From Theory to Practice: Alephium’s Sharding Innovation and Market Potential

Introduction

Alephium is a POW blockchain that employs sharding technology. It has developed a unique sharding technique called Blockflow, which combines the UTXO model, DAG, and sharding technology, creating the first horizontal scalability algorithm that supports single-step cross-shard transactions. Additionally, it has improved the UTXO model into the sUTXO model. Alephium aims to create a scalable blockchain with high throughput and low transaction fees while incorporating the advanced programmability of Ethereum and the reliability and security of Bitcoin, thus building a “scalable Bitcoin with reliable smart contract solutions.” In August 2024, the mining manufacturer Bitmain announced the launch of the first Alephium miner, bringing Alephium back into the market’s spotlight.

Project Basic Information

Basic Information

• Website: https://alephium.org/
• Twitter: https://x.com/alephium, 41,000 followers
• Discord: https://discord.com/invite/XC5JaaDT7z
• Telegram: https://t.me/alephiumgroup
• White Paper: https://github.com/alephium/white-paper/blob/master/alephium.pdf
• Launch Date: The token was launched in 2021.

Project Team

Core Team

Funding Situation

Alephium has raised approximately $3.6 million through a round of funding. Seed Round In September 2021, Alephium initiated a pre-sale, led by Alphemy Capital, with participation from White Paper Capital and Archery Blockchain, part of which was for individual purchases.

From the specific funding situation, it can be observed that Alephium did not receive investment from top industry institutions, and the relatively small funding amount has had a certain impact on its future development.

Development Strength

Alephium was initiated in 2019, founded by co-founder Cheng Wang. Key events in the project’s development are summarized in the table below:

From Alephium’s development roadmap, it is evident that the team has consistently delivered timely upgrades and new features, showcasing their technical development capability.

Operating Model

In decentralized currency systems using UTXO, there is often a large number of UTXOs (unspent transaction outputs). Each UTXO lacks successors in the flow graph, making them susceptible to tampering by attackers. In blockchain technology, especially in single-chain methods, this transaction flow is flattened into a single transaction chain, leading to output dependencies for each transaction. While such systems are straightforward to implement and easy to verify for security, they introduce excessive dependencies in transactions, enforcing a total order that only forms a partial order in reality. The primary drawback of fully ordered transactions is that it discourages parallel transaction confirmations, reducing throughput and increasing overall system latency. Alephium employs an innovative sharding technology called Blockflow, where all users are divided into G independent groups. For every i, j ∈ G, there exists a transaction shard containing all transactions from group i to group j, resulting in G × G transaction shards. In Alephium’s cryptocurrency system, each transaction shard is structured as a blockchain to ensure complete ordering among transactions within the same shard. Transactions in different shards can be submitted in parallel as long as the sequence does not violate fundamental dependencies in the transaction flow graph. Alephium uses PoW to achieve finality across all shards, although any other finality algorithm can be adjusted to work with Blockflow.

The scalable UTXO model (sUTXO) adopted by Alephium applies traditional UTXO transaction models to its sharding mechanism. For instance, if Alice (address i) has a UTXO of 100 coins and wants to send 90 coins to Bob (address j), this results in two new UTXOs: one for Bob and one for Alice containing the remainder. If Alice is in group i and Bob in group j, two methods exist to create the transaction. Alice can use her current address as the new UTXO or use a new address in group j. For privacy and security reasons, using a new address is advisable. This sharded UTXO model allows all transactions to be divided into G × G shards. Therefore, the consensus algorithm in Blockflow comprises G × G chains, with each chain responsible for a transaction shard. For simplicity, Chaini;j represents the chain consisting of transactions from Gi to Gj. Chaini;j depends on transactions in Chaink;i for all k ∈ G, as a result of the UTXO model. Users in group i only need to download data from Chainj;i for all j ∈ G and Chaini;k for all k ∈ G to know all relevant transactions. For each user, this means 2G−1 chains instead of all G × G chains, enhancing the scalability of the Blockflow algorithm as each user handles only a portion of the overall network data. Blocks from different chains can be submitted in parallel, making mining more efficient.

Source: Alephium White Paper

In summary, Alephium’s unique sharding model, Blockflow, utilizes a scalable UTXO model in conjunction with DAG and sharding technology, making it the first algorithm to support single-step cross-shard transactions for horizontal scalability. This innovative design allows Alephium to achieve breakthrough advancements in the blockchain space, providing users with efficient and secure transaction experiences. Through Blockflow, Alephium effectively addresses the slow transaction speeds and low throughput common in traditional blockchain systems.

Introduction to Alephium’s Innovative Technologies

1. Blockflow: Blockflow is the first UTXO-based sharding model, combining sUTXO, DAG, and sharding technology. Its native single-step cross-shard transactions ensure efficiency akin to single-chain blockchains while distributing transaction loads among nodes. Following the Rhône upgrade in June 2024, Alephium reduced block time to 16 seconds, theoretically achieving TPS of 10,000, significantly surpassing the previous 400 TPS.
2. PoLW Consensus (Proof of Less Work): Alephium adjusts traditional proof of work to achieve similar security levels through a less energy-intensive consensus mechanism. Miners must burn ALPH tokens to confirm blocks and solve hash problems, resulting in an 87% reduction in energy consumption during mining.
3. sUTXO (Stateful UTXO): The sUTXO model merges mutable and immutable states in blockchain technology, combining the security of Bitcoin’s UTXO model with the flexibility of Ethereum’s account model to support smart contracts. This grants Bitcoin’s UTXO model enhanced scalability, allowing projects on its chain to truly function as DApps.
4. Alphred: Alphred is Alephium’s virtual machine based on the sUTXO model. It features an advanced stack virtual machine design, making contract code smaller, gas usage lower, and execution more efficient. This allows developers to focus more on business logic rather than bug fixing or performance optimization. Alphred significantly improves security by preventing asset reentrancy attacks and disallowing flash loans, while its new APS system requires instant asset approval and simplifies user operations.

Alephium integrates the PoLW consensus, Blockflow sharding model, and sUTXO model to combine the security, immutability of Bitcoin with the flexibility and scalability of Ethereum, innovating within blockchain technology. By addressing the scalability trilemma without sacrificing decentralization, Alephium provides users and developers with high security and scalability.

Innovations Compared to Similar Projects

Alephium is fundamentally a POW public chain, competing against projects like FLUX, KAS, and CKB.

1. Programmable Gas-Free Transactions: Alephium introduced programmable gas-free transactions, allowing users to interact with dApps without holding ALPH tokens. Smart contracts can pay for transaction fees through a new virtual machine instruction called PayForGas, enhancing user experience and enabling various fee structures.
2. Reduced On-Chain Storage Costs: The Rhône upgrade reduced contract storage fees by 90%, from $1 ALPH to $0.1 ALPH, facilitating the deployment of more smart contracts, particularly beneficial for NFT collections.
3. Combining Sharding with UTXO Model: Alephium employs BlockFlow’s sharding algorithm to enhance BTC’s UTXO model for scalability. Using DAG data structures allows for consensus across different shards, theoretically enabling up to 10,000 TPS, far exceeding Bitcoin’s 7 TPS and Ethereum’s 27 TPS.
4. Proprietary Virtual Machine (Alphred): The Alphred virtual machine, tailored for Alephium’s blockchain, reduces contract code size and gas usage, improving efficiency and user-friendliness for developers, thus facilitating large-scale DeFi projects.
5. Adoption of PoLW Consensus: Alephium integrates token economics into traditional POW, creating the PoLW consensus mechanism, optimizing resource use and reducing network energy consumption by 87%.
6. Support for NFTs: Alephium enables NFT creation, increasing usability for tokenizing assets like collectibles and in-game items, allowing users to verify and explore NFTs via a blockchain explorer without third-party involvement.

In summary, Alephium offers low gas fees, low storage costs, low energy consumption, and high performance compared to other POW public chains. By utilizing PoLW consensus, BlockFlow, and Alphred, Alephium merges Bitcoin’s security and immutability with Ethereum’s flexibility and scalability, providing substantial conveniences for on-chain users and project developers.

Project Model

Business Model

Alephium is a POW public blockchain, and its economic model comprises three roles: miners, application developers, and blockchain application users.

• Miners: Miners are the maintainers of network security and normal operation. Alephium miners protect the network by using specialized mining machines to comply with the PoLW consensus mechanism. While mining, they must also consume a certain proportion of ALPH tokens. The PoLW consensus allows miners’ operational costs to remain stable while reducing energy requirements. Therefore, miners need both mining equipment and a sufficient amount of ALPH tokens to mine effectively.
• Application Developers: As a public blockchain project, it is crucial for Alephium to have a sufficient number of projects and users participating in its ecosystem. Based on Alephium’s characteristics, it is more suited for widespread use in DeFi, projects sensitive to transaction fees that require frequent interactions, and NFT projects.
• Blockchain Application Users: The gas fees paid by users or project parties on the Alephium network are the primary source of revenue for Alephium.

From the above analysis, Alephium’s revenue sources are:

• Gas fees paid by application developers and storage users.

Token Model

According to the white paper, the total supply of ALPH is 1 billion, with 86% allocated for miners, expected to be fully mined within 82 years after the mainnet launch. The remaining 14% is allocated for ecosystem development, sales, team, and financial distribution. Currently, the circulating supply of ALPH is 87,610,963, with a total supply of 202,300,884, resulting in a circulation rate of 20.23%.

There is no halving mechanism set during the mining process, but block rewards will be dynamically adjusted based on network hash rate and timestamp. Currently, rewards are mainly determined based on time, meaning the reward amount gradually decreases linearly and will then stabilize.

The distribution of the remaining 14% of tokens is as follows:

Token Empowerment of ALPH

According to the white paper, the uses of the ALPH token in Alephium are as follows:

1. Miner Rewards: Miners on the network receive ALPH tokens for mining new blocks, which requires them to maintain the security consensus of the Alephium blockchain.
2. Mining Consumption: Miners must consume a certain amount of ALPH tokens while contributing computational power for mining.
3. Contract Storage Rent: Each smart contract on the Alephium blockchain requires 0.1 ALPH as storage rent.
4. Transaction Fees: Users conducting transactions on the blockchain must pay transaction fees in ALPH tokens.

Value Assessment of ALPH

The ALPH token exhibits a deflationary effect within the Alephium blockchain, characterized by three mechanisms:

1. All transaction fees on the Alephium chain are burned and do not re-enter supply.
2. Miners must burn a portion of ALPH tokens to activate mining.
3. Each smart contract requires 0.1 ALPH for storage rent, which, while not a burn, effectively reduces the circulating supply.

Advantages and Disadvantages:

While Alephium’s extensive empowerment of the ALPH token is beneficial, it has two drawbacks:

• Lack of Staking Mechanism: Despite integrating aspects of a PoS mechanism, there is no staking system, which reduces control over ALPH’s circulation and diminishes incentives for users to hold the token.
• Dynamic Mining Adjustments: The mining mechanism does not feature a halving schedule but adjusts based on network hash rate and timestamps. This could lead to a negative feedback loop where low interest in the project results in higher token distribution to miners, forcing them to sell tokens to cover mining costs, thereby suppressing the token’s price.

Token Price Performance

ALPH token price trends (Data source: Coingecko)

According to data from CoinGecko, the price of ALPH has increased over 27 times since September 2023, reaching a low of $0.14 and a high of $3.87. Major trading platforms for ALPH include Bitget, Gate, and Uniswap. However, the absence of listings on top-tier exchanges is considered a disadvantage

Market Capitalization

Current Price: $1.69

Circulating Supply: 87,610,963 ALPH

Market Capitalization: $148.51 million

Fully Diluted Valuation (FDV)

• Current Price: $1.69
• Total Supply: 1 billion ALPH
• FDV: $1.69 billion

Daily Trading Volume

ALPH’s daily trading volume is approximately $1.61 million.

ALPH daily trading volume (Data source: Coingecko)

The daily trading volume of ALPH is approximately $1.61 million, with a circulating market cap of about $148.51 million. Although the turnover rate is only 1.08%, which is relatively low, this is mainly due to the recent subdued trading sentiment in the Altcoin market, and ALPH has not garnered significant attention in the market.

Alephium Hashrate

Alephium Hashrate (Data source:https://explorer.alephium.org/)

The chart shows that Alephium’s hashrate has been on an upward trend, indicating that more miners are joining the network. It is expected that Alephium’s hashrate will further increase with the deployment of Bitmain’s ASIC miners.

On-chain transaction volume

Alephium’s daily on-chain transaction volume (Data source:https://explorer.alephium.org/)

The chart shows that Alephium’s on-chain transaction volume is unstable, with significant fluctuations. This indicates that Alephium’s on-chain activities are not very frequent and are greatly influenced by market trends.

New user growth

Daily increase in new users on Alephium (Data source: Dune)

The increase in the number of new users has remained low over the past six months.

Ecosystem Projects

Alephium Ecosystem Projects (Data Source:https://www.alph.land/)

The chart shows that Alephium has a total of 77 ecosystem projects, with the most in the infrastructure category (19 projects) and 15 in the DeFi category. However, the key indicator of ecosystem health — the Total Value Locked (TVL) in DeFi projects — is is only $15.1 million, indicating a very low number of projects. This suggests that Alephium’s ecosystem is still in its early stages of development and lacks well-known projects, with a total number of ecosystem projects being quite limited.

Project Risks

1. Token Mechanism Issues: Alephium’s token mechanism has some drawbacks. On one hand, despite integrating a POS mechanism, it lacks a staking mechanism, reducing the means to control the circulation of ALPH tokens and diminishing the incentives for users to hold them. On the other hand, Alephium’s mining mechanism does not include a halving mechanism; instead, it dynamically adjusts based on network hash rate and timestamps. This means that when network hash power is low, the distribution of tokens increases, while higher hash power results in reduced supply. This design could lead to a positive/negative feedback loop.
2. Lack of Significant Development: Founded in 2019, Alephium has been building its ecosystem since its mainnet launch in 2021. However, there has been little significant development over the past three years. Although various types of projects have been developed within its ecosystem, the number of on-chain users remains low, indicating a lack of user engagement. For a public chain project, the prosperity of its ecosystem directly affects its success.
3. Limited Institutional Investment: Alephium lacks substantial backing from well-established institutional investors and has raised a relatively small amount of funding. This limitation directly impacts the future development of its projects and ecosystem, resulting in fewer quality resources for collaboration.

Summary

Alephium’s unique Blockflow sharding model, utilizing an expandable UTXO model combined with DAG and sharding technology, is the first horizontal scaling algorithm supporting single-step cross-shard transactions. This innovative design enables Alephium to achieve breakthroughs in the blockchain space, providing users with efficient and secure transaction experiences. Through Blockflow, Alephium effectively addresses the slow transaction speeds and low throughput issues found in traditional blockchain systems, marking a significant innovation.

Additionally, Alephium’s token model provides more utility to ALPH compared to other project tokens, creating a favorable deflationary environment. However, the token mechanism has notable issues, such as the absence of a staking mechanism and potential risks of negative feedback loops in controlling token distribution.

Moreover, Alephium’s ecosystem is not thriving, and the project lacks substantial institutional investment, which greatly limits its future development prospects.

In conclusion, while Alephium’s Blockflow sharding model and PoLW consensus mechanism give it a certain advantage within the POW track, its ecosystem development is less than ideal, and the absence of significant funding and institutional support raises concerns about its future growth.