Algorand review: the CBDC contender

Note:

1. All price information taken on 11^th June 2021.
2. I’m using “Algorand” for the project, company and foundation, and “Algo” for the tokens themselves.

Algorand is one of the most promising crypto projects out there.

In terms of tech, it beats out nearly every other crypto in the top 100.

Partnerships? It has plenty… many of which are extremely impressive.

Team? Its founder, Silvio Micali, invented zero-knowledge proofs. He’s won the computer science equivalent of the Nobel Prize (the Turing Award) and is without doubt one of the brightest minds in crypto.

Green credentials? Algorand is so energy efficient that it’s going carbon negative. It bills itself as “the greenest blockchain”.

Potential? Huge. It’s positioning itself as the crypto of Central Bank Digital Currencies (CBDCs). It’s already creating a CBDC for the Marshall Islands and is angling for many more.

So what’s the catch, why is it languishing?

Well, Algorand dropped the ball on what’s arguably the most important aspect of crypto – economics. Or, as we call it in crypto, tokenomics.

If you read my everything you need to know about crypto essay, you’ll know that crypto pretty much came about because of failures in the current financial system.

…The financial crisis, the bank bail-outs, the endless money printing and all-time low interest rates that inflate asset prices and increase inequality… all that fun stuff.

As I said in that essay:

Remember that quote we began with: “In a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.”

Well, the genius of Bitcoin is that it does the exact opposite. It harnesses greed to create democracy.

The Bitcoin network is maintained by “miners”. These are people that lend their computer power into keeping the Bitcoin network secure. For doing this, they get rewarded in Bitcoin.

Anyone can become a Bitcoin miner. All you need is a computer and an internet connection.

And the more people that decide to mine Bitcoin, the more decentralised, democratic and powerful its network becomes.

In this way, Bitcoin is flipping the Goldman Sachs model on its head.

Of course, in practice, it doesn’t work quite as smoothly as this. As more and more people mine, it gets harder and harder to make money at it and so smaller players get pushed out.

Right now, it’s hard to make money mining unless you live somewhere with very cheap electricity. And then there’s also the problem of Bitcoin’s massive energy usage.

Even so, it’s a very elegant model to harness greed and self-interest for the good of the many.

The only reason Bitcoin is still around today is because of the financial incentives that were programmed into it.

Of course, some projects go overboard with these financial incentives and we get Ponzi schemes like Bitconnect and SafeMoon.

Algorand seems to have put so much effort into making a technically brilliant crypto that it completely neglected the tokenomics side.

In fact, it did such a bad job that two months after its Initial Coin Offering (ICO) it was forced to buy back nearly all the Algorand it had sold.

Why? Because Algorand’s early backers owned 25% of the total supply and Algorand itself owned another 25%.

And while ICO participants paid $2.40 per Algo, according to the block crypto, those early backers got in for less than $0.09.

Just to put that into context…

If you’d managed to get in before the ICO as an “early backer” and put in $40,000, you’d make over $1,000,000 selling at the price ICO investors were paying.

Oh, and that ICO sold out in four hours… so you know the demand is there at that $2.40 price.

Given that, it’s no wonder that as soon as the ICO took place both the early backers and Algorand itself started dumping tokens like crazy and the price tanked.

It got so bad that the Algorand Foundation offered to buy back ICO participants coins for 90% of what they paid.

According to Algorand, “Nearly all” the holders accepted this offer.

That debacle ended in July 2020, and it’s since been working hard to rectify its woeful tokenomics.

Instead of unlocking the total Algorand supply over four years – with 50% going to Algorand and the early backers between them – now it’s unlocking over 10 years. (Source: Algorand).

But those early backers and Algorand itself get millions of tokens unlocked every month, and continue to dump them onto the market.

Essentially no matter how low Algorand’s price goes, the early backers will still be making a huge profit by dumping their Algo as soon as they get it.

And they won’t stop getting it for a good few years.

So if you’ve been following Algorand and wondering why it hasn’t seen explosive growth like Cardano, Polkadot, Ethereum et al… that’s why.

They basically built the best house in the world and forgot to put a roof on it.

So, is Algorand worth your time? Can it outgrow its disastrous start? Will it become the de-facto CBDC platform?

Let’s get into the review and find out.