Feedback requested on proposed Q3 2022 Governance Measures

Governance
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I would support both measures, here are some initial thoughts.

Proposal A: I think 10% is too small, something like 25% of governance rewards being dedicated to DeFi would make more of an impact without tarnishing what currently exists.

Proposal B: I 100% agree with this, and I struggle to see how anyone can argue with supporting folks who are building up liquidity pools. Definitely important to keep it to things like USDC, and bridged versions of BTC and ETH though, so I think this proposal is amazing.

In fact, I hope if it passes it would be able to be implemented for Q4 that way I could just move as much as possible to liquidity pools, I think we would see a nice gradual shift in increasing liquidity pool participation.

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Oh I don’t disagree, a material decline in the rewards would not be on its face popular with the folks at governance, and that’s why I’m supportive of this workaround. Having said that, theoretically I would like to see the community discuss at a future point this topic if we are still struggling with Defi activity. I think you could get most people on board, but I suspect your large accounts would balk heavily.

Most likely, this is something that will have to just be addressed at the time we cap out at 10B and determine how to do rewards afterwards.

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hahaha. yeah, maybe youre right…but has anything actually been done since governance started

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25

I agree and support zero Governance ALGO rewards. Being an ALGO holder is incentive enough to participate in Governor. By being an ALGO holder, you are incentivized to maximize Algorand ecosystem growth, which maximizes ALGO value for the ALGO holder.

The simplest solution, which I have proposed numerous times, is to reallocate all Governance ALGO rewards to the Aeneas program. The challenge is how do we get the majority of Governors on board and on the same page. It’s like Social Security in the U.S. Logically, everyone knows that it’s extremely capital inefficient and has an overall economic negative effect. Yet, no one even dares to repeal Social Security. It is quite apparent that the Algorand Foundation is aware of this, and hence proposes a weak 7M allocation to DeFi rewards as an attempt to not try to upset the masses too much. This is too weak to cause any significant impact. The Algorand Foundation should admit they made a monumental mistake with Governance rewards. We all make mistakes. If we think strategically and long-term, then we know that removing Governance ALGO rewards is in the best interests of all ALGO holders and the entire Algorand ecosystem.

In regards to ALGO voting rights, on-chain ALGO for DeFi liquidity must be accounted for, i.e., DEX protocols, lending protocols, LP farming/mining protocols, or any type of DeFi liquidity pool. We want to ensure that all on-chain ALGO liquidity providers retain their voting rights.

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26

ALGO holders (whether off-chain or on-chain) should vote as Algorand citizens. Paying folks to vote does not make sense. As ALGO holders, it’s in your best interest to vote and participate in the ecosystem.

The Algorand Foundation made a crucial mistake when they handed over control of ALGO distribution to the community through Governance. Now is the time to admit to the mistake and clean up this mess.

I propose to reallocate Governance rewards to the Aeneas program. That being said, I don’t have enough information as an outsider to best allocate that ALGO capital. The Algorand Foundation. under Staci Warden’s leadership, is best capable of deploying that ALGO capital to maximize ecosystem growth.

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27

I think Measure 1 is a much more clean approach and helps build additional momentum for Liquid Governance products that are already gaining a lot of traction and momentum within our community.

This strategy also:

  • hits closer to home for a governance related initiative as opposed to general LP rewards for various, hand-picked asset pairs on various hand-picked DEX/AMMs. The attempt to define which assets are substantial and have active enough markets is a fools errand, as this is likely to change from one governance period to the next, if not within the same period. Lastly, but equally important, It doesn’t alienate certain platform users or ASA investors who will undoubtedly feel left out if/when their preferences in assets or exchanges aren’t included.

  • removes price risk (not to mention impermanent loss) for holding non-ALGO assets, staying in-line with risk levels more akin to governance participation. Thus, its is more likely to attractive to new (and experienced) DeFi users as well as the current governance participants interested in extra yield, without taking significantly more risk.

  • allows DeFi liquidity providers to continue to utilize their LP tokens as they see fit, with the flexibility they are accustom to, without having to worry about when lockup periods are beginning and ending.

PLUS, Algorand Governance doesn’t need to compete against the use cases for LP tokens as collateral in borrowing, farming and staking operations in DeFi that already count toward Algorand’s TVL. Not to mention that the would be, governance incentives for these Liquidity Providers in Measure 2 is likely far less than what they are already capable of receiving thru staking/farming currently.

Measure 1 is a home run because it incentives using products in DeFi that were built specifically to improve participation in Algorand governance. This is proper synergy, IMO.

Measure 2 sounds like a logistical nightmare that also requires users to take unnecessary risk by requiring them to hold assets other than ALGO (that they will likely sell once a period ends if the only reason they acquire it is for the sole purpose of providing LP during a period for rewards) while offering diminished returns for growing Algorand’s TVL (since providing LP is already widely incentivised throughout DeFi currently).

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Well, I myself am neither a big fan nor a big critic of the rewards for governance - BUT if people invest time into something (for example the x-Gov) it absolutely does make sense to pay them something.

Also I would pas the node provider from the community, for the work.

Its not the only way of handling things, but its definitely one way of doing so.

Btw. saying that the foundation should decide the allocation and is best so, is going against the fundamental principal of decentralization - which is the main point of crypto, so I dont know, how you could be invested in it and still stating such stuff :smiley:

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No one should be providing liquidity to an LP unless they would be equally happy holding either asset, as that is the point of constant-product AMM pools.

This proposal seems to provide the ability to do both of:

  1. Provide ALGO-ASA liquidity, while also
  2. Earning governance rewards

And I think this should be a welcome incentive to bolster the depth of liquidity on various protocols, all of which are very thin right now.

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I agree that the community would not support a significant reduction in Governance ALGO rewards. We need to change that mindset - refer to my other posts in the discussion.

Based on the suggested proposal, the Algorand Foundation is being too cautious and conservative with the proposals by trying not to rock the boat too much. The proposals are too weak to make a significant impact. What’s done is done. Let’s all come to terms that Governance rewards were a crucial mistake. Let’s correct that mistake and zero out the Governance rewards and reallocate that ALGO capital to maximize ecosystem growth. Let’s do this the right way and all the way. Trying to find a compromise to appease the community or a partial solution is not solving the problem. There’s too much at stake. We need to take decisive corrective action and solve this problem once and for all … and not have it drag out any further.

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I like both measures. I think 10% is a great starting point for incentivizing Defi without alienating whales committing in governance. I.e. I think the small % that Coinbase gives to Algo holders on their platform goes a long way to market algorand to the crypto community on a CEX.
I also think allowing LP providers to participate in governance is a great call as well. I would be more likely to have larger amounts in LPs if I knew I could participate in governance with them.

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I fully agree, no one should be involved with LP unless they would be equally happy holding either asset.

The people already interested in holding both assets and earning yield, are likely already doing so by providing LP, right now.

Who then, are the new entrants that are going to seize this “incentive to bolster the depth of liquidity”? Those whom are specifically interested in getting additional governance rewards? I think not.

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Decentralization and $ALGO distribution of the total supply are separate concerns. The Algorand Foundation is responsible for fully distributing the $ALGO supply and putting it into circulation with the goal to maximize decentralized ecosystem growth. Only when ALGO is fully in circulation is when you can have true decentralization.

Governors should be able to vote on how ALGO transaction fees are utilized, but that is a whole separate discussion.

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I don’t agree they aren’t trying to rock the boat. Simply need to look at the last governance voting round to see that they are willing to put ideas out there and I wouldn’t call them cautious in having made the proposal. This time around they are understanding community positions better which is why in general there is a better overall feedback to the proposals given above by the foundation.

I also don’t agree that rewards are a crucial mistake. You aren’t going to get any major participation without incentive. You can reward people for participation and grow an ecosystem, in fact I would argue they are both not mutually exclusive. What you appear to be suggesting is just going around the community to do what you feel should be done to maximize the ecosystem. If that is the direction that this project wanted to take I wouldn’t want any part of it, and I suspect many others would feel the same.

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Well, I was mostly talking about transaction fees and payments of working participants of the algorand ecosystem like node provider or x-govs and decentralization in the decision making over time. I did understand that the funds in discussion was the fund, that was used, to pump up the fee-pool until it hopefully wont be needed anymore and the running system would pay itself.

I still think, that paying people who do work on the ecosystem would be a good idea - you do not want to have a system only running on people working for free - at least, I do not.

But I think, you are right, that the distribution of the initial funds should be decided (or at least guided) by the foundation, as long as the community is taken into consideration - like right now, with this feedback section.

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36

I understand what you are saying. But I don’t agree with your line of thinking.

The number of governors or uniques wallets doesn’t matter nearly as much as the total of algos committed. In period 3 over half the circulating supply qualified for governance rewards. That means the majority of algo holders participated in governance.

Governance is more than just a few yes or no answers. It’s a decentralized way to shape the future of Algorand. You agree with the free market well those with the most to gain from Algorand’s success have the largest voice. In period 3 governors used their votes to go against the foundation.

Governance in my mind has set down the correct path and these measures continue to forge a more decentralized future for Algorand.

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One thing I would also like to see from the Foundation is to push more proposals and try and get more done each quarter. Three months is an eternity, and to only have two yes or no questions to answer is not a lot to decide. We voted to approve xGovs, but there is no proposal to start implementing that. I think asking more of the community and pushing towards 4-6 proposals were quarter is more than fair enough. Ideally we can start getting a stronger framework of governance going before the next bull run. It’s been 4 quarters now, everyone is used to the process, ask more of us, require more!

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39

Yes, DeFi should stand on its own two feets, But when there is still little liquidity or less activity than elsewhere, it is harder to compete, for example fees for an LP are lower. That may restrain many DeFi players to come to Algorand and find out how more efficient and reliable is our protocol. This is why we suggest to help breaking this negative loop. But with a fixed amount that provides less APR the more DeFi grows.

Rewards are not for voting. They are to incentivize behaviours that prove a sufficient engagement in the ecosystem, and skin in the game in the algo market, to be a governor. Staking is the most basic of this behaviours, it’s not good to have governors that bought 1M algo today to vote and will dump it tomorrow, so it can make sense to have staking and remunerate it. But when there are more active forms of engagement, it can make sense to remunerate them more, and reduce those of the others. @conscious or @jjr pushed even more than we propose on this.

Some very interesting comments on the second measure as well. It’s true @AlgorandIntern that selecting eligible pools every time is both operationally heavy and an element of centralization towards platforms/foundation that contrasts the spirit of our decentralized governance well expressed @Algo_Cleanup. A fixed list - @oysterpack proposed one based on objective criteria in his first post, for example - to be updated in the future by xGov community proposal could be a viable more decentralized alternative.

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40

While these proposals are certainly better structured as in G3, I still have some grave concerns.
Below I address some of them for each measure, addressed in the order of their importance.

M1:

Endangering security of the network?

The aim of M1 is to get more ALGO to participate in DeFi. One crucial point of this goal is to consider where are these ALGO expected to come from?
The answer is of course from just simple holders. But many of “simple” holders aren’t just holding. Many are performing the most crucial task for the network - participating in consensus, thus providing its security.

Participating in the majority of DeFi activities doesn’t allow for simultaneous participation in consensus. With M1, these “simple” holders will essentially be penalized in Governance for doing the most crucial task! I would argue that many would reconsider what is best for them personally and deploy funds to DeFi, essentially reducing the security of the network. Hence, I would suggest that only DeFi solutions that allow direct, individual participation in the consensus simultaneously with DeFi activity, should even be considered for such a program. While this would disqualify the majority of protocols, the network security should remain the top priority of Algorand - as it’s always been.

If this concern is deemed exaggerated, I would expect from the Foundation to dismiss it with an exhaustive simulation of possible outcomes, which show that the probability of a reduction in security is indeed negligible.

Unknown benefit?

Another unknown of M1 (at least for the general public) is what is concretely the expected outcome of deploying further 24M ALGO/year to DeFi. There should be available some concrete projections based on the results of Aeneas program. However, I have not yet seen any report published on exactly how those funds have been spent and what was their effect. Before further funds are committed to the exact same cause, I would expect this to be clarified so that the actions can be justified.

Implementation requiring centralized middlemen

The implementation should not rely on any centralized middlemen. If a list is to be constructed and maintained, it should be based solely on on-chain data that anyone can independently verify.

M2:

Unequal treatment of Algorand users

The proposal M2 inherently discriminates between different Algorand users. If one participates in LP of a DEX, one is consciously prepared to part with the ALGO committed to it. That is inherently a different type of commitment than what is required for “ordinary” Governors.

The proposed solution of soft-locking the LP tokens based on a snapshot at the end of commitment period and including only LPs with assets that have a “recognized, open and substantial market” does not change this. LP users would still be assigned voting power based on ALGOs they might not hold due to impermanent loss, regardless of it being “natural” or maliciously-induced. The proposed solution just tries to minimize the probability of a maliciously-induced loss, while being “reasonably sure” that it won’t happen.

The requirements for being a Governor should be exactly the same for all.

Unequal treatment of DEXs

DEX can be either implemented as AMM (i.e. with LPs) or as order book. The M2 rewards just the first kind of implementations, while the second ones are as important despite not being as popular. I do not see a difference in their worth to the ecosystem that would justify their different treatment. Hence, a solution is necessary to cover both cases.

Legal ramification of endorsement of certain ASAs by the Foundation?

The proposal M2 is based on the assumption that the Foundation selects certain assets as having a “recognized, open and substantial market”.

If such a selection were made, I would suggest to gather and share with the public a legal opinion about any possible ramifications for the Foundation (consequently the success or failure of Algorand) of such an endorsement if any of these ASAs were to fail. Better be safe than sorry.

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41

Thanks Anon for your thoughtful analysis.

Regarding your concerns on network security, I think that DeFi players and consensus runners are different categories of users with limited overlap. It is easier to attract Defi users from other chains rather than distract node runners.

On your other points, I have expressed my views on similar topics in my previous post

…when there is still little liquidity or less activity than elsewhere, it is harder to compete, for example fees for an LP are lower. That may restrain many DeFi players to come to Algorand and find out how more efficient and reliable is our protocol. This is why we suggest to help breaking this negative loop. But with a fixed amount that provides less APR the more DeFi grows.

Rewards are not for voting. They are to incentivize behaviours that prove a sufficient engagement in the ecosystem, and skin in the game in the algo market, to be a governor. Staking is the most basic of this behaviours, it’s not good to have governors that bought 1M algo today to vote and will dump it tomorrow, so it can make sense to have staking and remunerate it. But when there are more active forms of engagement, it can make sense to remunerate them more, and reduce those of the others. @conscious or @jjr pushed even more than we propose on this.

…it’s true @AlgorandIntern that selecting eligible pools every time is both operationally heavy and an element of centralization towards platforms/foundation that contrasts the spirit of our decentralized governance well expressed @Algo_Cleanup. A fixed list - @oysterpack proposed one based on objective criteria in his first post, for example - to be updated in the future by xGov community proposal could be a viable more decentralized alternative…

In any case, running nodes is most crucial and a fundamental way to show engagement and commitment to the network. There were proposals to include node runners in previous Governance discussions, thanks for raising the topic this time.

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I believe distribution of rewards should follow a different hierarchy, as others’ have suggested. I would like to see incentives for node running as well. For Measure 1, I believe the % should be structured more along the lines of 60% Defi/20% Governance/10% Relay Nodes/5% Participation Nodes.

As for Measure 2, the management sounds like a nightmare. However, if this were just opened up as another option of participating in Defi, and LP pairs were voted on for adoption, this could work IF we get more ASA and LP support from Ledger or other hardware wallets.

That’s my .02 Algo.

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