Feedback requested on proposed Q3 2022 Governance Measures

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 Commitment will be monitored by monitoring the LP tokens from ALGO pools, which cannot be sold or withdrawn during the term.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

Rationale:

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.

Technical Implementation:

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

Rationale:

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.

Technical Implementation:

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.

12 Likes

I hope it’s ok to leave a response being a non-expert and just an average algo user.

These are clear and well thought through proposals which are an interesting idea for discussion.

I am personally against the whole way governance is implemented at the moment, giving out 70m Algo to ask 33k people a couple of yes/no questions is costing over 2k Algo per voter, it would literally be cheaper to send someone to their homes to ask them in person.

Moreover giving rewards for voting means that a lot of people vote who don’t care about the answers or the future of the chain, they’re just doing it for the rewards.

Imo there’s been a mixing of the concept of “finding the best people to ask about the future of the chain” and “offering incentives to participate”.

Imo it would be much better if governance were a voluntary program where people had to sign up, even pay a small fee, prove they are human, jump through some hoops etc, that way firstly you’d find the people who really actually care and secondly save a lot of money.

At the moment what is happening is:

The governance system is very generous so that sucks all the liquidity out of the ecosystem and stifles any project which can’t offer >10% rewards.

So now we’re applying band aids to try and stop that from happening and get the liquidity back to it’s proper use.

Imo it would be much better to admit governance is broken, take the rewards away and make it a program based on community service (which is the reason running a node carries no rewards and that works great) and then use the incentives in separate programs to build the ecosystem we really want.

I also really believe in free markets and I don’t like the whole vibe of “the Foundation verifies that list” etc because it’s creating a powerful centralised actor in what is meant to be a decentralised system.

So yeah IMO these proposals are just taking us further down the wrong road.

15 Likes

I really like these proposals. To me this shows a big improvement in the measures. Personally i hope they both pass so we can trial the implementation

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Measure 1 Feedback
If the goal is to incentivize DeFi participation, then let’s really incentivize it. The Governance DeFi reward pool should carry greater weight than the Governance non-DeFi reward pool. In addition, DeFi participation has substantially more risk. Based on this logic, the proposed reward allocations are backwards. I suggest inversing the allocations, i.e., 63.5M ALGO DeFi reward pool / 7M Non-DeFi reward pool.

Measure 2 Feedback
Makes total sense and is a no-brainer. The ALGO/ASA LP pools should be restricted to:

  1. stablecoins: USDC, USDT, STBL, GARD, (xUSD), (goUSD)
  2. blue-chip assets: goBTC, pBTC, goETH
  3. top 15 ALGO/ASA LP pools ranked by total aggregated TVL (see https://vestige.fi/). The top 15 pools are determined by taking a snapshot of TVL when the Governance commitment window closes. LP competition will help to concentrate liquidity in the strongest projects.
7 Likes

I mostly agree with your suggestion but I think 63M is way to high for the DeFi. Somewhere between 40 and 50% to DeFi makes good sense. Don’t incentivize one thing much higher than the other or you will just get all of your money sent to one enterprise and stifle improvements in other areas.

1 Like

I understand what you are saying, but I don’t think that logic applies in this case. Liquidity is the lifeblood of DeFi. At this point, we need to incentivize and inject as much liquidity as possible into DeFi. Why hold back? We need to put the pedal to the metal and aggressively grow liquidity. To win the war we must be aggressive with our strategy. Let’s not be afraid or timid to deploy our war chest to turn the tide of the war. Yes, the future will be multi-chain, but dominated by only a few chains. If we want to rise and solidify our place as one of those dominant chains, then we must do all in our power to dominate. This is the art of war.

3 Likes

Sorry for being the pessimist in the room, but I do not like any of the measures.

  1. The LP would get already the rewards of being a LP AND of the gov. They are already double dipping, why also cut the rewards from the others? LPs take more risk and they get rewarded with 2 kinds of rewards. If they lose everything as the LPs, this is the risk they wanted to take and should not be payed cutting the rewards of others.

I guess, most of the normal Algo holders are no LPs, which means, the rewards of many will be decreased, while the ones of few would increase, which I think, will be contrair to a bigger adoption. Many Investors (me included) came into Algo, because the tech was just easy to use and worked out of the box, while given ‘staking’ rewards just by holding Algo. The move to gov rewards was understandable, but already reducing the initial pull towards this project. Now this easy minded people (me included lol), that just want to invest and hold, and maybe from time to time switch or buy an nft, will now be forced to go into DEFI, what they most likely do not wanted in the first place.

Furthermore, with a rewards for LPs people will be edged into going a way more risky road, which can result in impermanent lost. Algorand should be neutral about all this!

Therefore, I think, this is the wrong strategy overall, but ofc. the LPs will hype it up.

  1. Letting LPs double dip is okay from my perspective, but I would rather see a solution build by DEFI and not by Algorand, as the DEFI-projects are not Algorand, just one use-case of the chain. I would rather see some new ‘real-world’ use cases being in the gov voting, instead of DEFI Gov again and again.

The Solana TVL-spoof did show, that DEFI activity is not the best measurement of the well being of a chain (just one of many).

While I think, both proposals are better then the previous, I still am not convinced to vote for any of them (which would, if the majority would think the same, result in the next voting proposal of how to give DEFI more gov rewards and everything else seems not important?).

Lastly, if I understand it right (never was an LP), the problem of the current DEFI is, that the risk is high and the foundation wants to navigate this risk, by paying for people, to take this on … I dunno, this seems not the right way to do it (in my opinion). Better let DEFI figure out, how to reduce the risk itself, or give grants to fix the problem?

English is not my first language, so I hope, that my thoughts were understandable.

Cheers

7 Likes

Some more rationale:

The reason that we use a single snapshot round to set the value of all the LP tokens is to ensure that attackers cannot move a single ALGO from pool to pool and get multiple LP tokens at different rates. By using a single snapshot at the same round for all pools, we ensure that the ALGO equivalent of the committed LP tokens actually represent the ALGO balance that belonged to that governor at the snapshot round. Thereafter we use that value and isolate these governors from the effects of price fluctuations. If you maintain your balance, in ALGO and/or ALGO-equivalent tokens, then you can safely participate in governance, even if these tokens are now worth less ALGOs (since the ALGO price has risen).

The reason that we only consider pools in which the ALGO is traded against Assets with a substantial, recognized active market, is to ensure that committing to LP-token balance represents an actual meaningful commitment. In particular, we want to avoid the following type of attack:

  1. The attacker creates a new synthetic ASA (call it XYZ) with a total supply of 10B;
  2. The attacker establishes an ALGO-vs-XYZ pool with (say) 1000 ALGOs and 1000 XYZs, at a 1:1 ratio
  3. The attacker commits the LP tokens that it receives from that pool, getting credit for their 1000 ALGOs in that pool;
  4. As soon as the sign-in window is over, the attacker swaps the rest of their 10B XYZs for ALGOS, leaving the pool with 10B XYZs and essentially zero ALGOs.

Note that this allows the attacker to use the ALGOs that they have from the pool immediately. They are not committed to anything, but can still keep their LP-token balance in order to participate in governance and get rewards.

To defend against this type of attacks, we insist on only allowing real Assets that have a substantial, recognized, active market. This way, we can be reasonably sure that there is no single player that holds a majority of the asset and can use it to manipulate its price.

11 Likes

Yes! Agree 100% with this

1 Like

While I see the current form of gov not useful (I already complained within a long comment in this thread), I disagree on no rewards for being in gov.

If there would be more things to vote on and maybe a leveled rewards system for people within x-gov and normal voters or stuff like this, I can see, how it could work out.

But right now, I think it is quite busted and ineffective.

We now needed an extra 3 month period to essential vote on the same topic like the last time (just in another form). This could be worked out in weeks and not a quarter of a year.

A lot of work in many kind of ways is needed.

5 Likes

These proposals seem much more reasonable and effective. Thanks for working on it and providing this updated version to the community.

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So you think Defi should get incentive and you propose to choose one of the above measures, which are both DeFi incentives.
But did you first ask the community whether incentivizing DeFi is what they want or not? I think that the results of vote on the Q3 first measure already told you something about community’s orientation on this theme, so I think you cannot be that sure that incentivizing DeFi correspond to the community will.

7 Likes

Interesting proposals, I like them more than the previous ones, but I do feel we’re missing the forest for the tree with them. I agree with the general assessment that due to the “risk-less” nature of governance when compared to DeFi it is improbable for a DeFi user to match the rewards at the same level of risk during the same period of time (but I’m just going off a hunch, maybe it’d be an interesting case study to see if this holds true, something along the lines of comparing investing on ASAs, or providing liquidity through a period of governance compared to just passively receiving the governance rewards, there’s a chance the results might surprise us all, but I digress). However, I believe a lot of the dialogue has revolved around the yield nature of the governance rewards when compared to DeFi and not around how to bolster the DeFi ecosystem. I believe that considering just how small the space is at the moment, it is more cost effective to avoid offering faux yield in the form of rewards to DeFi users for participating in protocols, but instead the emphasis and focus should be on investing on these protocols, and if possible, in a decentralised manner.

I think the fund proposed on Measure 1 would be better served as either liquidity support for new projects or as funds for development of new protocols (would even give xGovs a task to fulfil) than it would as rewards, just because I feel the later runs the risk of generating a feedback loop that will help us in the short-term but inevitably will hurt the long-term viability of most projects. I truly believe that it would be better for the foundation to create a DeFi fund projects can apply for and users can vote for than it would be to reward users for participating on DeFi. DeFi should stand on its own merit, and if the foundation can support a few innovative projects along the way I believe in the long-run this would be a better use of the funds than rewarding pioneers on the spaces. Specially because it is my belief that this way the Foundation (and by proxy all of us) would be exposed to the potential upswing of innovative projects as these show up in the space, whereas by just providing rewards we’d only be offsetting the DeFi’s participant’s risks without receiving anything for it but a pump on TVL metrics which in my opinion aren’t indicative of a strong DeFi ecosystem, innovation is. I think a single innovative product will bring more users to the chain and help our goals more than any rewards program could.

I also believe that this can open the space up for “significant” governance", where we can collectively “put our money where our mouth is” and vote towards who we choose to back and on what terms openly, making the user feel like their votes matter/have an impact. Of course this is all a process and it will take time, but it is better to start opening up the forum for users to decide what happens on the chain sooner rather than later.

Regardless, I do see these proposals as a step in the right direction when compared to the previous ones (I do worry about the technical implementations, specially on the later one since every time there’s a cut-off there’ll be controversy as to what is included and what isn’t).

TL;DR more grants (if possible with community involvement either through governance or xGovs), less rewards.

4 Likes

I like the idea. However, 10% seems too small. 20-30% would be better for DeFi users, but I am not sure if 20-30% would get thumbs up unfortunately.

1 Like

At a high level, I’m in agreement with the intention of both proposals and want to give credit to the foundation for taking the feedback it got with the last vote and working to make a better proposal overall. We want to incentivize Defi while not making it broken, and the first proposal is a nice way to allow people to make risk based decisions on whether to go into Defi or not. For an additional 5+% I suspect most people will do so. We also want to grow the pool of who can participate in governance.

My only curiosity is what will be the break point where there is not additional liquidity added to defi governance (e.g. at 2% additional rewards, people decide not to do Defi). My hope would be that this does not occur until we are close to 1-1.5%, or around there. If we see Defi rewards being an additional 6-7% then it may be worth reconsidering if we are getting the desired effect of increasing liquidity. This will give us a good reflection on the risk tolerance of the people in Algorand in my opinion.

Additionally, as others have noted there is a question of whether governance rewards are just too high in general. If so, another avenue to target would be reducing the amount of rewards overall. I do believe there needs to be a reward given for governance, even if not in Defi, otherwise you will not have participation.

Second measure I fully agree with, no comments.

1 Like

Algorand is not just DeFi. It is a technology capable of many things. If you were in the gym and you saw that a lot of the guys had great arms, would you only pump your arms up for months so that you had great arms but a big belly and skinny legs? No, of course not.

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First, those suggestions are way better than the ones proposed in the previous governance period, so kudos for that. That being said, i still have some questions:

If i participate in defi X, which is part of defi governance system, do i automatically participate in governancr or is it opt-in? If it’s opt-in how does that look like (example)?

How can you verify that every person, which decided to participate in the governance through defi app X, is actually included in the given list?

Are you sure that knowing snapshot time in advance doesn’t allow someone to game the system somehow?

Who votes in this case and how exactly? I’m guessing that’s answered in your answer but i don’t understand exactly, so an example would help :slight_smile:

Agree with this and same holds for other defi governance. I understand why foundation is proposing solutions to incentivize defi support but if things go wrong then pushing people to a dapp might turn out to be a horrible decision. It’s a different story if algo inc wrote the dapp, but that’s not the case so you need to trust two sets of programmers, one very well known and one very likely unknown.

1 Like

I totally agree with your sentiment. However, imagine you’re in the Foundation’s shoes and you propose reducing governance yield… I think there would be an uproar, people even going so far as to claim they’ve been ‘rugged’! Unfortunately, I think the Foundation is effectively locked into the rewards schedule they proposed a year ago.

For this reason, I think their only option is to change the rewards distribution.

  • Sorry for the repost, struggling with the forums reply impl, weird that my reply shows in the top level instead of nested to your comment

you know, maybe there should be an option C, for people not in favor of option A or B. not for this particular voting session but in general. If A or B cant get at least 50% of the votes, then the proposal doesn’t get passed.

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@Domenico Nothing would ever get done because of extra choices cannibalizing. Better to keep it simple.

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