Algorand Community Governance: Period 3 Review

Governance Period 3:

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Period Start: Mar 31, 2022

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End of Commitment: Apr 14, 2022

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Period End: Jun 30, 2022

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Committed Stake: 3.543 Billion Algo

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Circulating Supply at Commitment: 6.710 Billion Algo

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Governors: 35,466 wallets

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The third Algorand Governance vote is now complete, and it marks a number of important milestones. Participation was the largest ever, with a voting stake of 3.5B Algo, representing for the first time the majority of the circulating supply. The result is particularly noteworthy given that this period included the collapse of UST and Luna, and saw a massive selloff in the crypto market. However, only 10% of Algorand governors’ stake left during the commitment term. This increased participation also pushed down the Governance quarterly yield from 4.1% in the first governance period to 1.99% for this last period.

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Also, for the first time, this Governance period had more than one measure on the ballot:

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• Measure 1 requested a vote on granting Defi projects governor status, with rewards based on their average TVL and voting power based on twice that amount till the end of the year.
• Measure 2 requested a vote on a mechanism by which everyone in the community can propose measures and then expert-governors (xGovs) vote to promote them to the governance ballot.

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Measure 1 was supported by only 33% of the vote, while Measure 2 was approved by a 98.69% majority. Since both measures were supported by the Foundation, the result on Measure 1 also marks the first time in which the Governance community expressed an opinion different from that of the soft recommendation of the Foundation.

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Vote distribution by Algos and by wallets

Thanks to the transparency of the blockchain, we can break down the electoral results by wallet and stake. Below we present the vote results for the two measures, aggregated by the size of the wallets and expressed both as the number of Algos and as the number of governors who voted for A or B. Please note that, while the official vote result is weighted by the stake, looking at the number of voters gives an interesting alternative view on the vote distribution.

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The second measure on xGovs was consistent across investor size, as one can appreciate from the table below:

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There was more heterogeneity in the vote on the first measure about Defi:

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This analysis shows a fairly uniform rejection of this measure by a roughly 2-to-1 ratio, regardless of wallet size or whether the vote was weighted by stake. The only slight exception were mid-sized wallets (“dolphins”), where the vote was a little closer.

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We start with commentary of Measure 2, where the next steps were defined by the victory of option A. Commentary and possible next steps regarding Measure 1 are reported subsequently.

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The xGovs design. Measure 2 Next Steps

With the overwhelming victory of option A and thus the enthusiastic approval of the expert-governor (xGov) layer for community proposals through two votes, the onus is now on the foundation to work with our partners to implement this layer. We highly encourage community members that want to help us build the required components to contact us. As sketched in the last measure, there are actually two systems that we envisage being implemented:

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• A system for listing proposed measures, which is open to anyone in the Algorand community.
• A “DAO factory” for the xGov layer itself, that implements voting to advance proposals to be placed on the ballot in the next governance period.

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Below we give a few more details on the latter component. We will provide more information over the next few weeks, as we develop this concept and its implementation. We start by stressing again that any Algorand governor can be an xGov, all it takes is a stronger commitment. Specifically:

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• With the help of our partners, the foundation will publish a DAO factory implementation. Every smart contract which is derived from that factory will be an xGov DAO.
• An Algorand governor can become an xGov by designating their governance rewards to any deployed xGov DAO. These rewards will be hard locked in the DAO for a period of at least one year, and the governor must continue participating in governance for that entire time.
• Sending their rewards to an xGov DAO will let the governor vote on promoting proposals, that vote will happen on the DAO itself.

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The DAO Factory

The DAO factory will enforce a minimum set of rules that all the xGov DAOs must follow. For example it will enforce the at-least-one-year lock period for the rewards. DAO may have additional rules regarding these rewards Algos, such as enrolling them in governance periods during the time that they are locked.

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Another aspect that will be enforced by the factory is allowing xGov participants to vote on proposals, and report the results to a “mothership application” that will tally the votes from all the xGov DAOs. Here too there could be variations. For example one DAO can implement an internal winner-takes-all policy, while another just passes the individual xGov votes to the mothership. DAOs can also implement different internal weighting schemes for the vote, such as giving more power to governors that lock their rewards for a longer period of time.

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Redesigning Defi in Governance. Measure 1 Next Steps.

With the clear but narrower victory of option B, and the open and detailed debate undertaken with the community, the Foundation will move to an approach to the relation between Defi and Governance different from the one proposed in Option A.

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The debate about the evolution of Governance started several months before the vote. On different social platforms, members of the community commented that Governance rewards provided by the Foundation, especially in Q4, 2021. had a side effect of “crowding out” and disincentivizing staking in Algorand’s Defi ecosystem.

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For this reason, several proposals and contributions were made by DeFi developers, aiming at supporting Defi within Governance. In March the largest Defi platform, Algofi, created a Vault for Defi lenders to commit to Governance within the current rules, while other projects such as Folks Finance and AlgoGARD developed liquid governance solutions that also allowed Defi participation for Governors. In April a Foundation Medium post addressed the relevance of these forms of governance, and the need to extend them and provide specific incentives for Defi Governors, that are also economic players and risk-takers

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https://medium.com/algorand-foundation/evolving-community-governance-c185f06cab7b.

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Along these lines, in May, a post on the Foundation blog opened up a conversation between the community and the Foundation, with contributions from many community members and relevant Defi players

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https://forum.algorand.org/t/evolving-algorand-governance/6646/.

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The feedback from the community has been generally positive on the idea of involving Defi players in Governance, giving them specific rewards and roles in voting and making proposals. The community has proposed and discussed several different possible implementations of the general principle, each of these with their own different nuances on a particular aspect, being the measurement of the commitment, the aggregation mechanism or the related voting power.

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In the initial formulation, Option A proposed granting Defi projects governor status and rewards based on their average TVL, and voting power twice that daily average. Option B proposed to keep awarding governor status only to Algo holders that commit for the governance period. Once the measure was published, two weeks before the vote, the Community reacted negatively to the implementation specs contained in the question. In particular, one of the community’s critical observations about Measure 1 was the possibility that DeFi stake could be artificially inflated, with a potentially unlimited and unpredictable impact on rewards and power of the other governors.

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Then the official question was slightly modified to point out that both the usage of TVL and the doubling of the voting power, were temporary and the Foundation would have addressed any misuse or distortion. The result of the vote indicates clearly that, even temporarily, these specific aspects of the proposal did not have the support of the majority of the governors. Based on the community debate, however, the majority does not oppose the principle that Governance decisions, and Governance rewards, need to see an involvement of Defi users.

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This is why the foundation is restarting the debate from the original discussion about the involvement of different kinds of blockchain participants in governance.

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Vaults, Liquid Governance, and a possible solution for DEX

The Foundation still believes that, with the evolution of the ecosystem, other categories of players need to have a role in governance, since their voices need to be heard and their role needs to be structurally acknowledged and incentivized. This means finding an alternative way to acknowledge Defi participation, as well as expanding the definition of ‘governor’ to other forms of participation.

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For Defi, the risk of manipulations aimed at increasing TVL, absorbing resources from other governors, was often mentioned in the debate as a serious risk of the previous proposal. Another point that came up multiple times in discussion so far is the importance to measure stake by committed Algos for rewards and voting power. Solutions which are based on Algos only, and require some form of commitment, exist already for Decentralized borrowing-lending, through vaults and liquid governance solutions. They can be made more rewarding for participants, since they involve additional risk, and can be extended to DEX, so far excluded from participation.

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DEX liquidity providers see their investment vary with market fluctuations. This is not compatible with the definition of the governors’ commitment as a fixed amount. While participation in the governance of a blockchain will always require a form of commitment, this definition needs not to be rigid in an evolving context. As a starting point in this evolution, market losses suffered by the Defi governors that do not withdraw their algo commitment should not lead to their disqualification or to other penalties.

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The Foundation is exploring solutions based on this fundamental principle. Liquidity providers that lose Algos during the term due to market movements (impermanent losses), but without actual withdrawals from the liquidity pool, can participate in Governance and will not see their Governance Algo stake or rewards diminished. This rule will not impact the other governors’ rights, since Algos lost to the market will not be reusable for governance in the term by any other player.

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The foundation commits to achieve the goal of an active and fully representative governance, helping the growth of the ecosystem, based on the more solid principles developed through the debate with the community, including the result of the Measure 1 vote. A possible approach to include other categories in Governance, which is free of manipulation risk and easy to assess for the other governors, is to carve out a pre-set portion of the governance rewards for including new forms of ecosystem activity. For example, allocating 10% of the rewards pool (or about 7M Algos per term) as rewards for governors that participate in governance through Defi, defines clearly the maximum impact that the inclusion of this new activity can have on the general Governance. It also has the advantage that its benefit is maximized when it is most needed. In the example with 7M Algos devoted to Defi governors per term, if 200M Algo are committed in Defi governance, the rewards rate for the Defi governors is 14% annualized, providing a strong incentive for growth. But if Defi governance participation reaches 1B Algo, their rewards rate reduces to less than 3% annualized.

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We will bring to the community a more detailed description of the solutions sketched here ahead of the next vote, and the community will have time to assess and comment on the proposal before the next voting session.

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The support of Menno Sijben of https://algorandstats.com/ is gratefully acknowledge.