What is Algorand? Is it Halal?
Algorand (ticker: ALGO) is a relatively new cryptocurrency and open-source blockchain platform that focuses on scalability and speed. Officially launched in 2019, the Algorand platform and the accompanying ALGO cryptocurrency rank 35th in the cryptocurrency world.
Algorand seeks to compete directly with Ethereum, the juggernaut in the crypto world, offering a similar use case with smart contracts and Proof-of-Stake (PoS).
Just like Ethereum, most scholars hold Algorand to be halal. We also share this view.
Read on for a deep dive into what Algorand is and how the ALGO cryptocurrency works.
What is Algorand?
Algorand is both a cryptocurrency (ALGO) and an open-source blockchain platform that offers fast transaction speeds and a smart contract ecosystem in much the same way Ethereum does. In fact, Algorand is a direct competitor to Ethereum and aims to become the mainstream smart contract and payment currency in the cryptocurrency space.
Silvio Micali, renown cryptographer and a professor at the Massachusetts Institute of Technology (MIT), founded Algorand in 2017. The platform was officially launched to the public in June 2019.
It is easy to understand Algorand by comparing it to Ethereum. It has a similar consensus mechanism, has smart contract capability, and is directly competing with Ethereum.
Algorand is open-source just like Ethereum, meaning anyone can see the code behind the platform. This allows it to garner a level of trust and foster a developer community that is harder to come by in closed source projects.
Algorand’s unique selling point is that it boasts fast transaction speeds, and can scale these fast transactions allowing it to position itself as a crypto version of Mastercard or Visa. Meaning that Algorand aims to be the payment and currency network that handles global transactions at near instantaneous speeds.
Another way in which Algorand competes directly with Ethereum is that it can host other cryptocurrencies in its ecosystem and blockchain platform. This would allow people to start their own cryptocurrency whilst using the underlying technical prowess and open-source platform of Algorand.
The number of ALGO coins is capped to a total of 10 billion, with about 7 billion in circulation right now. This creates some level of scarcity which provides ALGO coins with value.
How does Algorand work technically?
The Algorand network is a decentralised, open-source blockchain platform that was designed to be fast, secure, and scalable to handle massive volumes of transactions at near instantaneous speeds.
Ethereum validates a new block of transactions within 12-14 seconds, whereas Algorand validates a new block of transactions within 5-12 seconds.
Bitcoin (and previously Ethereum) uses a Proof-of-Work (PoW) mechanism to validate these transactions. PoW is essentially using very powerful computers to solve increasingly complex mathematical puzzles to add a block to the blockchain. The one who solves the puzzle in a PoW is rewarded. This person is called the ‘block proposer’.
The problem with PoW is how energy-intensive it is. Due to the computing power required it simply costs too much for most people to participate.
Ethereum moved onto the Proof-of-Stake (PoS) system in 2022, where users can ‘stake’ their coins to validate new blocks and earn rewards. Staking is basically locking up coins as collateral to earn coins. You can read more about staking here and whether it is halal.
Algorand has evolved the basic PoS mechanism and uses a unique consensus algorithm called ‘Pure Proof-of-Stake’ (PPoS), which allows it to achieve high transaction speeds and low fees without sacrificing security or decentralisation.
One of the key features of the Algorand network is its use of ‘verifiable random functions’ (VRFs) to select the ‘block proposer’ for each new block.
In a traditional PoW blockchain like Bitcoin, the block proposer is selected based on their ability to solve a complex mathematical puzzle as outlined. In contrast, the Algorand network uses VRFs to randomly select the block proposer from among a pool of validators (called ‘committee members’), who are chosen based on the amount of ALGO they have staked (i.e., locked up as collateral).
This means that in order to participate in the Algorand network as a validator, you must first purchase and hold a certain amount of ALGO. The more ALGO you hold, the higher your chances of being selected as a committee member and earning rewards for proposing and validating blocks.
In addition to its PPoS consensus algorithm, the Algorand network also uses a novel ‘atomic transaction’ mechanism to ensure the integrity and consistency of its blockchain ledger.
Atomic transactions allow multiple transactions to be bundled together and either all committed to the ledger or all discarded, depending on whether they are valid. This helps to prevent the ‘double spend’ problem that can occur in other blockchain platforms, where a single unit of cryptocurrency can be spent multiple times before the transactions are fully processed.
The Algorand network and ALGO cryptocurrency aim to provide a fast, secure, and scalable platform and alternative to Ethereum for building decentralised applications (dApps) and quickly processing transactions to compete with not only other cryptocurrencies but with the likes of Mastercard and Visa.
It offers a smart contract capable ecosystem to foster a developer-consumer community and become the de facto open-source cryptocurrency platform of choice.
What are the use cases of Algorand?
Payments and DeFi
The ALGO cryptocurrency presents itself as a leaner, faster version of Ethereum.
ALGO can be used to make payments to merchants and people around the globe in a matter of seconds and with minimal fees, making it the ideal payment network.
Developers can also use the Algorand network to build decentralised financial applications, such as peer-to-peer trading markets or platforms for stablecoins.
Algorand presents itself as a serious contender in the cryptocurrency as an actual currency space because of speed, scalability, and cost.
NFTs are tokens that can be attached to unique items, such as art and media. These unique tokens are not interchangeable like a standard ALGO token. An NFT is secured on the Algorand network and can only have one owner at a time. NFTs can be sold on global markets powered by the Algorand network.
Are people using Algorand right now?
Algorand is a small player in the cryptocurrency space when compared to the larger cryptocurrencies, but a big player in absolute terms.
It ranks 35th out of all cryptocurrencies and has a market dominance of 0.17% and a market cap of under $2 billion.
ALGO currently has a daily transaction volume of under $20 million and a daily transaction count of under 5 million. This is especially the case after the market downturn in 2022 where before it used to see higher numbers and more activity.
While in absolute terms Algorand is being used, it is miniscule when comparing it to some of the bigger players which compete against it directly.
What are the strengths and weaknesses of Algorand?
- Algorand’s ‘Pure Proof-of-Stake’ (PPoS) mechanism allows it to speed past competitors in verifying transactions without sacrificing security and stability. This gives it an advantage when scaling up because on the level of millions of transactions, that is an immense amount of time and money saved.
- Algorand is an open-source, smart contract capable blockchain platform which means it allows developers to build decentralised applications and even other cryptocurrencies on the Algorand network. This makes it attractive to a developer community which is essential to the longevity of any crypto network.
- Algorand currently has a very small market cap and market dominance. The smaller this is, the less trust and momentum it can gain overall which affects its future prospects. People, developers, and companies will be more likely to go with bigger, more established competitors.
- Algorand does not offer anything radically different from its more established and trusted competitors. This calls into question whether Algorand can truly take off and gain a respectable market dominance as opposed to remaining a niche, hobbyist blockchain network.
Is Algorand a good investment?
Crypto has now become a staple of many investment portfolios. Even major institutional investors now hold a small percentage of crypto in their portfolios.
Putting a small percentage of your portfolio means that you can benefit from some of the potentially dazzling increases in crypto whilst also not going bankrupt if crypto were to take a really deep nosedive.
The price of ALGO currently sits at $0.2 and has decreased from high points of $3 in 2019 and 2021.
Algorand is currently quite a niche and small player in the space with multiple, better alternatives. If investors believe, after due diligence, that it has some advantage in a specific industry or market, then it may be worth dedicating small portions of your crypto portfolio to ALGO.
However, Algorand does not actually bring enough radical innovations to supplant the larger, more established players.
Alternatives to Algorand
Algorand is one of many smart contract blockchains. While it has the advantage of speed over other networks, it is not the only network with unique technical innovations.
If Algorand is to truly rise and become part of the core DeFi infrastructure, it will have to maintain and innovate in its competitive advantages over the networks below.
Ethereum is the name in cryptocurrency when it comes to DeFi and smart contract capable networks. Given how synonymous it is with the DeFi space and its 19.31% market dominance, Ethereum is the giant that Algorand needs to wrestle with.
While Algorand has higher transaction speeds than Ethereum, there are two reasons why this may not be enough to contend with Ethereum.
Ethereum has a level of trust in the community that Algorand is a long way from achieving.
Now that Ethereum has moved to the Proof-of-Stake in late 2022, some of the advantages Algorand had over Ethereum have now disappeared. Mining ETH is not as expensive and energy intensive as it used to be.
Cardano (ADA) has a market capitalisation of almost $13 billion and hence the number 8 spot in the crypto space. Cardano was founded based on peer-reviewed research and evidence-based methods, lending it technical credibility.
Cardano claims to be the most environmentally friendly blockchain network, using only the power of 600 homes annually, which is comparatively less compared to the colossal energy usage of other major cryptocurrencies. This makes it more sustainable in the long-term.
Cardano offers a similar feature set to Algorand whilst being more sustainable over the long-term.
Coming in the 12th spot with a market capitalisation of $7 billion, Polkadot (DOT) is well-known in the crypto space for its ‘interoperability’ feature.
This allows several blockchains together to form one larger network, allowing data to be shared securely and efficiently. This cross-chain collaboration is so important for the future of Web 3.0 and the internet at large, that Polkadot can seriously be considered one of the core digital infrastructures of the future and slowly gain market dominance.
Polkadot is a network that can co-exist with Algorand as it aims to tackle different problems. Algorand is focussed on high transaction speeds and low fees, whilst Polkadot is focussed on interoperability.
Is Algorand (ALGO) halal?
Most scholars hold ALGO and Algorand to be halal. We also share this view.
The essence of the debate on whether cryptocurrencies are halal comes down to whether they are ‘Māl’ as we have explained previously. Māl is something that can be acquired, whether it be an item or a service.
There are three stances on cryptocurrencies today:
- Cryptocurrency is not Māl, rather it is a speculative, non-Sharia-compliant investment.
- Cryptocurrency is a digital asset but not a currency.
- Cryptocurrency is a digital currency.
Proponents of view (1) argue that cryptocurrencies are not Sharia-compliant since they have no intrinsic value and are merely entries on a digital ledger.
Our view has always been that (1) does not seem right since cryptocurrencies have value as millions of people are willing to buy, hold, and trade them. They are just as real as fiat currency today which mostly exists in the spreadsheets of banks. Our monetary system became predominantly digital a while ago.
View (2) seems to be the most realistic view, as cryptocurrencies are a new and emerging technology that are yet to mature into fully fledged currencies used by economies at large. However, in practice, there is no real difference for casual users between (2) and (3) since they both consider trading cryptocurrencies to be permissible.
Zakat is due on ALGO like any other currency. Zakat will be relatively simple to calculate since it is simply like holding US dollars or Pound Sterling. Read our Zakat on crypto guide for a good explanation.
The Pure Proof-of-Stake mechanism is a good innovation which results in higher transaction speeds, lower costs, and better scalability. The question is though, is this enough to foster a developer and consumer community that will be loyal to Algorand to the exclusion of all other, larger blockchain networks that offer similar feature sets?
If Algorand can’t clearly demonstrate a unique selling point to truly distinguish itself from its bigger competitors, then it’s not clear how much longevity it has in the coming years.