Critical conclusions from the “Report on the State of the Algorand Economy”

Conclusion 1: The Algo distribution process produces excessive dilution and inflation effects that may impair the economic stability of the ecosystem. More sustained and comprehensive measures are needed to maintain stability and balanced growth. Strategic actions will be taken from both supply and demand to promote the long-term development of the Algorand economy.

Conclusion 2: The Algorand Foundation’s suspension of node release awards does have an impact on changing the existing supply on the market. Algo Market issued 3.2 million Algos per day as a node reward before the suspension of Algo’s release of the award. Algo’s performance is usually lower than the overall market, except for the Algorand Foundation’s repurchase action, which temporarily reduced the available supply. After the announcement of the suspension, Algo’s movements immediately aligned with the market. The original release ratio led to an underestimation of Algo’s market behaviour. Effective market performance can only be restored if the daily cashing impact on supply is significantly reduced.

Conclusion 3: Algorand’s only way to achieve a non-speculative, borderless economic goal is to eliminate the “technical” imbalance of supply and demand. The most relevant evidence is a downward trend compared to the reference cryptocurrency market, which empirically seems to be related to the generation of oversupply. IThistrend will only disappear when supply and output are reduced. The estimated annualized volatility during the pre-suspension release period is close to 150%. The annualized valuation after the suspension of the redemption was 82%, still higher than expected, but ultimately consistent with the cryptocurrency market. This stable benign process is the basis for Algo’s commitment to its utility and application. EAC will recommend long-term reforms in its conclusions to avoid stifling this stable benign process that has just entered.

Conclusion 4: The release of relay nodes has been the most important source of supply on the Algo market. However, it is not unique. Another source of supply is “Participation rewards.” This supply has been considered excessive and has been reduced by the suspension of auctions and the release of a period. If Algorand wants to adopt a holistic approach to addressing supply imbalances, participation rewards need to be reduced, at least proportionally. This does not require a change in the total amount invested in these awards. However, it needs to fundamentally change its overall distribution over time.

Conclusion 5: The market reacts strongly to the current actual supply and expected short- and medium-term expectations. EAC recommends not assigning a fixed bonus to everyone, as it will increase Algorand’s perceived structural inflation resulting in excess supply. In the future, Algorand will introduce additional incentives to ensure long-term infrastructure support and health. It’s time to move from the original approach to a sustainable long-term approach in which reward pools are used as incentives for beneficial behaviours in blockchain development, such as committing Stake Algos overtime to participate in consensus. Different rewards for participants based on their commitment to ecosystem health have always been a successful strategy in the blockchain because, in the long run, community commitment must be the only one in a truly decentralized economy.

Conclusion 6: An indefinite pause in auctions will harm demand dynamics, which is another fundamental variable in Algorand’s future economy. It is wise for the Algorand Foundation to suspend the auction after the first auction because they avoid exacerbating the oversupply for the first three months. However, this is an option that cannot be continued. The indefinite suspension of this commitment will harm demand dynamics, which is another fundamental variable in Algorand’s future economy. EAC believes that Algorand should not aim at price increases, but should aim at market value growth. The size of the market is very important for the security and decentralization of the blockchain. This applies in particular to blockchains like Algorand, which have the ambition to provide important distributed services for financial and industrial companies. Such a business needs to be protected by a network of economies of scale compared to the scale of the business it maintains. We have seen that even after some measures have been taken to make this situation sustainable, there is still expected growth in the supply of Algorand. This sustainable supply growth must be aligned with sustainable demand growth, to create a stable market and expand market capital. This requires some specific commitment. Breaking the vicious circle of oversupply and negative bias compared to the reference market trend are prerequisites for demand.

In summary, this report analyzes market trends since Algorand went live. Evidence suggests that node rewards will be redistributed over time. These rewards are now suspended. When the supply is restored, the goal of stabilizing the market requires them to adjust so that the total supply inflow is still significantly lower than the supply inflow before the suspension. The goal should be to achieve stability and to make the supply grow more slowly before recovering a higher amount of release. Similar reasoning also applies to participation rewards. Besides, it seems that it is time to more closely link these rewards to the ecosystem-friendly behaviours of the current state, such as active participation. At the same time, according to the Algorand Foundation’s analysis, if the supply is increased again in the short term, keeping it even higher before the suspension will lead to another strong devaluation. The Algorand Foundation showed a zero-tolerance attitude towards another phase of depreciation.