Classifying Algorand according to the International Classification Framework (ITC)

Currently, Algorand is listed at spot #30, according to Coinmarketcap. At its core, Algorand is trying to solve the blockchain trilemma by using its unique consensus mechanism called Pure Proof of Stake (PPoS). The rising confidence in Algorand can be seen by many countries that want to deploy their CBDC through Algorand. Some of them, including the Marshall Islands, already did, and more and more developers are switching to the Algorand network for development.

Authors: Nick Allgäuer, Valentin Kalinov

The Blockchain Trilemma

As stated above, the core problem Algorand tries to solve is the so-called Blockchain trilemma, which states that within a blockchain, there will always be a trade-off between decentralization, security, and scalability. This is due to the nature of Blockchain. A network that is decentralized and has a high level of security would not be scalable. Similarly, a blockchain that is decentralized and scalable will have little security, etc. Binance smart chain, for example, relies on only 21 validators, validating each transaction, which is heavily centralized. However, due to that, they are able to process more transactions than more decentralized systems would be able to.

The Blockchain Trilemma: (1) decentralization, (2) security, (3) scalability.
Figure 1: The Blockchain Trilemma (source: www.ledger.com)

As the picture shows, moving towards one edge of the triangle leads to a reduction in at least one of the other parameters, meaning that each blockchain needs to position itself anywhere in the triangle. While Ethereum is trying to solve this problem by switching to PoS, sharding, and L2 solutions, Algorand decided to take another path.

Current consensus mechanisms

Algorand tackles the above-stated problem with its unique consensus mechanism called Pure Proof of Stake (PPoS). Developed by the famous mathematician Silvio Micialli, who also was awarded the “Turing Award ‘’, and his team, they tackle the core question of a blockchain: Who does the network entrust to choose, publish and add the next block to the blockchain on behalf of all. In Proof of Work, this problem is solved by choosing the person(s) who solves a cryptographic “puzzle” first and thus contributes computational work to the Blockchain network. However, the entry costs of being able to participate in such a network are high due to large investments in hardware, as well as electricity, making it partly centralized. In Proof of Stake it is the person(s) who on average locks the most stake on the blockchain. This is equally secure as PoW since, in both consensus mechanisms, an attacker has to spend a huge amount of resources (comp. power in PoW and capital in PoS) in order to dominate the network. However, the problem of decentralization might not be solved in PoS either, since validators are still able to control large parts of the network by locking massive amounts of stake to the network and gain most of the staking rewards, which might result in a self-reinforcing circle. Moreover, validators have to “lock” their stake away and cannot use it for trade.

Pure Proof of Stake (PPoS)

Officially praised as the first decentralized, secure, and scalable blockchain, PPoS achieves consensus through the following steps.

  1. Every holder of the ALGO coin can decide whether he wants to participate in the consensus by “switching” their account to online/offline. This can be reversed at any time and does not require locking up one’s token; instead, they are freely tradable through the wallet.
  2. Out of all token holders that want to participate in consensus, one is selected to propose the next block to be added. This is achieved by the Verified Random Function (VRF), which acts as a partially weighted, partially random lottery according to how many ALGO coins one has in their wallet.
  3. Through VRF, another 1000 token holders are selected that have to approve the chosen block to be added to the blockchain. If 2/3 of miners vote for the block, it will be added. Otherwise, the above steps are repeated.

Important to mention is the fact that in the Algorand network, there exist two nodes. First, there is the participation node, which is able to participate in the consensus mechanism described above. The other node is the relay node. It stores all the history of the blockchain and facilitates the communication between participation nodes needed for consensus.

Smart Contracts on Algorand

Ethereum is the first smart contract blockchain and defined many smart contract standards. If a developer wants to deploy code on Ethereum, it needs to be Ethereum Virtual Machine (EVM) compatible. Many sidechains and alternative protocols try to stay compatible with Ethereum in order to be able to offer easier onboarding for existing Ethereum projects. Algorand, on the other hand, is not yet EVM compatible. Recently the team launched a $20M incentive program to fund developers who can provide solutions for Ethereum Virtual Machine (EVM) compatibility. The need for smart contract developers in the blockchain space has been steadily growing. Providing easy access and onboarding for the developers is very important. EVM has established itself as the favorite standard, and it will be for the foreseeable future. Platforms like Algorand will be forced to stay compatible if they want to grow their market share in the industry.

The classification of ALGO according to the ITC:

Figure 2: The ALGO Tokenbase entry (source: https://itin.itsa.global/RQQPZH3R1)

Economic Purpose (EEP): ALGO is listed as a settlement and governance token (EEP22TU03) due to its design as a means of transaction settlement within the Algorand network.

Industry Type (EIN): The issuer of ALGO is active in the field of Cloud Computing, Distributed Systems, and Decentralized Applications (TTS41BC).

Technological Setup (TTS): ALGO is the native token of the Algorand network which utilizes Pure Proof of Stake (PPoS) to achieve consensus on the distributed ledger. Consequently, ALGO has been classified as a Blockchain-Native Token (TTS41BC).

Legal Clam (LLC): The ALGO coin does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token (LLC31).

Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. Algorant’s blockchain platform is built by an expert team of engineers and researchers in the field of computer science, AI and blockchain. Its Issuer Type is a Private Sector Legal Entity (LIT61PV).

Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information of the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). The ALGO token qualifies as a Utility Token according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.

The International Token Standardization Association (ITSA) e.V.

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

  • The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
  • The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
  • ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.

Remarks

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Nick Allgäuer is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. Originally coming from a Data Science background, he has working experience as a Data Scientist at Cognize and as a Market Conformity Analyst at UBS. Currently finishing his bachelor’s in Computational Business Analytics, you can network with him via Linkedin.

Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via valentin.kalinov@itsa.global and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.

Algorand cover photo

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International Token Standardization Association

The International Token Standardization Association (ITSA) is a not for profit organization working on holistic market standards for the global token economy.