GP8 Measures DRAFT DeFi Rewards Allocation Q4

Governance Governance Measures
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Measure 5 - DeFi Rewards Q4 Allocation

The community voted strongly to allocate 25M of Algo rewards in GP7 to DeFi, with 7.5M Algo allocated directly to the projects through the Targeted DeFi Rewards program for Q3-Q4/2023.

The total amount available for governance rewards distribution in GP9 is 40M Algo and this measure proposes increasing the DeFi rewards allocation to 27.5M Algo for DeFi rewards, continuing the trend of allocating fewer rewards to general governance and more to programs that require more active participation, impacting the growth of our DeFi ecosystem.

The Foundation supports option A.

Measure 5
Should the DeFi rewards allocation increase from 25M Algo to 27.5M Algo for Q4/2024?

Option A - Yes
Option B- No

Introduction to Measure 6

During G8, Folks Finance independently allocated 50,000 ALGO as rewards for consensus participants using the Liquid Governance product. In the month following, wallets participating in consensus through Folks Finance rose from 24 to 105, and the corresponding ALGO stake rose from 6.7M to 18.8M.

The uptake of this initiative reveals significant interest in incentivized consensus participation and gives reason to expand upon the idea: promoting consensus participation through DeFi projects could create a mutually beneficial relationship that benefits Algorand’s security and ecosystem growth.

Measure 6 - Consensus Rewards Pilot Program via Targeted DeFi rewards

This measure is conditional on the measure above (5) to approve allocation extra DeFi rewards allocation passing. Governors must vote on this measure, even if they voted “No” on measure (5).

To build upon the experiment described in the introduction above, measure 6 proposes amending the criteria of the Targeted De-Fi Rewards program to provide user incentives for specific protocols that allow users to indirectly participate in Algorand consensus. Whilst current Targeted DeFi Rewards are allocated on the basis of TVL metrics, this Measure would allow further iteration of this scheme also to be based on online stake and consensus participation.

Responsibility for defining the technical implementation and allocation of Targeted DeFi Rewards to participants/protocols would reside with the DeFi Committee. As part of that implementation, each project would be responsible for monitoring and reporting “good” node behavior to ensure online accounts are actually participating in consensus and not harming the network. The methodology will include calculating the expected number of block proposals an account should have and comparing this to the actual number of blocks proposed. The process for determining eligibility will be open-source and verifiable by the community, and rewards will be distributed proportionally to the amount of blocks which an account produced, excluding the accounts which were marked for “bad” node behavior.

The Foundation supports option A.

Measure 6
Should consensus incentivization be in scope for Targeted DeFi Rewards as a specific sub-program and, if Measure 5 is passed, should up to 1M Algo of DeFi Rewards be allocated in Q4/2023 for this purpose?
Option A. Yes
Option B. No

Measure 7 - Allocation of DeFi rewards to Targeted DeFi Rewards specifically for the Consensus Rewards programs via DeFi protocols.

This measure is conditional on the measure above (6) to approve adding consensus incentivization to the Targeted DeFi Rewards available via DeFi protocols. Governors must vote on this measure, even if they voted “No” on measure (6).

If this measure passes, either 8M or 8.5M Algo will be distributed in Q4 for the Targeted Rewards program, with up to 1M specifically allocated for consensus incentivization.

The Foundation supports option A.

Measure 7
How much should be allocated to the pilot of the consensus incentivization via DeFi protocols?**
Option A. Allocate 1M Algo
Option B. Allocate 500K Algo.

*** UPDATE 28 August ***
Thank you all for your feedback. Your deliberation has highlighted the need for further discussion on this topic. We will not proceed with measures 5, 6 and 7 this quarter.

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We’re interested in your comments about running this pilot as part of the Targeted DeFi rewards program and what is a good amount to allocate here. We are being conservative on our approach, as we try with most pilots, but the DeFi rewards total pot is 25M, so we could increase the allocation if the community feels like that is the right direction.

John mentioned that we are working the team at Inc to implement consensus rewards at the protocol level, but that will take at least 9 months before it’s ready for testnet, so incentives in this program will likely be temporary.

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I would like to see FAIR consensus incentivization. Not just online escrow accounts from folks, but also other online accounts, and also public participation nodes.

Also i would like to see the incentivization to be paid on frequent period, for example lets give each online account the incentivization payment each hour if in the past hour it was online.

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Something like that will be in the protocol-level solution :slight_smile:

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this proposal will only benefit one dapp and thats folks finance. additionally, they might financially profit directly from this due to the way gALGO works. every gALGO needs to me reminted every period and if you dont do it FF uses that ALGO and commits it to governance and then they earn those rewards… and if node runners dont redeem their gALGO in time they are stuck with it (or they sell at a loss) and might not be able to continue running the node as it needs real ALGOs. doesnt sound like a good system for node runners

on top rewarding consensus participants only through a non-open source protocol seems like a pretty bad decision as this opens up more easy attack vector on the protocol

also in this way defi gets even more centralized around one protocol which is not good for an ecosystem

since you just need to put your account online this will open up a market of: you want rewards, i will generate participation keys on my node. and afaik the protocol doesnt like it if more than 4 people do this on one node. would this fall under bad behavior? and we might not end up with more nodes…

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Thanks, Lobo. I appreciate your input.

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I would like to see FAIR consensus incentivization. Not just online escrow accounts from folks, but also other online accounts, and also public participation nodes.

Something like that will be in the protocol-level solution :slight_smile:

It doesn’t have to be, tough. Governance could reward consensus participation through a boost regardless of whether they are a folks escrow or not.

I like the idea of incentivizing consensus - at least for now - but restricting this to just folks finance does not seem like the right thing to do.

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Measure 6 is a bad proposal, and I will STRONGLY urge the foundation to not pursue it for this governance period. Whereas fundamentally I believe we should find ways to encourage consensus participation, this proposal, even if open to anyone, in practical terms will only see one beneficiary, Folks Finance.

Leaving the clear conflict of interest aside, this proposal does not help address (and I can’t stress this enough) its identified problem, because:

-The creation of a cyclical consensus participation system is in itself a VERY risky pattern a malicious attacker can take advantage of.

-There’s no easy way to retrofit consensus participation into truly decentralised protocols that don’t have back-doors or updateable contracts

-The relaunching of protocols that comply for this program will either generate a “one person participates for everyone” situation, which Inc has said should be done with EXTREME precaution or a fragmented standard that will decrease UX and their ability to effectively take advantage of the situation, since we don’t have an impartial stALGO/wALGO standard.

-It is not up to DeFi to mess with the security of the base layer, specially when there are already efforts being worked on by the Foundation itself for this. Giving the message that the Foundation supports A is either a miscommunication or something that has not been given the proper thought.

-The pilot program launched by Folks Finance is touted as a success, when I know for a fact a sizeable amount of what went online is in a single node operated by a DeFi DAO that leveraged the Foundation’s liquidity deployment.

-Only protocol that can participate is essentially a black box since its contracts aren’t open source so we can’t even make sure that they don’t have a backdoor or an ability to update.

In essence we have a protocol that has already had the deck stacked for it asking for even more help under the guise of helping consensus, when it doesn’t help consensus and it doesn’t increase decentralisation. The security of the base layer is the most important thing we have and we should not toy with it.

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Measure 6 is a conflict of interest. That alone should disqualify it.

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Hey Scholtz, we worked closely with AF and the DeFi committee to draft this proposal. We have designed it to be a general DeFi proposal as we believe a general Consensus rewarding system must be implemented (not only for FF, indeed yes, we are currently the only one having a system that allows it). Still, we do not have the power to push it at a protocol level. Where we have space of freedom is DeFi, so in our opinion opening an incentive system to all the DeFi apps is a great first step to push more DeFi protocols to develop consensus participation and to start to educate the community in participating.

Each app should demonstrate a valid monitoring system, and yes, the rewards will be paid based on block active participation. The monitoring will be publicly announced from each app, similarly to the DeFi targeted rewards distribution.

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I will copy-paste my comment from discord here, just to make sure both audiences can share my thoughts.

I have two issues with it. The first being that the only protocol that can take advantage of this is Folks, and they are the only ones who pushed for it. They know that no other defi protocol can implement something like this, since all the DEXes are 1: immutable and 2: do not want to allow a single party to participate with all ALGO in pools, there’s no way to have liquidity pools with each user staking their own ALGOs.

The second is that Folks has to remove all the ALGOs from the escrows as soon as the governance period ends, since those ALGOs are backing the gALGO 1:1 redemption. This means that a huge chunk of ALGO will instantly go offline, and if even a single ALGO that’s currently participating moves from regular consensus to folks consensus it will make the protocol weaker during the redemption period, a perfect time for an adversary to attack the network.

This proposal does nothing than give folks additional rewards to give out. It does not increase the security of the network, neither is it a fair program, as only 1 party can participate.

[…] if we’re moving to make this a primitive of the algorand blockchain I see no reason as to why we should also be doing it through governance. To me that’s just undermining the tech/pushing out changes quicker on here without thinking. Having 9 days to review something that touches the security of the network is bananas. Nuances have to be discussed and looked over by a lot of people to make sure that this doesn’t cause the blockchain any harm. Undermining the Algorand Foundation tech team is crazy, they are moving at the pace they are moving at for a reason (I’d assume).

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I wish I could work closely with AF or the DeFi comittee

Can we agree on the fact that that it would be much more fair if there is simple application that would monitor all accounts in state online and directly send them some algo each hour?

This would increase not just DeFi consensus participation but consensus participation of anybody who has on the account any algo and he wishes to protect algorand blockchain.

Note also that I prefer people to run the participation servers publicly so that we do not create assumption that everybody must run his own algod node. (Check swagger for online method to generate partkeys, or source of the server proxy to the algod server)

Also I believe that we should set some standard ARC method, so that any smart contract can make the partkeys registration transaction. If all smart contracts will have this method different it will be mess… Perhaps you should propose such standardized method as you already have it?

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Hey Lobo :wave: allocating incentives to consensus will hopefully encourage others to develop tools for consensus participation. At the core of this proposal is the desire and need to bolster Algorand’s network security. As the Foundation and Inc are unsure of when they can deliver this at a protocol level, using DeFi to distribute consensus rewards is a solution for the time being. It would be great to see creative tools and solutions be built around consensus, initiated by these rewards going live. Everyone is able build tools for this purpose and the more options, the better.

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I believe that any increase in online stake increases the security of the network.

Also I believe that it is good to have standard in smart contracts on how to make the stake held by smart contract online.

But I believe that anybody should be able to get hands on the participation rewards not just people who use folks… For example there is huge stake surly held by binance, kraken or whoever else… And those exchanges or whales would be happy to make their stake online if they get some incentive…

So in my opinon we should create fair system for participation incentivization to everybody equally.

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the thing is announcing something like this this so far into this period means no protocol will have a chance developing anything before next year which means FF will be the only one profiting from it for some time. and i dont know if any existing protocol can even develop tools for that without the need to relaunch their existing contracts (xBacked, GARD) or even at all (DEXs)

and one of my problems with it that FF can directly financially profit from it if a node runner doesnt redeem their gALGO in time since you then commit those ALGOs and earn the associated rewards + the node runner is stuck with gALGO and either have to sell at a loss or cant continue to run their node as before. is there any way FF could be more user friendly in this case and not try to financially profit from it?

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What’s up d13 :smile: with official incentives in place, it’s likely to spark the development of more tools to participate in consensus. The proposal, if passed, should drive interest in bringing more users into consensus, which would bolster the security of Algorand. There are probably a lot of ways to creatively integrate consensus participation into all types of dApps, and that would be beneficial to the whole ecosystem. As there hasn’t been much reason to develop consensus tooling, that area of innovation on Algorand is still completely unexplored, and could have huge potential.

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It’s true that recommitting the ALGO to mint gALGO in the new quarter would be needed until Folks builds a solution to this. It woud be a good opportunity for other projects to build solutions that don’t have the same commitment schedule as Liquid Governance.

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That is a completely wrong understanding of how the protocol works.
Marking a stake online only increases security of the network if the corresponding participation keys actually vote correctly.
Otherwise, the security of the network is even decreased.

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But as soon as governance ends all of that stake will abruptly go offline. Folks empties all the escrow accounts which will put the folks-commited online stake to 0. This creates a situation where the network will be weaker at predictable times. This not being obvious or discussed thoroughly is exactly why I strongly oppose this. We are not just giving out DeFi rewards, we’re playing around with the security of the network, and that might have unintended consequences.

I think this is a rushed measure that only benefits one team on this chain (because no one else can implement something like this before the next period starts, while folks has prepared this for a long time while having back-channel negotations with the defi committee and the foundation to push this along). If we also include the fact that the foundation has been very public about the fact that they’re currently building protocol native rewards I see no reason for this to exist.

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No one will be able to build, audit and deploy such a protocol in the 40 days before the effect of this proposal takes place. Maybe this measure should be deffered to the next period, to level the playingfield compared to Folks who have had a lot of time to plan and lobby for this in back channels, without notifying the community.

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