The Algorand Foundation seeks feedback from the community on proposed ballot measures we are considering putting forward for the upcoming Governance voting session in September. Below we describe the measures that we are preparing, their rationale and their possible technical implementation, followed by a few initial points for discussion. We welcome all the supporters to participate.
In the current Algorand Foundation governance system, DeFi users can participate in Governance through custom solutions that are implemented by the different DeFi platforms, such as Valut or Liquid Governance. These solutions enforce the commitment of a DeFi user for a Governance term, allowing DeFi users to vote and receive governance rewards. This compounded activity in both Governance and DeFi is not currently incentivized by differentiated rewards. It also excludes a relevant activity such as participation as a liquidity provider in a decentralized exchange, since fluctuations in price may result in impermanent loss, making it hard to keep a fixed Algo balance throughout the governance period.
In this voting session we plan to put forward two proposals that are aimed at incentivising DeFi users to participate in governance with their Algos:
- One proposal will designate 7M ALGOs of the governance rewards (which is about 10%) to DeFi governors committing Algos for a governance term. The other 90% will be distributed to all governors as we do now. This would add a limited bonus as incentive to Defi participation in governance on top of existing governance rewards.
The other proposal is to extend direct Governance participation to DEX users, by allowing liquidity providers to commit to Governance the ALGOs that they contributed to a trading pool. Commitment will be monitored by monitoring the LP tokens from ALGO pools, which cannot be sold or withdrawn during the term. The only eligible pools are those where the Algo is exchanged with an asset which has a substantial, recognized, open market.
These two proposals are motivated by the same desire to support DeFi in governance and, compared to previous ones brought to governance, they are both limited to the Algos that are committed in DeFi for an entire term, and limited in their impact on the other governors. But they are independent of each other, in the sense that we can implement either one, none or both, depending on the results of the vote. Below we provide more details on these proposals and their motivation, as well as a short discussion of how they can be implemented and combined.
Measure 1: Incentivize DeFi in Governance by designating to them 7M ALGOs (9.93% of the Governance Rewards) for Q4 2022
The aim is to grow the Algorand DeFi participation and market size. This will benefit the ALGO and therefore all Governors. Allocating a fixed portion of the governance rewards pool will provide a controllable extra incentive to DeFi participation, boosting market growth. Compared to previous discussions and proposals presented to governors, this solution is limited to the Algos that are committed in DeFi for an entire term. Its impact on the rewards of the other governors is limited to a preset amount, while the voting power is untouched.
With a fixed portion of Governance rewards reserved to DeFi governors, we obtain support when it is most needed (i.e. strongest incentive when DeFi participation is smallest). For example: A) If only 300M ALGOs are committed in DeFi Governance through any of the above solutions, then 7M ALGO rewards correspond to an additional 9-10% yield per year B) If 2B ALGOs are committed in DeFi Governance, then the same amount of ALGO rewards corresponds to only 1-2% additional yield per year.
Governors’ commitment and voting procedure is unchanged. The different DeFi platforms are tasked with maintaining a list of the valid Governance wallets that they manage, and the Foundation verifies that list. At the end of the period, all governance wallets receive the distribution of 63.5M rewards according as usual. The last 7M ALGOs are distributed only among the governance wallets on the DeFi list. DeFi platforms must apply to the foundation with their Governance solutions to be included in this program.
Measure 2: Allow Liquidity Providers that contribute ALGOs in DEXes to participate in governance for Q4 2022
We wish to open Governance to the most relevant DeFi activities, without keeping out DEX Liquidity Provision in pools which include the ALGO. Liquidity providers, due to impermanent loss, cannot keep a stable ALGO balance, but through LP tokens they can prove on-chain that they are not deliberately reducing their ALGO commitment.
Participation of Liquidity Providers will be allowed by counting and monitoring LP tokens. Only LP tokens of DEX pools including ALGOs vs Assets with a substantial, active open market are eligible. DeFi platforms with demonstrated liquidity will establish a public list of eligible pools, and their corresponding LP tokens, that the Foundation will verify. LP tokens can be committed to Governance during the sign-up window with the same zero-ALGO transaction mechanism as we use for ALGO commitments. The LP-token balance of governors will be tracked just like the ALGO balance.
The ALGO governance stake of all LP tokens will be determined by taking a snapshot of all the relevant ALGO-vs-Asset pools at a single snapshot round after the end of the sign-up window. At that round, we calculate for each LP token the number of ALGOS that the liquidity providers would have received, had they returned their LP token at that time.
To be eligible for rewards, governors will have to vote, and to keep their balance in each of the LP tokens that they committed to (in addition to whatever direct ALGO commitment that they made from the same wallet - if any). Governors that keep all their balance commitments and participate in voting will be eligible for rewards, irrespective of variations in market value of LP tokens due to impermanent loss.
Compared to previous discussions and proposals presented to governors, this way of including DEX in governance is limited to ALGOs from liquidity providers that remain committed for a term. The use of LP tokens aims at making continuous commitment transparent on-chain in spite of impermanent loss. The requirement that any asset paired with the Algo needs to have a recognized, open and substantial market, and some of the related proposed rules, aim at avoiding the inclusion of non genuine pools, whose rate of exchange could be manipulated to extract artificially the ALGOs committed before the end of a governance term. Even if the impact of such a behavior outside the specific pool is narrow, platforms will be given direct responsibility to exclude the risk of such situations from their open lists, and the Foundation reserves the right to disqualify at any time, autonomously or upon alerts from the community, any asset involved in such manipulative behaviors.
In order to strengthen this point, the Foundation is also considering the possibility to include in the measure just a fixed list of eligible ALGO pairs, or in any case objective criteria about the pools and the assets which can be used by LP Governors in pair with the ALGO. One example is including only pools that have existed at least for a given time, and above a given liquidity and volume threshold. On this point, and on all the above ones, we welcome all observations and proposals.