Will Algorand Shine During the Next Bull Run?
Will Algorand Shine During the Next Bull Run?
What has held Algorand back and how is that about to change?
Algorand is one of the most impressive smart contract platforms to ever exist. Its novel Pure Proof of Stake consensus mechanism gives anyone holding a single ALGO the opportunity at participating in consensus. This novel design puts decentralization first. Most other proof of stake blockchains are controlled by those with the most stake. POS consensus typically centralizes the process. Algorand does things radically different.
Algorand also has the brightest and most impressive team. Founder Silvio Micali is the godfather of modern crypto. Micali is a Professor at MIT and is best known for his fundamental early work on digital signatures, pseudorandom functions, zero knowledge proofs, and public key cryptosystems. In 2012, Micali won the Turing Award for his work in cryptography. Essentially, Micali helped create the cryptographic backbone most modern cryptocurrencies rely on today. You can even find much of his work cited throughout various Ethereum research papers.
So what has held Algorand back? Some argue it was the tokenomics. 2021 saw a large increase in the circulating supply due to an accelerated vesting schedule. Some argue this dilution was the primary cause of the ALGO token’s poor performance. This is an understandable thought to have, but I do not agree with it and I’ll explain why below.
Problems
DeFi TVL (total value locked) has become a giant factor in a token’s success in the market. TVL refers to the total amount of value that is ‘locked’ into defi protocols on each chain. This value is typically locked, via smart contract(s), into various staking/yield farming protocols, supplied as collateral to decentralized lending protocols, or held in some smart contract escrow for something else. Higher TVL on a chain can be interpreted as higher confidence in said chain. If a chain has a high TVL, one can naturally assume the market trusts this chain, the chain is easy to use, and there is demand to use it. Conversely, low TVL can give investors the opposite impression.
Creating mathematical concepts on how to value this new asset class has been tough, but one metric that has risen to prominence is the market-cap to TVL ratio. Some look at this ratio in a similar light as the traditional P/E (price to earnings) ratio for stocks. It is a very straight forward metric. You simply take the token’s market-cap and divide it by its TVL. The closer this TVL ratio is to 0, the more “undervalued” it is. Conversely, the further away from 0, the more “overvalued” it is. Algorand’s Mkcap:TVL ratio is 46.4. For comparison, Ethereum has a ratio of 2.3 and Terra/Luna has a ratio of 1.3.
Algorand got its first DEX (decentralized exchange) on October 7, 2021. Before this, Algorand had only one dApp contributing to its TVL, Yieldy. Yieldly is a yield farming app that is incredibly easy to use. Once Tinyman (Algorand’s first DEX) came online, TVL began to explode. Then, in early December, Algofi hit mainnet! A borrowing and lending protocol with a built in algorithmic stablecoin! Algomint, a bridge from Bitcoin or Ethereum to Algorand, also went live. This created a perfect storm. Algorand TVL went from near $0.00 at the beginning of 2021 to nearly $237 million by the end of the year.
This, unfortunately, was very short lived. Tinyman, which at the time was still the only DEX on mainnet, was exploited. Users had to withdraw all of the liquidity provided on the platform. From there, TVL tumbled from $237 million——to where it sits now, at the time of writing, around $112 million, even though Tinyman is back online. Of course, some of this reduction in TVL is now due to the crypto bear cycle we find ourselves in.
In my personal opinion, this still does not answer the question. There were/are much bigger reasons as to why Algorand’s TVL has been lagging that of its competitors. If Algorand has been live on mainnet since 2019, Why did it only have 5 dApps contributing to its TVL by the end of 2021? Algorand competitors like BSC have 316 dApps. Avalanche/AVAX has 171 and Matic/Polygon has 200. What gives?
Algorand is a non-EVM (Ethereum Virtual Machine) chain. Chains like Binance Smart Chain, Avalanche, Polygon, Polkadot, and so many more, are all EVM chains. Meaning, they can all essentially copy and paste the code from an Ethereum dApp and deploy it quickly to their chain. This has a lot of short term benefits, such as quickly porting over liquidity from Ethereum and boosting TVL. It does come with some long-term limitations though. Chains that use the EVM are hindered by a virtual machine that is slow and outdated.
This is why Algorand started from the ground up, building out its own virtual machine. Though the drawback is a slower start than its competitors, the Algorand Virtual Machine was purpose built for enterprise ready solutions. Algorand also uses a programming language known as TEAL. Most blockchains do not use TEAL. This created a unique problem for Algorand. Algorand developers had to learn how to use the AVM and code using TEAL. No simple copy pasting of source code of other dApps on other chains.
There is one more final piece to this puzzle and that is governance. Algorand has the largest governance participation level out of any blockchain. It is truly remarkable. This last quarter, nearly 50% of the ALGO circulating supply was dedicated to governance. That’s BILLIONS of dollars. This is an amazing accomplishment! But, it has its drawbacks. This means roughly 50% of ALGOs that could be used to help grow its defi TVL, were *trapped* in an illiquid governance protocol for 3 months.
From the accelerated vesting, to the Tinyman hack, to the new virtual machine, coding language, and governance structure, the Algorand token has had a rough go when compared to its peers. But, I think that is all about to change.
Solutions
For starters, accelerated vesting is over. 66% of all the ALGO that will ever exist is already now in circulation, with the remaining 34% to enter the market over the next 8 years. The days of too much dilution are behind Algorand. Algorand will have a steady and reasonable inflation rate until 2030, when it very likely becomes slightly DEFLATIONARY. There aren’t deflationary mechanics built in by design, but with no new tokens entering circulation after 2030 and with people inevitably continuing to lose their private keys, millions of tokens will be lost over time.
Secondly, the AVM has gone through multiple upgrades since inception. These upgrades supercharged Algorand’s capabilities. The coding language has upgraded from TEAL 1 all the way to TEAL 5. Without getting into the nitty-gritty of what that means on a technical side, I’ll just say that this upgrade now allows for things such as: making multi-token, liquidity token, and auto-compounding staking possible and allows for up to 512-bit operations (doubling EVM’s 256-bit max) - which allows for a higher degree of precision/accuracy in mathematical calculation. TEAL 5 also increases security as well as allowing for “batch” transactions.
Algorand and its AVM are far from done with their upgrades. an upgrade to 10,000 TPS and another to 46,000 TPS is still in the works. These ground-up innovations may have created a slow start for Algorand, but developers from all over the blockchain space are beginning to realize the potential. Algorand went from just a few hundred developers in 2019 to having over 11,000 today. The Algorand ecosystem is also blessed to have people like Chris Swenor involved in the space. Chris is the CEO of Reach, which is a blockchain agnostic programming language that is more efficient than anything else in the blockchain space. Reach now has over 4500 developers on board. Many of those developers, so I hear, are building on Algorand.
What else is changing? Algorand is becoming EVM/Ethereum compatible. Algorand’s recent update to Algorand 3.4.0 also brought with it State Proof keys, which are post-quantum-secure Falcon keys used to generate Algorand’s novel “state proofs”. This allows Algorand the ability to interact with Ethereum and “prove state” without using the traditional risky bridging technology. State Proofs are being leveraged by C3 protocol, which will use the tech to unlock siloed liquidity and build an entirely new experience for cross-chain trading. Milkomeda is also working to bring Algorand/Ethereum interoperability. Their goal is to bring EVM compatible sidechains/rollups to Algorand
The goal of Ethereum-Algorand compatibility has been gaining a lot of steam lately. Staci Warden, the brilliant and newly-named CEO of The Algorand Foundation, announced a $20 million fund at ETH-Denver with purpose of bringing Ethereum interoperability to Algorand. That is quite the incentive! $10 million in grants will go to developers that can provide solutions for Ethereum Virtual Machine compatibility. “For Algorand, EVM compatibility means applications that are built on Ethereum or other Ethereum-compatible chains can also execute on Algorand.”
Bridges are also helping to bridge the gap between Ethereum, Algorand, and soon other chains such as Solana. Bridges are an important tool in the current stages of the crypto-ecosystems. They give users the ability to lock a token from one chain into the bridge’s smart contracts and mint a “wrapped” or synthetic version of that token on the blockchain you are bridgeing to. A good example of this is Algomint. They are currently helping port liquidity from Bitcoin and Ethereum to Algorand. However, Algomint does things a bit differently, for now. Instead of using smart contracts to lock up their user’s funds, they use a third party custodian known as Copper. Algomint has helped bridge 118 Bitcoin and 807 Ethereum onto the Algorand blockchain! Another bridge is coming! Glitter Finance will be launching hopefully by the end of Q1! Glitter Finance is creating the “One” bridge, bridging Algorand, Solana, Polygon, Terra, and Cudos.
So why else will Algorand TVL increase aside from interoperability between chains? Well, it could have something to do with the incredible lineup of dApps that are sprouting up in the ecosystem. Here is a list of dApps that are live now or soon to be live:
Tinyman - first Algorand DEX
Yieldly - first Algorand DeFi (yield farming)
Algofi - first Algorand lending protocol - borrow, lend, swap, zap, stake, LP, LP farm, decentralized stable coin
Algodex - first Algorand order book DEX
Pact - newly launched DEX
HumbleSwap - soon to launch DEX, made by the Reach team
xBacked DAO - soon to launch lending platform with an interesting revenue sharing model and a decentralized stable coin
Folks Finance - soon to launch lending protocol
AlgoGard - unlocking Governance liquidity
Opulous - royalty-paying, copyright backed, music NFTs
Lofty AI - tokenized Real Estate
Vesta Equity - tokenized home equity
Dequency - music synchronization licenses on chain
Anote Music - European marketplace for investing in music royalties
Zone - First gamefi ecosystem on Algorand
NFDs - wallet naming service similar to ENS
AlgOracle - on chain oracle service much like Chainlink
ClimateTrade - tokenized carbon credit market
It’s nearly impossible to name them all!
Photo Credit: Firebrand
But wait, there’s more to it!
The Algorand Foundation launched a liquidity rewards program with the primary objective of boosting TVL in the ecosystem. The Aeneas Liquidity Program is Phase II of its $300m Viridis Fund. “Its goal is singular yet ambitious: to bootstrap all three pillars simultaneously”
Robust bridges for newcomers and migrants.
AMM DEXs for aspiring traders and merchants.
A borrowing & lending architecture for capital efficiency and commerce.
This liquidity incentive program is going to have massive effect on Algorand’s DeFi TVL. They have the DEXs, the bridges, the borrow/lend financial infrastructure. Now they just have to give it some juice and $300 million is quite a lot of juice. Most analysts estimate that for every $1 spent to boost TVL on other chains has resulted in about $4-10 in actual TVL. If these metrics hold true, Algorand could easily see TVL break a billion or more in 2022.
Is that it?
Certainly not!
In my opinion, I saved the most interesting for last.
Unlocking Algorand Governance liquidity!
As I had mentioned earlier in this article, Algorand has nearly $3 billion devoted to its governance program. This is $3 billion that could be boosting its TVL! If Algorand’s TVL were $3 billion higher today, it would be number 9 on the list of smart contract platforms, in terms of TVL, compared to where it is now at 32. It’s marketcap to TVL ratio would be 1.8 rather than the 46.4 it has now. That’s a complete shift from being seen as “over-valued” by mckap/tvl metrics, to seen as “under-valued” (or close to). That ratio would make Algorand the 4th most under-valued smart contract platform, just by unlocking the money trapped in governance. Only 3 chains would have a better ratio (Luna, Avax, and Tron).
Clearly, unlocking this liquidity is super important. But, how will that be accomplished? One project looking to solve this issue is AlgoGard. AlgoGard is building a borrowing and lending protocol backed by the ALGOs in governance. Essentially, a user can tap into their governance bag by minting a stable coin (GARD) that is backed by their governance bag as collateral. This is genius! It is a fantastic way to unlock that liquidity trapped in the protocol. Soon, users will be able to participate in governance, borrow against that stack, and deploy the borrowed money into various parts of the Algorand ecosystem, like yield farming on yieldly or supplying liquidity to a number of different DEXs. This not only helps to grow the TVL in the Algorand ecosystem, but it also allows Algorand Governors to “double dip”. By this, I mean that users will be able to participate in governance, which is yield bearing, and participate in other yield bearing dApps. AlgoGard has a 3 fold benefit. 1. Allows governors to double dip in yield bearing apps, 2. grows the ecosystem’s TVL, and 3. by proxy, will help to increase the price of the native ALGO. Remember, higher TVL typically results in a higher market cap!
Edit* Algofi is also working to integrate vaults that allow users to borrow against their governance collateral.
Let’s wrap this up nicely! Algorand is a top notch platform that had a rocky start due to some of its novel designs and concepts. The problems? Siloed liquidity in governance, AVM learning curve, no interoperability, low dApp count, low liquidity, etc. The Solutions? Unlocking liquidity trapped in governance through AlgoGard, Reach helping developers launch dApps using less code and an easier language, state proofs + C3 Protocol + Milkomeda + Algomint/Glitter Finance + a $10 million fund bringing interoperability to Algorand, Reach - along with AVM upgrades - allowing for more dApps to be built quickly, and the $300 million Viridis fund bootstrapping dApps & boosting TVL.
It is only a matter of time before Algorand has its “Solana” moment. The next bull cycle, whether it’s this year or next, will be Algorand’s bull cycle.
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