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The Allure and the Very Real Pitfall of Algorand

InvestorPlace - Stock Market News, Stock Advice & Trading Tips While Algorand represents an extraordinary paradigm shift in finance and economics,...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

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You might not agree with anything I say about the financial markets and that’s completely fine. Life is about growing, not necessarily about consensus. That said, when it comes to cryptocurrencies, I’m usually speaking from personal experience. In the case of Algorand (CCC:ALGO-USD), I’ve been through both a bull and bear phase within a matter of months.

A logo for Algorand (ALGO) on a patterned background
Source: Shutterstock

Let me tell you, this is not an easy ride. However, I can also appreciate why Algorand has captured the attention of those seeking to dial up the risk-reward profile of their virtual currency ventures.

Per Coinmarketcap’s succinct definition, “Algorand is a self-sustaining, decentralized, blockchain-based network that supports a wide range of applications. These systems are secure, scalable and efficient, all critical properties for effective applications in the real world.”

On a sexier note, Algorand’s protocol enables the decentralization of previously centralized financial mechanisms, such as the development of crypto exchanges, options markets, synthetic asset applications, non-fungible token platforms and market making. In my opinion, the latter is most compelling for everyday individuals as anyone with an internet connection can help provide liquidity for certain crypto pairing transactions.

Given the broad term decentralized finance, or DeFi for short, this democratized innovation has given next-generation protocols like Algorand a greater purpose. For instance, Bitcoin (CCC:BTC-USD) started life as a peer-to-peer network, a function-specific blockchain. In contrast, Algorand is much more open source, allowing developers to replicate mechanisms that prior to the blockchain were the exclusive domain of banks and other major institutions.

For instance, through the various applications that Algorand (and similar blockchain networks) facilitate, it’s possible for people to earn generous interest payments. From around 3% to 13% annual returns depending on the asset involved, crypto users can profit from the underlying sector without resorting to pure speculation.

Algorand Sounds Too Good to Be True

Recently, El Salvador has been dropping bombshells. First, the country announced that Bitcoin is now legal tender within its borders. Second, the government inked a key partnership with “leading Latin crypto firm Koibanx to implement blockchain technologies.”

Now Koibanx isn’t exactly a household name globally. But the main driver is that the company will build its systems using the Algorand protocol. News of this integration spiked the ALGO price, which turned my personal loss in the coin to a rather healthy profit. Such is the life of a crypto investor.

What adds color to the above high-level developments is that the underlying technologies that undergird Algorand and similar systems helps millions of everyday individuals build wealth. If you’ve been following my work on Bitcoin and other cryptos, you’ll now that I basically bought my house with virtual currencies.

While I’m glad to have largely gotten away from the speculative capital gains component of digital assets, I’ve moved onto the DeFi segment. Unfortunately, I probably won’t have any sexier stories like buying houses with cryptos. However, I’m currently paying my car bill with interest earned through DeFi platforms.

How can this be possible? First, it’s a non-expensive vehicle. Second, when your lowest interest payout is 3% annually and with many stablecoins earning 13%, it’s very possible. Plus, the interest payments that you accrue monthly go back toward your principle (assuming no withdrawals). Therefore, you can accrue quite a bit of cash.

Except that this cash is tied to a speculative investment which could go sour at any time. If the China Evergrande (OTCMKTS:EGRNF) crisis taught us anything, it’s that decentralized never truly means exactly that.

In other words, while the technical protocols of blockchain networks are definitely decentralized, the mass-scale economic value of such always requires a conversion from centralized assets to decentralized.

Enjoy it While it Lasts

If you think about it, even the concept of crypto mining requires a conversion from centralized currency to decentralized. As we all know by now, mining isn’t free. It requires energy. Of course, miners do it because there’s a market value for crypto coins and tokens. And when comes time to pay their utility bills, miners pay in the underlying fiat currency.

But if that market value was zero, believe me, there would be zero incentive for anyone to mine cryptos.

Which brings me back to the China Evergrande crisis: if the stablecoins and other decentralized assets that form the backbone of the crypto economy are themselves backed by commercial paper that is apparently becoming worth less by the day, the whole industry could be facing a doctorate’s thesis in scatology.

That’s the one thing that has always kept me worried about cryptos in general. Yes, the whole idea of decentralization is wonderful and all. But let’s not forget that there’s no native wealth creation involved. Instead, it’s just a distribution from different set of hands to another. And it could all go away in an instant.

On the date of publication, Josh Enomoto held a LONG position in ALGO and BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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