised programming knowledge to build.
  • The upgrade will also roll out app-building libraries to allow users to easily incorporate third-party smart contracts into their own applications.
• P2P gossip network
  • Algorand currently operates on a relay-style network, where consensus nodes produce blocks in a permissionless manner. Blocks are then transmitted across the network through relay nodes which, though efficient, is not the most decentralised format.
  • Algorand is moving to a P2P gossip network, in which data flows directly between consensus nodes, creating a decentralised web-like structure. This reduces the reliance on relay nodes, making the network fully viable even without relays present.

Consensus Incentivisation is the most valuable change. A shift to sustainability by increasing network revenues is vital to increase value.

Risks and Mitigations

Algorand has built a secure and reliable Layer-1 blockchain network that has grown considerably. However, there are challenges. A cursory glance at the largest cryptoassets by market capitalisation reveals that the Layer-1 network space is highly competitive. Ethereum remains market leader with a market capitalisation 230 times greater than Algorand, but Solana (41x larger) and Cardano (11x larger) stand out in a chasing pack. Algorand lags in terms of dApps, developers, users and other key metrics.

Risk management is not about eliminating risk, but rather understanding the risks one takes in search of profit to minimise the unexpected. Key risks prevalent with Algorand include poor token distribution, making the network more susceptible to centralised control than some of its competitors, lower network activity, which diminishes the development of useful dApps, and very low revenues, which reduces business value. That said, Algorand holds advantages over Ethereum, including faster transaction speeds, lower transaction fees and greater scalability in its current state. A unique consensus algorithm enables it to achieve decentralisation, security and scalability concurrently, distinguishing it from other blockchains. It has also focused heavily on sustainability, which could lead to perceived attractiveness by the public, and the Foundation has worked on targeted partnerships with several traditional finance entities.

Algorand offers a unique, advanced environment and our analysis suggests the fundamentals are there to drive long term utility.

Relevance

The question is, how does Algorand distinguish itself in a competitive market? It takes a quality-focused approach to blockchain deployment, driving technological contributions through research. But the network’s recent tack has sought to increase bottom-up adoption, improve developer experience and tackle the trilemma head on by providing superior technology. Emphasis on a novel consensus that allows participation with just 1 ALGO marks it as inclusive and valuable to users globally and, over the last couple of quarters, TVL has increased accordingly.

Still, Algorand is weaker in other areas and faces a huge fight to rival Ethereum’s market dominance. Key themes show one-sided token distribution in favour of founders, a relative lack of developer engagement compared to other networks and limited revenue generation. Risks in mind, however, we determine that the underlying technology is inherently strong. Algorand focuses on advancement, forming strategic partnerships and attracting VC funding, rather than relying on hype. The roadmap and public initiatives are evidence that Algorand is targeting areas of weakness, and we conclude that Algorand’s technical utility positions it for success.

It is one to keep an eye on.

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Disclaimer: This analysis is for informational purposes only and does not constitute financial advice. Readers are encouraged to conduct their own research and seek professional advice before making investment decisions.

The author has held a stake in Algorand since 2024.

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