The Coin Craze: Is Investing in Algorand a Good Idea?

The Coin Craze: Is Investing in Algorand a Good Idea?

They say great things take time but is that the best argument for why Algorand is a good investment? Let's dig in.

The Coin Craze: Is Investing in Algorand a Good Idea?
Guy Ovadia

Published Mar 22, 2022Updated Mar 22, 2022

Crypto

Crypto

Technology

Technology

DeFi

DeFi

In a society where we expect everything to be as immediate as a T.V. dinner, we sometimes forget it took a lot of hard work and innovation to achieve a culture in which we can not only expect to have everything right now but can often deliver on it, too. The advent of cryptocurrency was the natural next step of this evolution, but even Bitcoin wasn't perfect when it came out, as it also underwent periods of upheaval to reach what it is today.

Despite the challenges, Algorand has been able to remain relevant in the bustling world of decentralized finance (DeFi) seemingly against all odds. So what is Algorand? And is Algorand a good investment?

The truth is that it's too early to tell if Algorand has a future.

Well, the Algorand that launched in 2019 is different from the Algorand of 2021 and the Algorand of the future. The Algorand blockchain network is far from perfect or even ideal, with issues like centralization and tokenomics still hurting the ecosystem.

What is Algorand?

Algorand is a pure proof of stake smart contract blockchain that uses the native ALGO coin. Algorand's pure proof of stake consensus mechanism is a system that allows any computer to become a validator and confirm Algorand transactions by staking at least one ALGO.

Algorand's staking mechanism is similar to the standard proof of stake (PoS) in that validators are chosen based on the proportion of their crypto. Two things that make Algorand's staking unique are that there's a much lower staking minimum than other PoS blockchains and there's no lockup period, which makes it one of the most accessible consensus mechanisms to participate in.

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Algorand staking rewards

Another notable thing about Algorand is that stakers don't get rewards, but rather everyone holding at least one ALGO in a non-custodial wallet gradually accumulates more ALGO. Although this is definitely not a good source of passive income, it certainly compensates for the transaction fees of just 0.001 ALGO, which is extremely cheap. However, this system is set to be fully replaced by the Algorand governance system on May 15, 2022.

Algorand governance

Algorand introduced its governance mechanism in October 2021 in its push toward decentralization. Currently, the Algorand blockchain depends on permissioned relay nodes running alongside validators that must be approved by the Algorand Foundation to participate in the network. Making these relay nodes faster requires increasing the block size, which makes it harder to validate the blockchain and further centralizes the network as a result by reducing the number of viable nodes. Governance is Algorand's solution to this less-than-optimal level of decentralization.

To participate in Algorand governance, an ALGO holder has to register to become a governor before the start of the governance period and keep it locked for the entire three-month period. Once staked, Algorand governors can vote on proposals and earn ALGO rewards for doing so. This governance structure is great because it makes the network more accessible for 'Algonauts' who want to practice what they preach without too much commitment.

Concerns about Algorand

As mentioned above, Algorand is not sufficiently decentralized compared to competing proof of stake smart contract blockchains. The fact that there are only 100 permissioned relay nodes all approved by the Algorand Foundation is counter to the crypto ethos and poses a security risk. While the network is functional and the foundation has time and time again shown its dedication to transparency, this does little to reassure ALGO investors.

Tokenomics

One of the biggest factors driving the price of ALGO down is the selling pressure resulting from the aggressive distribution schedule. A large proportion of the 10 billion ALGO supply currently in circulation is controlled by Algorand and its early backers. While low prices could seem like a buying opportunity, this downward pressure caused by the distribution schedule could be a long-term trend.

Governance flaws

One major flaw in Algorand's governance system is that centralized exchanges have the most governing power. There will always be whales with disproportionately large crypto balances, but because exchanges hold such huge bags of ALGO they can exercise a high level of voting power as Algorand governors. While Algorand is being progressive in working with exchanges to find a solution, this seems like a major oversight that could compromise Algorand governance altogether.

Tiny DeFi ecosystem

One thing that Algorand does not particularly excel at compared to other smart contract platforms is that the number of DeFi protocols on Algorand is pathetic compared to the amount hosted by top blockchain ecosystems. Algorand only has four open DeFi protocols, but none of them stand out in this increasingly competitive and oversaturated market. 

The biggest decentralized exchange on Algorand called Tinyman was drained of $3 million in crypto due to a hack in January 2022. The Tinyman protocol was a pivotal part of the Algorand ecosystem, so this hack was especially devastating to the network and the confidence of its users.

Price Prediction

The aforementioned aggressive ALGO distribution schedule is the biggest factor impacting the ALGO price right now and in the foreseeable future. While the price of ALGO has suffered in concert with the broader crypto market, the only concrete indicator of price is inflation, which includes the distribution of foundation funds and participation rewards.

Based on the Algorand roadmap and anticipated dispersion of ALGO over the next decade, there is a solid chance we won't see any significant price movement until 2026. While four years may seem like a ways away, the only thing that is likely to change this is if hundreds of millions in venture capital cash causes Algorand to ease its ALGO selling. Changes to this are at the discretion of the Algorand company, the Algorand Foundation, and, to an extent, Algorand governors.

Is Algorand a good investment?

The truth is that it's too early to tell if Algorand has a future. Algorand is an organization that laid the foundation for a promising project, but it will take time before the major flaws will be straightened out and Algorand becomes a viable DeFi network. If you're not as much into crypto and want to look at it through the lens of fintech investing, Algorand is pioneering the way for blockchain-based central bank digital currencies (CBDC). Algorand's push for CBDC development could position it alongside Ripple and Stellar as one of the leading partners of central banks in developing their blockchains.

Algorand has partnered with e-Money to create stablecoins for Euro and other European currencies, and another partnership with fintech firm Koibanx gave Algorand an in to the El Salvadorian crypto market. In addition to hundreds of millions of dollars in venture capital support, this has geared Algorand to be focused on generating institutional adoption and developing enterprise applications.

Where can I buy Algorand?

Investors who want to get in early on ALGO can purchase it from practically any centralized exchange. If you're not looking to DeFi but want to HODL some ALGO anyway, you can always buy it from Crypto.com. You can buy and stake your ALGO on Crypto.com for up to a 2% annual yield, which is great if you're comfortable with holding your crypto on an exchange. 

cryptocom
Crypto.com

3.5

Crypto

To HODL or not to HODL? That is the question.

Whether you're just getting into DeFi or hanging on to that bag for dear life, everyone has to decide what to do with their hard-earned crypto. This is sort of like voting with your wallet, where the best protocols win and the best networks thrive, while the rest wither away into oblivion. So, are you following the crowd when it comes to DeFi? Or are you a swashbuckling crypto pioneer?

To HODL or not to HODL? That is the question.