The Algorand Economic Evolution report

Sean Mann

, Massimo Morini

, Michele Treccani

The Algorand Foundation Transparency report published on March 31, 2021, highlighted several evolutionary

dynamics in the economics of the Algorand network - that in the following text we will briey call Algonomics.

The aspects which are relevant to this report are

• A signicant acceleration of the distribution process in the rst part of 2021, based mostly on

an algorithmic element of Algonomics, that is the Acceleration feature of Early Backer vesting.

• The transformation of the rewards system, linked to the shift from Foundation governance to

Community governance, conrmed by the community referendum on July 7, 2021, and becoming

a reality between 2021 and 2022.

• An evolution in the utilization of the Foundation’s resources, to increase the Foundation’s autonomy

as the curator of the much larger Community resources.

In this report we provide further information and analysis about these 3 aspects of Algonomics,

essentially anticipating and explaining the forthcoming update of the Long Term Algo Dynamics (LTAD)

page of our website incorporating these facts. In particular, the Long Term Algo Dynamic, which is the main

economic document on our website, will receive a new, specic role with governance, balancing the power

of choice of the Community with the analytic certainties about the future Algonomics until 2030

given in the LTAD. The structure of the report is as follows, starting from a brief recap

of the main past evolutionary dynamics:

• The Algo Market Evolution So Far

• Algorithmic Vesting Acceleration in practice

• Evolving LTAD with Governance: the example of Rewards

• The current structure of Algo circulating supply

The Algorand

Economic Evolution report

Data Intern

Chief Economist

Head of Market Research and Analytics

The Algo Market Evolution So Far

We start by reporting the chart of Algo supply vs time. The supply chart reminds us of the specic Algo

dynamics: the Algo market started with an initial tiny supply, so that subsequent reward ows,

represented mainly by participation rewards (paid to all holders) and rst-node-runner rewards (paid to the

initial supporters that had invested in the project and committed to run relay nodes), had a disproportionate

inationary impact, as one can see from the price chart further below.

This led to the need to introduce some early reforms to the algonomics. First, participation rewards were

stabilized compared to the initial distribution trend, until market conditions, almost one year later,

allowed them to restart growing.

Secondly, the vesting plan was changed, rst by pausing vesting for several months (EIP-09092019PC

and EIP-10182019), and later (EIP-11252019AF) by introducing a new vesting agreement shifting payments

to node runners to the further future and allowing in return a contingent increase and a possible acceleration,

but the latter only when the market will be sufciently mature for smooth absorption. Maturity here

is measured mainly by market capitalization. The supply chart below shows how indeed vesting acceleration

has been an important part in the growth of supply, particularly in the rst half of 2021, so now is the right

moment for some empirical analysis of acceleration.

Since acceleration is linked to market cap dynamics, we also report the price chart, market cap being just the

product of supply and price. For ease of analysis, we also report in the same chart some important events in

the algonomics, comparing the chart with Bitcoin one. The comparison allows us to appreciate the afnity

but also the differences: the different trends in 2019 2H–2020 1H, the difference in the timing and nature

of the start of trend of 2020 2H–2021 1H.

The growth of the Algo market cap seems to have been, compared to the volatility of the initial boot-

strap period, relatively smooth and non-inationary also during vesting acceleration. In fact, the growth was

relative and not only absolute: the ranking of the Algo market cap in the rst 6 months of 2021, that included

90% of the vesting so far, moved from position 52 to position 32, and if we limited the analysis to blockchains

of the kind existing when the network was launched, the market cap would have moved to the rst 20s.

Correlation analysis conrms a strong correlation with both BTC and ETH, but also that the price dynamics of

the Algo had its own behaviour different from the one of the largest cryptocurrencies. Looking specically at

price correlations from launch, we see this pattern.

The Algo is more correlated with ETH rather than with BTC, which can be understood considering the

importance that smart contracts and DeFi have for both Algorand and Ethereum, and it is not surprising to

see that also the correlation with mainstream nance represented by the Standard & Poor index is very low,

explaining the Algo role in diversication.

Yet, the ne details in correlation can change, see for example the historical trends of monthly correlations

(computed on a 1-month window rolling in time):

S&P BTC ETH ALGO

S&P 100% 29% 28% 26%

BTC 29% 100% 82% 58%

ETH 28% 82% 100% 65%

ALGO 26% 58% 65% 100%

The instabilities we see are quite normal in market time-series when it comes to volatilities and correlations,

but we can see that these short-term correlations, while showing more variability, essentially conrm

the longer term correlations seen above. Correlation analysis will be important also for analyzing vesting

dynamics in the next section.

Algorithmic Acceleration in Practice

In the LTAD, one can see that the initial vesting distribution to Early Backers / Relay Nodes group would have

resulted in a signicant spike in supply between 2019 and 2021, starting when the market was immature:

in fact, all vesting was supposed to happen in the rst two years with a at distribution schedule. As explained

in the Transparency Report that followed the most recent acceleration, in the early days of the Algorand

Blockchain, market analysis showed that vesting was an important element of ination. While history is full

of thousands of forgotten blockchains who disappeared in the initial days due to excess supply related to the

distribution of tokens to initial backers and other structural “whales”, the Algorand community recognized the

importance in ensuring a future for the platform based on the superior technology introduced by Silvio Micali,

and was able to work together to achieve reform.

After EIP-09092019PC and EIP-10182019, suspended vesting were proposed and approved by the

Early Backers themselves, EIP-11252019AF reforming vesting for the long term was proposed by the research

and economic functions of the Foundation as a reform based on input from the community, and approved with

a blockchain vote by the majority of the Early Backers, that accepted a heavy worsening of their conditions:

the EIP spread the distribution from 2 years (with 50% vesting in the rst year and the remaining 50% in the

second year) to 5 years, with the following skewed non-inationary schedule, where percentages refer to the

originally allocated amount of 2.5B Algo, and sum up to 125% where 25% came from contingent rewards.

While the 25% future contingent rewards were devised for compensation of the planned 5 year delay of the

backers’ rewards, a deeper and forward-looking alignment of the interests of the early backers / relay nodes

to those of the ecosystem was both necessary for the agreement and healthy for the ecosystem,

and it took the form of Accelerated contingent vesting.

The goal of the percentages in the above table was to make vesting happen only when the market cap

was sufciently large to absorb this supply without destabilizing or inationary effects. The acceleration

mechanism in the EIP reinforced this feature, by providing that, in the case certain market conditions were

reached, it would accelerate the vesting of these tokens and bring forward the end date of the early backer

program. The purpose of vesting acceleration was to make a faster distribution still possible, as an incentive

to the EB/RN to agree to the contractual change, but only if and when the market conditions could allow it

without inationary effects. Consistent with the original purpose, there was a limited acceleration in 2020,

and a much more signicant acceleration in early 2021, when the Algo market cap was larger and increasing

and a sufciently long time had elapsed since inception. As a result of acceleration, on June 16, essentially

2 years after launch, when the original vesting program was supposed to be completed, around 2BN had

actually been distributed, almost 80% of the original predicted amount, but the distribution was not even

but dynamically executed following a totally automated algorithmic dynamics.

Year 2020 2021 2022 2023 2024

Vesting % 3% 8% 25% 35% 40%

It is possible to see below that volumes have been, in terms of empirical distributions, higher during

acceleration periods, yet it is a moderate effect that may potentially only be due to a spurious effect,

since both volumes and vesting tend to increase during periods of increasing market cap.

Acceleration, while advancing the early backers program by almost two years and increasing strongly the

decentralization of Algo holdings, had a sustainable effect in inationary terms, as proven not only by the fact

that the ranking of the Algo market in the rst 6 months of 2021, that included 90% of the vesting, moved

from position 52 to position 32, but also from the analysis that follows.

We understand that the growth of the market cap depends both on the increase of supply and on the price

dynamics, and that the increase in supply clearly increases the market cap, but we also understand that the

increase in ranking has been possible only because the price dynamics also kept healthy, without nullifying

the supply increase. This is conrmed by the following result regarding the correlation between the amounts

of algo distributed through vesting acceleration and the price.

While the happening of vesting does bring the correlation between price and vesting into negative territory,

since more supply always means more potential inationary pressure, this negative correlation remains

limited to the range between -5% and -10%, and the effect seems to be limited to the rst few days,

with correlation going back to be indistinguishable from 0 after around 10 days. Extending the correlation

analysis to a longer range risks being dominated by spurious effects. It is not difcult to interpret these

dynamics based on the acceleration maths and what we know about basic blockchain economics.

The value of the blockchain progenitor Bitcoin has always been linked both to the attraction that the

technological promise exerts on new participants entering the ecosystem by buying the cryptocurrency,

and to the loyalty of the existing holders, that are called hodlers, with reference to an episode of extreme

loyalty of a holder. Loyalty is based on technical, sentimental and ideological reasons, that are never irrelevant

even in traditional nance and probably particularly strong in these days – like the Game Stop case reveals

– but also on more genuine economic reasons, that for Bitcoin node runners are even the foundation of the

security of the Bitcoin PoW consensus algorithm. In fact, apart from the technical aspects of mining,

the economic effect is that miners invest an enormous and ecologically dramatic amount of resources in

Bitcoin production, so that the economic sustainability of their activity is preserved only by Bitcoin keeping

its value, with the effect that, while being the “whales’’ that earn all the newly distributed digital BTC units

and that could easily dollarize an enormous fortune by dumping Bitcoin in the market, miners tend to remain

committed to the currency, both technically by performing correctly their node running role and economically

by holding the most part of their gains.

Proof-of-stake itself is built on the same economic, skin-in-the-game incentive logic, but with the crucial

innovation of avoiding the enormous waste of resources associated to mining: the largest holders are

supposed to have the strongest loyalty and guarantee the best execution of node running services even

without introducing an external resource consumption. A meaningful criticism to proof-of-stake is the

following: liquidating the token holdings of PoS is relatively easier than liquidating the external hardware

investments of PoW, making PoS more subject to node runners turning malicious one instant before

liquidating. This potential weakness can be addressed in several ways. First of all, really massive stakes

are not easy to liquidate, which exemplies a fact visible in all blockchains: the importance of a balance

between the advantages of granular decentralization and those of the presence of larger and more heavily

committed holders. Secondly, various forms of locking commitments can easily be enforced for node runners

in the reality of blockchain self-executing smart contracts. In a sense, delaying vesting compensation

and skewing it towards the future serves the same purpose, and chaining any anticipation to signicant

improvements of the global blockchain value can even work as a reinforcement mechanism. A further analogy

between this mechanism and other more traditional blockchains is the algorithmic nature, subtracting it from

the changing views of human “monetary policies”, particularly when an effective decentralization is achieved.

The same fundamental tokenomic topics of decentralization of decisions, sustainable distribution, the balance

between LTAD predictability and community and market interaction, and incentives to signicant committed

holders, are all going to be the center of the next section as well, covering a specic new feature of the

Algonomics: Community Governance.

Evolving the LTAD with Governance: the example of Rewards

The LTAD can be considered the beginning of the second phase of Algonomics. After an initial phase when

Algonomics had to be reactive to the actual deviations from initial expectations, once a certain maturity was

reached it became possible to commit to dening a longer-term precise distribution, at least in terms of

expected ows, as done in the LTAD. Algonomics has beneted from this decrease of uncertainty, like most

blockchains, starting from Bitcoin, benet from a partially predictable future distribution, ensuring a certain

trend of scarcity rather than ination, and freeing them, indeed, from the changing views of human “monetary

policies”. At times, there is a confusion when we speak of the advantages of decentralization in blockchain:

in generalist media parlance, decentralization often refers to a system where everyone has the power to

decide for the community; in specialized blockchain or regulatory parlance, decentralization often means

a system where no one has the power to decide for the community, protecting community resources from

being abused by the interests of a single group or entity. Most virtuous realities are often a blend of these

two concepts, and this is the path Algorand has set itself upon starting from Silvio Micali’s governance blog

contribution, one of the elements that sparked the development of the LTAD.

Clearly, the LTAD ows are expected ows. As we explained at the end of the original LTAD plan,

some elements inuencing future distribution, like vesting algorithmic dynamics or contingent rewards,

could not be planned and could alter predictable ows. Additionally, if community Governance was going to

be introduced, any dened long-term plan would be subject to potential changes voted by Governors.

The rst possible deviation became a reality in the rst half of 2021, while the second possible deviation

has become a reality for the immediate future with the approval of the Governance referendum in June 2021.

Balancing between the advantages of a more distributed and transparent decision making system and the

advantages of a reliable long term scarcity path is crucial for an evolving blockchain.

We can consider Governance to be the third phase of Algonomics: letting the holders take increasing

responsibility. We believe this can improve quality and transparency of decision-making. We also know that,

if Governance was designed in such a way that any ephemeral slight majority in Governance could disrupt

any reliability in algonomics, with unexpected dumping of community resources, the community would

suffer dramatic consequences. The risk of such a moral hazard is highest when the Governors have to take a

decision about their own rewards, like in every case when a group can decide their future own personal wealth

potentially at the expense of the wealth of the whole community, while having the right to earn freedom from

any accountability just by forfeiting a small additional incentive. In order to avoid such a behaviour,

Governors need to prove willingness to increase commitment and skin in the game. When Algorand

Community governance starts in Q4 2021, the initial economic commitment to be governor is relatively mild,

at a level to which we attributed a 10% difculty score: rather than being locked by smart contracts, they only

lose 3 months of rewards in case of early liquidation. However, if the governors want to move to a level of

distribution signicantly higher than the LTAD long-term sustainable distribution, they will have to show they

are even more ready to stand the possible inationary consequences of their choice.

This allows Governors in Algorand to have the right to decide on their own rewards without the network being

put at risk by the potential moral hazard involved in this choice. The announcement of the rst governance

rewards in June 2021 indicated a path for the preservation of the community AERP structure. Governors will

have the option to vote if they want to keep the distribution within a lower bound of the range modelled by the

LTAD, while keeping the same mild Governance commitment rules set at inception, or to increase the rewards

above what planned by LTAD for that period, but only together with strengthening of the requirements in

terms of locking and commitment. Not only this contrasts strongly with the moral hazard risk, it also serves

the fundamental anti-inationary, economic aim of balancing more supply distributed to the Governors with

more long term holding commitment on the Governors’ side.

Above we see, specically for Rewards, an example of what the LTAD curve of expected distribution will

become. The blue line is the initial LTAD expected reward distribution published in 2020. The black line

is the LTAD distribution revised after 2021’s algorithmic acceleration, to align reward growth with supply

growth (anticipating scarcity by adding to 2021 and 2022 reward resources taken evenly from the

subsequent 3 years). After the Governors vote on Rewards in the fourth quarter of 2021, the line opens to

an area of possible scenarios, which, compared to the expected black line, can get to more saving on rewards

decided by governors, but also to more distribution if a higher commitment is voted by the Governors at the

same time. The plot is a simplifying synthesis of the following simulation of realistic Governor choices

about rewards.

We simulate under the hypothesis that Governors will have binomial choices to increase or reduce rewards,

and that the possible increase is higher than the possible decrease. Yet, all choices result in a sustainable

evolution. Early reward acceleration will lead to some automatic saving later on, instead early reward savings

may even allow the Governors to extend the current rewards system beyond 2029. None of the

Governor choices will impact the total supply or the AERP fair distribution in any of the 1024

possible scenarios simulated.

Every choice of increasing rewards will also increase difculty, so that the future commitment evolution

can be simulated by showing the possible difculty scenarios. The size of the node dots in the chart below

indicate how many times a given state can be achieved in the future: larger nodes can be reached by various

combinations of future choices, while smaller nodes can only be achieved by extreme choices such as always

increasing or always decreasing rewards, within the supply and sustainability constraints.

Dening difculty in the future will also be a Governors responsibility. For the time being, we are working

under the minimal hypothesis below regarding commitment and difculty. It is obvious that different

combinations of commitment time or withdrawal restrictions can lead to equivalent sustainable structures,

and also that there are several economic improvements, such as introducing overlapping governance periods,

which are beyond the list below.

For other categories in the AERP, there is not the same level of moral hazard involved in votes to self-attribute

resources, thus Governors will be able to decide on supply without any additional commitment. Yet the same

approach to maintain sustainability through mean reversion will apply, so that choice will be within a range

from the long term sustainable dynamic originally shown in the LTAD.

The role of Governors commitment as a guarantee that governors are properly incentivized to act in the

interest of the community, will emerge also when in the future community proposals will be dened to set

votes on potentially mean-diverging deviations from expected distribution. Compared to voting on predened

measures, deciding the measures to vote upon will require a “stronger than usual” commitment and difculty.

Difculty Level Commitment

10% 3m rewards lost upon withdrawals

20% slashing by an amount = to 3m rewards

30% slashing by 2×3m rewards

40% smart contract locking for 3 months

50% smart contract locking for 6 months

60% smart contract locking for 9 months

70% smart contract locking for 1Y

80% 1Y locking + running K nodes

90% 1Y locking + running 2×K nodes

Any decision that can bring a long-term large variation to the algonomics can only be taken by players

that ensure an equally long-term commitment to share the economic consequences of Governance choices.

The willingness to share the economic consequences of a choice is the only incentive mechanism

guaranteeing a decentralization from massive transient attackers. One possible way to balance the power

to deviate from a predictable path, is to let this decision-power build along the years for the most loyal

and committed governors, recognizing loyalty/commitment in a (probably non-fungible) tokenized form.

The guarantee of a long-term commitment will align the interest of the decision maker with the long

term interest of the ecosystem. The presence of incentives to long-term locking, together with the above

strengthening of commitment, will be very important to reduce further any opportunistic behaviour.

The current structure of Algo supply

In the latest transparency report, which so far has been approximately semiannual but that will become

quarterly when governance kicks in (to align with governance periods), we have introduced a few updates

to the composition of Algo funds. They were all implemented to achieve the goal of making the Foundation

the only autonomous non-prot curator of the Algo ecosystem.

One update given in the transparency report is the transfer of the fund for Protocol Development

to Algorand Inc, a nal step in severing economic links between the Foundation and Algorand inc.

This has allowed the Foundation to be fully fostering a diversied and decentralized contribution

to the Algorand protocol, smart contracts and services. In the meanwhile Algorand Inc has developed

as a software company aiming to spread the best blockchain technology to different partners, with an

enduring focus on the development of the protocol among other core activities that are regularly and

transparently reported. A trend that has made Algorand Inc one player among many committed players

in the ecosystem, important but equally separate from the many institutional roles of the Foundation.

The institutional roles of foundations are also the reason for the more precise denition of the Foundation

500M Algo resources as separate from the Community AERP 3.2B Algo funds. The AERP funds are locked

for the community and their future release outlined in the LTAD plan will be managed by the decisions

of Governors within the Governance process. The Foundation 500M Algo Resources will be used for the

independence and autonomy of the Foundation and of the Foundation activities, as the steward of the Algo

ecosystem, including a sustainable generation of income.

We all know that a blockchain project is not a company that has to “make money”, since blockchains have the

unique mission of “making money” in a deeper sense: creating, indeed, the money of the future world. Digital

currencies which are decentralized and whose working (accounts, transactions, nancial agreements) rely on

appropriate technology (cryptography, consensus, smart contracts) and not on a plethora of intermediaries

(banks, payment processors, lawyers) still implementing a business model designed in the renaissance. In this

process, blockchain steward entities can generate the resources for their sustainability, through the smooth,

long-term and responsible distribution of a small part of the resources, but the diversication of the funding

sources is an element of resilience.

A clear plan for sustainability assures the community that the functions of support to the ecosystem

development be available until needed. The Foundation will not participate directly in governance with its own

Algo resources, never receiving direct network rewards. The distribution of the AERP funds In Governance

can partially contribute to sustainability, by delegation revenues or by the AERP funds themselves generating

minimal fees for management and guarantees provided by the Foundation when decision-making is passed

to Governors. In order to fully support the Foundation activities, the Foundation 500M own resources will

include a fraction of internally managed investments for funding purposes, subject to strict and transparent

risk-management requirements, and another part of Algos transferred to external entities that will use these

resources for a diversied activity, autonomous but focused on the Algo nascent De-Fi and NFT markets and

nancial products.

This will maintain and grow resources to support the ecosystem for the remaining part of the full distribution

plan outlined in the LTAD, and until Community Governors will be the only governing entities.