As a new member of the Algorand Economic Advisory Committee (EAC), I want to take a few moments to step back and clearly describe to all participants in the Algorand ecosystem:

The goals of the EAC;

What we’ve learned since launching the network five weeks ago;

The different mechanisms that affect the token supply in the Algorand economy;

How we will manage those mechanisms.

The Algorand Foundation’s mission is to promote the long-term success of the public blockchain network and the Algo token. Now that we’ve launched the platform, we are focused on the growth of a decentralized ecosystem where users participate in consensus and in the development of use cases and applications. Our goals at the EAC are to introduce mechanisms that encourage participation in the consensus protocol, establish a well functioning market for Algos, and promote sustainable growth of the ecosystem.

These long-term goals require making adjustments as we learn more about the market and adoption of the platform. We will regularly share our observations with the community. In this first post we would like to provide more insight into what we have observed since launch and the steps we are taking to encourage behaviours aligned with long term value creation.

What we have learned

There are still many questions about our token supply, and about how the economics of our system work. Our summary of those questions are as follows:

Why are Algos important to the network?

How do Algos enter circulation?

How is balance maintained between Algos transacting vs Algos earning rewards and supporting consensus?

How many Algos are on the market?

Where are the founders’ rewards? and

What can we expect going forward?

Why are Algos important to the network?

Algorand is a public, permissionless, pure proof of stake network. It was designed from first principles and the code was written from the ground up. In Algorand, the security of the network is derived from users participating in the consensus protocol (which is different than in a proof of work type system which relies on miners to secure the network). Ensuring that tokens are participating in consensus, and doing so across many different users supports both security and decentralization.

Part of the Algorand Foundation’s responsibility is to promote the early safety and security of the network. One of the ways it is doing this is by keeping its tokens online and participating.

How do Algos enter circulation?

I. Token Sales

One source of new Algos into the economy is via token sales by the Algorand Foundation. The first token sale event was the auction conducted on June 19th. The Foundation may also use different mechanisms to sell tokens into the market over time. We currently have 3B Algos reserved for token sales which represents 30% of total supply.

We will introduce new Algos into the market taking into account market dynamics and the needs of the ecosystem, rather than simply running a regular stream of auctions until the supply runs out. As such, it will not be bound to a specific schedule.

Regular updates will be provided by the EAC on its view as to whether additional tokens are required in the near term.

The EAC is not advising any further token sales in Q3 2019.

One of the goals of the auction was to have the market determine the price for the Algos in a fair and transparent way, and also to encourage new users to participate in the protocol with limited financial risk by offering a Refund Policy.

Our first auction released 25M Algos and raised over $60M in less than four hours. The Foundation welcomed this support and looks forward to using the fraction of the funds that are available to the Foundation, in accordance with our Refund Policy, to help promote the success of the project. At the same time, this first injection of Algos into the economy led to some challenges in pursuit of economic equilibrium.

The auction price included the value of the token and the value of the refund policy. This l element may have made price discovery more difficult and may have increased pressure and volatility in the market. We will attempt to correct for this in subsequent auctions in an effort to reduce undesirable outcomes in price discovery and market dynamics. The refund policy may be adjusted in future auctions.

II. Relay node rewards

In order to maximize the Algorand network’s liveness and security, a diverse group of initial node runners including investors, universities, and other research institutions volunteered to support the network prior to launch. These nodes help boost throughput in the network while also helping us work responsibly towards our goal of true decentralization. These groups also help build applications on the Algorand network and conduct research that furthers the Algorand protocol and field of cryptography in general.

For their contribution, an initial rewards pool of 2.5B Algos was created to ensure proper incentive to support early liveness of the network. The total number of rewards earned by node runners is 3.2M daily on average. More than 50% of the Algos earned by the node runners are kept online by their nodes and are participating in the consensus protocol.

It is important to note that having money online and supporting liveness of the network is a critical component of the Algorand protocol. However, some of the tokens earned by node runners have contributed to selling pressure in the secondary market.

In response to this, the Foundation is considering incentives to increase the number of Algos held for long-term staking by introducing higher rewards for participants willing to lock tokens for various lengths of time.

This will support both the goal of improving secondary market dynamics while also ensuring that additional tokens continue to come online to support the protocol and decentralization.

III. Participation rewards

Every Algo holder currently earns a number of rewards proportional to their stake. These rewards are designed to drive participation in our ecosystem and accelerate our path to decentralization. Moreover, we want to use these incentives to pursue the broader goals of the community and economic stability.

These rewards slowly introduce more Algos into the ecosystem. Specifically, 10M Algos were distributed in the first 500K blocks (about one month’s worth) since network launch, and 13M are being distributed in the next set of 500K blocks. For more specifics, look at Foundation’s Token Dynamics content and the rewards program technical overview and FAQ.

While the release schedule and total number of rewards across the first twelve 500K-block periods have already been specified and will not change, the Foundation continues to reserve the right to update the distribution of these rewards across users in the future. Our goal with these rewards is to incentivize node participation and market stability. The staking program will be one first example.

Where are the Founders’ Rewards?

There have been a number of questions about the 2.5B Algos reserved for the Algorand Foundation and Algorand, Inc.

The 2B tokens held by Algorand, Inc., its public keys, and its statement of use of those tokens can be found here.

The 500M tokens held by the Algorand foundation, its wallets, and statement of use of those tokens can be found here.

A remark on technology and ecosystem building

We have discussed the economic observations related to launch and the first auction. At the same time, it is important to reiterate our technical success: the underlying blockchain developed by Silvio Micali and operationalized by the Algorand team has functioned without interruption (no stalls, no outages) with blocks averaging <4.5 seconds and with the capacity to handle over 1000 transactions per second.

The fact that Algorand has launched a platform based on new technology developed from first principles and has solved the blockchain trilemma of scalability, security, and decentralization bodes well for the applications and economic systems built on top of the Algorand blockchain.

The technology used by the Foundation can also be used by anyone else for tokenizing any asset they want, with transparency and at scale. Those who tokenize assets using the Algorand blockchain will be assured of having a truly decentralized blockchain, which no one can censor.

We will continue to build the technology to enable development and adoption of decentralized financial assets and instruments to form the backbone of the borderless economy.

State of the Economy report

In order to provide better transparency into the Algorand ecosystem, the Foundation will be releasing a “State of the Economy” report on a regular and ongoing basis. The purpose is always to help the Algorand community better understand changes to the ecosystem in the time between reports. Specifically, the posts will provide economic detail and information on subjects such as:

The EAC’s view on the need for token sale events, including any auctions that occurred or are planned;

Any updates to the participation reward mechanism or other incentives as they are released;

Other key indicators that will help the community understand the market;

The price of the Algo relative to other assets and related economic analysis.

Other significant updates in the ecosystem will also be examined, as well as any new proposals from the Economic Committee. These reports will be published on the Foundation website.

Thank you

I hope that this post helps clarify some of the dynamics in the Algorand economy. I look forward to continue working with the rest of the Economic Advisory Committee and the Foundation as a whole in our support of the Algorand ecosystem. Lastly, I want to extend a thank you to all members of the Algorand community and your continued support of the project.

Massimo Morini

Economic Advisory Committee, Algorand Foundation

Massimo is a member of the Algorand Foundation's Economic Advisory Committee and also serves as head of Rates and Credit Modelling, and Coordinator of Model Research, at IMI bank. He is Professor of Fixed Income at Bocconi University and teaches Blockchain and Cryptocurrencies at Swiss Finance Institute Lugano. He has been Advisor and Trainer at the World Bank, the Monetary Authority of Singapore and several private and public financial institutions. He published several quantitative papers and is author of the seminal books Understanding and Managing Model Risk, and Counterparty Credit Risk, Collateral and Funding.

Massimo’s main areas of interest are rates and credit modeling, risk management, and technology-enabled transformation of financial markets. He authored the first articles proposing blockchain and smart contract solutions for financial instruments, often quoted by US regulators. As board member, he headed the Valuation, Collateral & Risk Management working group at R3 blockchain consortium of banks. He led the development of smart contracts for collateralized derivatives with trusted computation on Ethereum. In the field he researches on decentralized financial market infrastructures, layer-two solutions and stability mechanisms, and his work on blockchain featured on Coindesk, Bitcoin Magazine, Harvard Business Review.