Distributed Ledger Technology & Law 101 Series | What is Algorand Blockchain | ALGO Explained | Environmentally Friendly Tokens | Ethereum Alternative 2.0

“Tesla has suspended vehicle purchases using Bitcoin. We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel…”

- Elon Musk

Introduction | Crypto 2.0 or Money 2.0

The high rate of energy consumption by Bitcoin has threatened greater adaptation of cryptocurrency at its infancy. With criticisms against Bitcoin ranging from consuming more energy than entire nations to high transaction costs (also related to high energy needs), the need for a more environmentally friendly and advanced alternative is greater than ever.

“Cryptocurrency is a good idea on many levels, and we believe it has a promising future, but this cannot come at great cost to the environment… we are looking at other cryptocurrencies that uses <1% of Bitcoin’s energy/transaction.”

- Elon Musk

Since the second coming of Bitcoin in 2021 (where the virtual assets reached historical highs), the one thing that can be certain however is that crypto is here to stay.

That said, as nations decide how to come to terms with this technology, government’s reaction towards crypto varied drastically ranging from outright ban in China, warm reception by Putin of Russia and being adopted as national tender in El Salvador. Thus, for the crypto community to further thrive, various regulatory concerns (from AML, transaction speeds to environmental impact assessment) must all be considered.

Of the myriad of blockchains now in operation, ALGO stands out shining for being the environmentally friendly alternative. Further, with countries like the Republic of Marshall Islands having used the ALGO Blockchain as the foundation their country’s Central Bank Digital Currency (“CBDC”), some have pivoted that ALGO may very well be poised to replace traditional (and less sophisticated) virtual currencies like Bitcoin and Ethereum.

As you plan on where your next move will be in the crypto-markets, don’t forget to follow our Distributed Ledger Technology 101 series penned by crypto-lawyer Joshua Chu and his team of specialists at the subscribe link provided. Your journey into Blockchain and Law begins here. 

Central Bank Digital Currency | SOV and ALGO | History in the Making

Back in February 2018, the Marshalls Islands legislature made history when they passed the Sovereign Currency Act of 2018 which creates and issues the SOV (short for “Sovereign”), a digital decentralized cryptocurrency which is to be the legal tender of the Republic of the Marshall Islands. At its inception, the SOV effectively became the world’s very first CBDC.  

One of the unique features of the SOV is that it’s powered by Algorand (or “ALGO”), a blockchain-based cryptocurrency platform that aims to be secure, scalable, and decentralized.

The Marshalls Island, being an island nation in the remote regions of the Pacific Ocean, is highly reliant on cross-border trade and finance to power the island nation’s economy. Many has pivoted by adopting SOV, the world’s first CBDC, SOV will curb the nation’s high transaction costs and making the island nation, though geographically isolated, closer globally via digital means.

ALGO | What am I?

ALGO is unique amongst the blockchain ecosystem in that it aims to solve Blockchain’s inherent trilemma of balancing speed, security and decentralization. ALGO was created back in 2017 by Dr. Silvio Micali, a computer scientist and professor at the Massachusetts Institute of Technology (“M.I.T.”) and the recipient of the Turing Award for his work in cryptography.

ALGO was designed to be similar to Ethereum but with features that enables faster transaction with near instant completion, processing up to 1,000 transactions per second and finalizing entire transactions in less than five seconds.

Special Feature | Pure Proof of Consensus Mechanism

The Algorand Blockchain is revolutionary in that it uses a pure proof of consensus mechanism with validators being given rewards to all holders of the ALGO cryptocurrency.

Whereas a normal proof-of-stake mechanism will require validators to set up a special computer to verify new blocks with their coins being locked up (otherwise they cannot be a validator), a pure proof of stake meant that holders do not need to stake their ALGO coins to earn more ALGO with all ALGO coin holders receiving equivalent of 4%-6% of the amount of ALGO coins simply by holding their coins. In other words, all holder of ALGO coins will see their wallet increase at a rate of 4%-6% per year.

The ALGO consensus algorithm is also unique in having the “player replaceability” feature where membership in the different committees changes every time the phase is run. This feature protects users against targeted attacks (given the fact that an attacker will not know ahead of time which users are going to be in a committee).

Special Feature | Smart Contracts Capability

ALGO supports three (3) types of smart contract, namely, (i) stateless smart contracts, (ii) stateful smart contracts and (iii) the Algogeneous smart contracts, which can be summarized as follows:

Stateless Smart Contract

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The purpose of stateless smart contracts are to authorize transactions by validate transactions between parties, like an escrow.

Stateful Smart Contract

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The way stateful smart contracts operates are via logical programs which are designed to store data on the blockchain.

Algogeneous Smart Contract

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Algogeneous smart contract integrate both stateless and stateful smart contract functionality and are written in a programming language called Transaction Execution Approval Language (“TEAL”) The Algorand smart contracts model support transaction atomicity where transactions can be in the form of indivisible and irreducible series of database operations such that either all occurs, or nothing occurs

By having smart contract support, ALGO is capable of having decentralized applications (AKA “dApps”). For those who are familiar with Non-Fungible Tokens (“NFTs”) and their associated high gas fees on the existing Ethereum network, many Apps developers have opted to find alternative networks to build their applications upon with some turning to the Algorand blockchain.

Another special feature found on ALGO is the Algorand Standard Asset Protocol (“ASA”) which is similar to the ERC-20 protocol on the Ethereum network. The ASA is far more user friendly in that instead of having to ‘write’ a smart contract oneself, novice users can do so by simply filling out a form to create a new asset and build smart contracts.

ALGO Use Cases

Since ALGO’s inception, there are several notable early adopters of Algorand with ALGO having been used in the following:

  1. Non-Fungible Tokens (NFTs): As mentioned, ALGO is essentially Ethereum 2.0, only with more efficient technology and solving a lot of the inherent issues with Ethereum (the crypto powering most NFT projects. Since ALGO tokens are unique, ALGO have been used to represent such things as collectibles, digital art, sports memorabilia, virtual real estate, and items within games. The NFT boom in 2021 propelled ALGO adoption even further.
  2. Decentralized Finance (DeFi): With the widespread implementation of DeFi, ALGO saw its own DeFi products ranging from AlgoCharts, a software that charts Algorand Standard AssetsDeFi loan pool the likes of Opulous. Two stablecoins, Tether and USD Coin (“USDC”), were also launched on the Algorand network back in 2020.
  3. Carbon Negative Projects: ALGO as mentioned is committed to negative carbon objectives. This is exemplified when the International Union for the Conservation of Nature announced that it was developing an Algorand-based system, FLRchain, a system designed to organize the application of restoration funds to forest landscapes.

All in all, despite the fact that ALGO already received a lot of critical acclaims and high profile CBCD projects, the platform is still relatively new.

ALGO The Carbon Negative Blockchain

"Bitcoin uses more electricity per transaction than any other method known to mankind… it’s not a great climate thing.”

- Bill Gates

One of the biggest drawback / arguments against the greater adoption Bitcoin lies in its intensive energy usage. With Bitcoin being said to have consumed more electricity than the entirety of Argentina (leading to Tesla announcing that it will no longer accept Bitcoin for payment and China banning all crypto mining/trade), it can easily be discerned why environmental costs is an important social responsibility consideration for all stakeholders involved.

ALGO is a carbon negative token. To this end, not only does ALGO offer users guilt free experience in that it does not add to the global carbon footprint, ALGO also actively work towards reducing carbon output with the consensus mechanism being a variation of the proof of stake. The carbon emissions are therefore far lower with Algorand Inc (operator of the chain), committed to make charitable donation towards climate trade solutions company.

Conclusion | Why is a Smart Contract Beneficial

The Republic of the Marshall Islands, being an island nation, stands to have the greatest to lose if humanity fails in its fight against climate change. Its decision to use ALGO as the foundation for it’s CBDC shows the nation’s commitment to stride into the future while, at the same time, aims to achieve its environmental impact objectives.

As such, whilst there are very few environmental regulations enacted with respect to virtual asset (with most regulatory activities geared towards licensing (e.g., Securities and Futures Commission lisencing regime, etc.) regulators in Hong Kong should, as more complex regulation is rolled out, keep in mind:

  1. Environmental Impact Assessment;
  2. Improvement and Security of New Technology; and
  3. Efficiency.

We hope you enjoyed the latest of our Distributed Ledger Technology 101 series. To stay tune for more content, hit the subscribe link provided. Until next time.

Solicitor, ONC Lawyers

Joshua Chu is a Litigation Solicitor qualified to practice in Hong Kong. Before becoming a lawyer, Joshua worked in the healthcare industry serving as the IT department head at a private hospital as well as overseeing their procurement operations.

Since embarking upon his legal career, his past legal experience includes representing the successful party in one of Hong Kong’s first cryptocurrency litigation cases as well as appearing before the Review Body on Bid Challenges under the World Trade Organization Government Procurement Agreement concerning a health care industry related tender.

Today, Joshua’s practice is mainly focused in the field of dispute resolution and technology law.

Aside from his legal practice, Joshua is currently also a Senior Consultant with a regulatory consulting firm which had been founded by ex-SFC Regulators as well as being a management consultant for the Korean Blockchain Centre.

Group CEO, Marvel Digital Group

Group Corporate Finance Director, Xtreme Business Enterprises