Evolving Algorand Governance

As we announced last week, the Algorand Foundation intends to bring to a vote in Governance Period G3 (June 2022 voting session), a proposal to evolve governance away from the current focus on just rewarding passive Algo holders.

Starting in G4 (the 3rd quarter of 2022), we intend to grant extra “governance seats” and rewards that favor active participants in the Algorand ecosystem, starting with DeFi participants (and later expanding to other constituencies such as NFT creators, developers, node runners, etc.).

We need feedback from the wider Algorand community as we develop the exact rules that will govern these governance seats and their associated rewards. The feedback that we get will be incorporated into the proposals that will be brought to a governance vote in the June 1st 2022 voting session. From there, changes and modifications to these rules will be brought for vote by the governors before taking effect.

Please use this forum to discuss and give us feedback regarding specific rules. We ask for your guidance on the fundamental questions of who should be considered an “active participant” for the purpose of governance, how to decide if a specific Algorand account belongs to that set, and how many governance seats (and rewards) they should get.

Specifically, for the G4 (Q3 2022) governance period, we intend to have two forms of governance seats: passive Algo holders as we do now, and DeFi participants. Some technical questions that we need to resolve include:

  • How do we identify accounts that participate in DeFi, and how many governance seats they should get?

  • How to reconcile changing participation levels over time? For example, how much weight should be given to a vote that happens sometime in the middle of a governance period, vs. how much to use for calculating rewards at the end of the period.

  • Should we have just a single governance rewards pool that is distributed among all governors, or should each segment have its own rewards pool? (E.g., 50% of the rewards go to DeFi participants and the other 50% to passive Algo holders.)

Below are plausible rules, these are meant as examples to promote discussion, NOT as the final rules that we will use.

  • Algo holders who commit to holding their Algos in their account for [three months], would get [one] governance seat for every Algo they commit.

    We are asking for feedback here, and the parameters are up for discussion. For example, should we modify the three-month period? Should we ditch the commitment altogether and move to a low-watermark system instead? Etc.

  • DeFi projects that average at least [$10M TVL] as listed in DefiLlama would be tasked with providing the Algorand Foundation with a list of active accounts and their balances. These accounts will get [three] governance seats for every Algo-equivalent that they hold (using daily average).

    • Each project will give the Foundation a list just prior to opening each voting session, and another list at the end of the governance period. The voting power of each account will be determined by the former list, and the rewards will be determined by [the minimum] of all these lists.

    Again, the above is just an example, quantities above like the $10M TVL and three seats are of course up for discussion.

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Hi all, this is Michel from C3 Protocol and Rand Labs (AlgoExplorer + MyAlgo).

I wanted to leave a brief note on my opinion as to why this discussion is extremely important.

I believe that the current Algorand Governance tokenomics are materially handicapping the DeFi ecosystem of Algorand. This tokenomics are cannibalizing Algorand’s TVL by creating an extremely high risk free interest rate (9-10% APY) from which the DeFi alternative needs to compete with.

9% might not seam too much, but when taking into account the risk free nature of it (i.e. no smart contract risk, hot wallet risk, etc…) it is a huge floor on a Sharpe ratio basis (Return/Risk ratio). Thus, if institutions where to choose between allocation $ millions into Algorand DeFi, 9% APY with no risk is an extremely better alternative to say 25% APY with smart contract risk and custody risk. Also, remember that the smart contract risk in Algorand is even bigger than other EVM alternatives given how nascent TEAL still is and whales know this.

Therefore, all the Algorand holders are getting inflated to the tune of 280 million new circulating Algos per year to the expense of nothing good but rather direct cannibalization of DeFi and TVL which has been empirically demonstrated to be a leading indicator of price appreciation.

It is for these simple reasons that I believe Algorand Governance should be either shot down all together or drastically modified to change from the current negative incentives cannibalizing Algorand DeFi to positive incentives purely towards DeFi adoption of Algorand. I believe that done right, Governance rewards allocated to DeFi in a fair way can boost the ecosystem to a place where it can compete with other top 5 blockchains. This will be exponentially more effective as many whales and institutional investors won’t want to take the smart contract risk meaning that the APY will be further concentrated into the hands of retail degens who have strong word of mouth from which network effects benefit the most (in comparison to whales/institutions).

Crypto users are constantly seeking APY and it has become the defacto way of acquiring users for blockchains. Therefore, I believe spending 280millon Algos annually towards making users from other ecosystem come and test Algorand’s DeFi and tools by directing those rewards towards boosting APY’s is a much better use of funds and inflation than the current situation.

Happy to hear more thoughts on this.

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I find ICP governance to be very practical for both the foundation and the holders.

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I agree that a 9% relatively risk free return is very difficult for DeFi projects to compete with. However, making drastic changes to the existing infrastructure or doing away with governance itself is something that large exchanges, who hold a lions share of the Algos currently in governance participation, are unlikely to support since they have business models set in place that revolve around the current setup. Along with the community, AF will need to work with these exchanges to find a common ground on pushing forward a proposal that reduces the incentives for simply holding Algo but maybe in a staggered approach.
Maybe something like this:
3 different tiers of governance. 1st tier is your standard 3 month commitment, similar to the status quo except that this tier would be capped at a 3% interest rate (or something comparable to the official Fed rate) with a 1.25 seat bonus for DeFi activity. 2nd tier is a 6 month commitment w/ a DeFi activity bonus of counting 2 seats for every Algo committed. Proposing a middle ground tier between the current 3 month commitment and the xGov year long commitment since that is a pretty significant time gap. 3rd tier would be the xGov year long commitment that overwhelmingly passed last round, only users who have actively engaged in the last few Governance votes (we need official Algorand Governance Participation NFT’s please…) are eligible for this tier. These xGovernors get a DeFi activity bonus of 3 seats for every Algo committed, are able to formulate, evaluate and propose measures to be put to vote, and also share a percentage of the fee revenue generated through the protocol transactions. Quarterly votes on new measures would still apply.

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One concern is the lack of support among dapps for cold storage Currently very difficult to participate in defi if there is no ledger support.

Michel and the foundation make great points for rewarding with compensation and extra votes for those that participate in the defi space.

Two interesting scenarios come to mind.

  1. Rewarding a defi wallet based on the assets held, but this raises the question will the wallet that minted goBTC be treated the same as the one that swapped for goBTC on tinyman?

  2. Rewarding a defi wallet based on the value of the defi assets, but this raises the question of an individual holding lots of LP tokens, clearly participating in defi, but the value may have significantly dropped over the governance period.

Just a few of my initial thoughts.

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+1 to Michel’s comments. I do believe that the exact return might change once we have exhausted the Foundation’s reserves and we start dipping into the FeeSink from the transaction fees, but in the meanwhile DeFi is being affected.

One thing that hasn’t been mentioned here is running a participation node. Accounts that are engaged in consensus are listed as “Online”.

Let me preface this by saying that I do NOT believe that participation node runners should receive rewards for running a node. Silvio has argued this before and it comes down to the fact that the cost is simply too low, the “work” (and hardware required) doesn’t really scale with the Algos staked. We’d be at risk of centralization. (I DO however believe Relay nodes should be rewarded, since running one is very costly. Preferably they should compete with each other to the point that nodes are barely breaking even.)

But I do think if you run a participation node so your account is online while you engage in governance, you should have more of a say. Maybe it should 2x your voting power, or something. This would be a good way to encourage participating in consensus, decentralizing Algorand.

(As always, we need to be careful to do this in such a way that whales dont just split their holdings over many smaller accounts.)

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Governance should always exist as a form of shareholder vote just as regular stocks hold votes. If your holding shares between certain periods, you are eligible.

Now, I agree this isn’t worth much but that is why we have xgov which already passed the vote… this needs to be expanded upon to bring more value to the blockchain as a whole. We do this just like everyone else… staking, and what that means is you must run a participation node. With concerns around defi participation I would concede the longer lock up periods but it is absolutely vital that we start securing and decentralizing the network. We can worry about relay nodes later. They are already paid until a certain date. At some point maybe we make relay nodes another layer of governance with lockups and slashing to incentivize good node running similar to running a validator on ethereum.

So here is what I would like to do as a participant.

  • Have my whole stack backing a participation node. This would be a layer of governance.
  • Participate in governance voting. Same rules as stocks. Small reward.
  • Use something like algofi to do governance so real coins are locked up and receive wrapped tokens to use in defi. Ideally a non permanent loss pool.

I would do all this and be happy with all parts summing up to ~10% apr which anyone can do. This brings much more value than just doing defi rewards or just doing governance. If everyone did this it should count towards TVL and everyone is happy.

Abondoning governance and just handing out money in the form of government subsidies is distasteful and I would avoid at all costs. It only gets messier from here.

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Created this new account, and leaving this comment just as a suggestion : Algo should really take a step back and think about how coherent their brand is… I almost missed the last vote because I never received a notification in my app… plus the app logo changed… plus the app drastically changed ( to pera )… I had thought my account was hacked… No direct communication in advance… No notification… No option to “vote with (majority)” so you don’t lose rewards…

I didn’t even know these forums existed until someone on reddit is linking to them - if you want feedback from the algo community - why can’t I leave this reply right inside the pera app? why didn’t I get a notification that the foundation wants feedback from governors? why was no “Welcome to algorand” email or text or splash page in pera or so on ever happen? Why don’t I know about most of your ecosystem, and why have you put so little emphasis on me ever being welcomed/invited/informed of any of it?

Im constantly told “you have to dyor” and “you have to contribute” and “you have to get informed, get involved” - as if it’s solely my fault that algo feels so fractured in so many ways… Meanwhile, entire counties, entire states, are protesting, rioting even - because someone couldn’t vote - because they didn’t update their drivers license for the last 20 years - and that HAS to be racist…

Anyway - “we are very new” seems to be the overall crypto theme - so many of these issues were never yours to solve in a day - but you really should put more effort into solidifying the “brand” and doing more to get your core community involved further, included better, and informed more meaningfully…

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I am wondering why the governance dapp/smart contract could not read all the smart contracts a user may have opted in to .

. This way, all Algo tokens a governor or xGov holds should count towards governance .

. For any ASAs held, the foundation or through a vote itself, create a whitelist of other tokens that can count towards governance ?

Edit#1: Also note that the high APY is only high due to the number of participating tokens is not high enough. If we automatically count all tokens a user holds in a wallet or locked up in smart contracts then users can collect rewards for both governance and participating in DEFI/games etc, this should solve he issue.

I assume there will be different tier of rewards for xGovs ( time commitment required) versus just voting.

Thanks,
Luis E. Rodriguez
https://www.linkedin.com/in/luis-e-rodriguez-b8969922/

i would be weary of giving too much power to the rich. although any dampening of wealth opens exploits to sybil accounts. to combat this, identity/KYC systems can be employed, but with the sacrifice of permissionless-ness. it’s a delicate balance.

a measure of breadth and depth of governance contribution is important. if you only vote on one item with 10,000 algos soft-staked, you are probably less valuable as a governer than someone who voted on 50 items, yet only soft-staked 100 algos. this of course assumes their depth level is reasonable – ie. they were diligent.

one way to measure this is to hold a peer-to-peer review of importance. the coordinape tool comes to mind, although it can be done in a plethora of ways. these reviews are notoriously hard to get right. beware.

ah yes… allocation of resources for public goods. i’m an active member in the gitcoin DAO and this is a problem we have dedicated workstreams to solve (like for example, the fraud detection and defense workstream that i am a leader in).

we are collectively building the 2.0 version of gitcoin grants where we are adopting a more modular approach for funding allocation. the goal is to provide all of the tools and processes needed to conduct resource allocation (based on the consensus of the community) without sacrificing legitimacy.

i would love to facilitate a collaboration between algorand and our fraud detection and defense workstream within gitcoin for fraud resilient governance fund allocations. this could be amazing!

this is called 1 dollar 1 vote (1d1v) and means that the rich potentially have unfairly amplified voices over the poor majority. we use quadratic funding, although it’s ripe with exploits so it should be proceeded with caution.

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I agree DeFi participation should be the strong factor in governance classification. If the goal is to improve DeFi participation then communication improvements are a must, i.e. an announcement of new tokens or dApps in Pera wallet or an ad on Vestige would be a start.

Greater award will be based on the amount of Algorand held in an ecosystem wallet as well as the extent of dApp use/support. Not everyone has the creativity to design a NFT, coding experience or resources needed to run a node. These skills, should not be a requirement for taking part in governance.

Rewards should, of course, be based on the amount of Algorand held as well as the length of time one is willing to commit their tokens. However, if a minimum commitment is being considered, care must be taken so as not to ostracize those with less resources.

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I missed the last vote.
For security all my crypto is done on a another computer which is normally switched off and disconnected.
Are mobile apps and the security of my phone sufficient for crypto?
The only way for me to keep up now is by subscribing to the Twitter account.

I was aware of the forum, but I thought it was just for technical issues and devs.

How are passive Algo holders rewarded?
Apart from a possible increase of value of the token over time?

I’m committing my Algo every three months and trying to vote on governance.
Should most Algo holders even vote?
As we probably don’t fully understand what we voting for.

Am I in a minority or a silent majority?

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Some really great ideas moving forward. I would first just advise to take as much time as needed before rushing out a change to Governance. It’s should be important to remember some of the qualities that Silvio has been pointing out, most importantly, inclusiveness. Creating Tiers may challenge this important aspect of the Algorand we have all come to love.

I think there can be a much simpler way to move Governance toward DeFi platforms without making initial massive changes. Why not run all Governance through DeFi platforms. It is essentially being done now. Stake Algo on your platform of choice for Governance, and then borrow to participate in DeFi. I believe if given more time this would have eventually happened.

Now, platforms should have some parameters. First, participating platforms should support cold wallets. Second, platforms participating in Governance must have PUBLIC auctions for liquidations.

I think this would be an acceptable next step in the evolution of the current Governance system that has been identified as the largest and most successful.

Great discussion. Thanks

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agreed. these things take time and are brittle.

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I will start by saying that this is a damn great post and I’m glad someone started this. I am sick of staking and governance systems. The majority of exchanges (these leaches) using the funds of others to participate in every single staking/governance and for this to stop, we need to get rid of this airdrops mentality… Nothing it’s free on this world, and as it was designed Algorand, it doesn’t need to attract billions of tokens staked for security. Algorand needs to attract investors, retailers, etc. through defi dapps, not through a fkn governance system with free Algo airdropped for nothing basically.

I agree with Dapps supporting cold storage.

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I think this is a great post and very well thought out. I’d point out that governance rewards will continue to decrease and that perhaps some changes could be made via proposals rather than a dismantling from the top down (although exchanges and Algorand Inc will decide right?).

I don’t dislike the governance program and I think that some goals may not be the same for everyone, but to be honest I’m not knowledgeable enough to have an opinion on this. This sounds like a good idea, but Algorand governance also seems to have benefits to me. It does at the very least seem that the TVL argument is correct but I can’t synthesize that into a particularly strong opinion.

In any case, just some thoughts. I appreciate the post and think this is an important discussion as somebody who wants Algorand to achieve the success it deserves.

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Hello all.

If the question is how do we reward active participation in the Algorand ecosystem to foster growth then I strongly disagree with rewarding participation in currently popular defi platforms with more than $10m TVL

This would only lead to pooling of funds on these already established platforms and make it harder for new projects to break into the space. Why would anyone try a new DeFi platform when they would lose their extra governance votes? It kills the potential for innovation and cements the status quo.

We need to reward all active participation equally or not at all - The problem is we can’t just count the smart contracts someone has value locked away in because not all smart contracts could be considered “active” participation.

I believe the solution to this lies in the auditing of smart contracts - If we included a simple standard flag in TEAL for “This account is actively participating with X amount” that could be added to contracts either by developers but only enabled after a short approval process or only added by approved auditors. This would be better than having a minimum TVL requirement because any project could potentially benefit and it would be easy to widen the scope of “active participation”

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I rather see the governance rewards and voting power, distributed among all defi projects running on Algo based on their TVL/Ape - Value/Algo contribution, than airdropped for free in a gov. After all, the projects, devs, active users should be rewarded, not exchanges for participating with ur share, neither the lazy VC whales which votes are always pushed in their favor. I really hate these systems designed to grab a penny for nothing. If the only utility of a token, it’s to get u more tokens, than that token it’s useless…