The Monetary Experiment: Algorand

June 17, 2019 Ninos Mansor

We explore the monetary experiment of Algorand, a new cryptocurrency invented by Turing Award winner Silvio Micali. Arrington XRP Capital will be participating in the Algorand economy by running a relay node and bidding in the Algorand Foundation’s dutch auctions.

Algorand brings together bleeding edge cryptography with a clever economic model that bootstraps Algo currency markets. This is a novel development that ties the token and technology to economic incentives that encourage efficient market pricing.

The Algorand Foundation will distribute 30% of Algos through downside-protected dutch auctions. In this world, auctions are akin to monetary policy catalysts, not only circulating tokens, but guiding price discovery both today and in the future. The clever part of this story is that any purchaser can refund their Algos one year after purchase, giving them up to 90% downside protection. This has wide implications for Algo market dynamics.

Algorand’s monetary experiment marries Silvio Micali’s solution to a three decade challenge in distributed systems with lessons from Foreign Currency (FX) trading, options pricing theory and traditional asset management. As these markets mature, we predict that Algo will behave unlike any other cryptocurrency today. Not a stablecoin; but a cryptocurrency whose economic model motivates financial markets to form rational expectations and seek out self-fulfilling equilibrium.

The downside-protection clause also opens up a new world for institutional investors such as family offices or endowments who have not yet ventured into cryptocurrency because of its drawdowns. The simple question for these investors as well as others who hold cash in their cryptocurrency portfolios is thus: Why hold cash when you can hold downside-protected Algos, gaining cryptocurrency exposure without significant downside risk?

Algorand’s economic experiment is unprecedented. It is where macroeconomics meets cryptocurrency; and we believe that it will have wide-ranging implications for cryptocurrency portfolio management, hedging and broader market dynamics.