9Sep 2019

Investment Highlight: Algorand

by Henrik Andersson

This is the first instalment of a series we call Investment Highlights where we briefly describe some of our current portfolio investments.

If we define Bitcoin as a first generation blockchain and Ethereum as second generation, then Algorand could be defined as third generation. Algorand was founded by Silvio Micali, a Turing award winning cryptographer and professor of computer science at MIT.

Algorand’s consensus algorithm is called Pure Proof-of-Stake. At its core is something called a VRF or a ‘Verifiable Random Function’. Micali, Algorand’s founder, was involved in introducing this cryptographic primitive in 1999. Much of Algorand’s security, scalability and decentralisation properties are thanks to this VRF (Dfinity, is another Apollo investment that utilises this primitive in its consensus algorithm). For each block, the VRF essentially selects a random set containing 1,000 tokens where holders validate the block. Each block is produced in below 5 seconds. The result is a protocol with potentially a very attractive set of tradeoffs between fast confirmations, robustness and security (Algorand requires that 2/3 of participants are honest). Despite being a Proof-of-Stake network, Algorand doesn’t have slashing as they don’t feel this is necessary to protect against bad behaviour. In our discussions with Algorand they do seem to be flexible on this point — this is something that could be implemented down the line if required.

To keep the network as lightweight as possible and to avoid unwanted complexity, Algorand will try to do more in layer 1 instead of at the level of turing complete smart contracts (layer 2). In our dialogue with Algorand, they expressed a goal to replicate ~95% of the functionality of current Ethereum use cases with layer 1 technology.

While Algorand has been criticised for not being completely permissionless, it is our understanding that they do have a strong emphasis on quickly becoming highly permissionless and decentralised. While a non for-profit foundation in Singapore governs the network, they have a for profit company in Algorand LLC which will provide support services to the network à la the Linux/Red Hat model.

From left to right: Algorand founder Silvio Micali, Apollo Capital CIO Henrik Andersson and Algorand LLC CEO Steven Kokinos

From left to right: Algorand founder Silvio Micali, Apollo Capital CIO Henrik Andersson and Algorand LLC CEO Steven Kokinos

The goal of Algorand is to ‘democratize finance’. This is an ambitious goal that falls well within our Investment Thesis. Our sense is that Algorand will initially focus on tokenised assets, stablecoins and different types of financial contracts.

Since the network went live in June, there has been an impressive list of announcement from Algorand in a short period of time:

  • Tether has announced they are integrating with the Algorand Protocol.

  • ISDA membership to enable financial organisations to use their existing templates and tools to easily create decentralised financial instruments.

  • Proposal to implement new fungible tokens and execution of atomic multi-party transfers (AMPTs) in layer 1.

  • New 200M VC fund, Algo VC Fund, focused on the Algorand blockchain platform.

  • IDEX, the leading DEX on Ethereum, will work on implementing a platform on Algorand using its layer 1 technology.

Apart from the above list, Algorand has shown impressive agility and innovation when it comes to token economics. Their first Dutch token auction in June contained an interesting buy back mandate. Algorand since then implemented an early redemption program for auction participants as well as a 200 million Algorand staking program. Talking to the team, it is clear that the 3bn Algorand to be injected into the ecosystem via auctions and other means will be done so over a minimum of 5 years. We also note that there has been a recent proposal to extend the token distribution to relay node runners from 2 years to 5 years which should, if accepted, lessen sell pressure in the medium term.

Algorand has a place in our portfolio as a base layer 1 blockchain that nicely balances a number of attractive tradeoffs and has so far impressed us with what they brought to market in a relatively short time frame.

Henrik Andersson

Henrik is the Chief Investment Officer at Apollo Crypto and is the fund manager for the Apollo Crypto Fund. He also acts as the fund advisor for the offshore Apollo Crypto investments funds, the Apollo Crypto Frontier Fund and the Apollo Crypto Market Neutral Fund. Henrik's expertise in traditional financial markets comes from spending a decade on Wall Street as a vice president in institutional equity sales. His exceptional understanding of DeFi comes from co-founding two successful DeFi protocols, mStable and dHEDGE.