Evolving Algorand Governance

[Arximedis]

IMHO - As a long-term advocate and supporter of Algorand’s approaches to solving the Trilemma, I think all suggestions, recommendations, and considerations should be carefully evaluated for their impact or vulnerabilities that could undermine decentralization, with regard to Governance and Ecosystem Creator Growth (DeFi, TVL, or otherwise). Forgive the length of this and any comments that might be aggressive, I may be too passionate about this

QUESTION: Any value in reviewing how PPoS consensus could help make Governance better?

Initial Thoughts: This discussion isn’t about governing dApps. Governance isn’t killing DeFi, but I see this topic indexing heavily on trying to accommodate dApp usecases rather than evolving Governance. I understand the opportunity cost of Governance may be seen as overshadowing DeFi, but I see no logic in giving “weight” to intermediary apps without clarifying criteria like; whether they are decentralized, whether they are open-source, how are they governed, what control do they have over user committed ALGO, but we dove straight into a discussion about how to include all dApps in Governance over the entire protocol. () Decentralization requires that individuals directly take part in Algorand. The discussion is about Governing the Algorand Ecosystem and Protocol. That requires dedication and focus to the topics related to Governance. I fail to see how we can consider relying on dApps without any Decentralized Governance model governing them, and, proposing suggestions to give any greater control, authority, or added weight to the users that rely on them. (Maybe I misunderstood, just seems peculiar). I admit it’s a bit mind-boggling to think: An ALGO holder in Direct Governance could receive less for remaining true to the decentralization thesis while an ALGO holder is Indirectly operating through a (De)Fi App + Governance, seems like a double-earn/spend by duplicating ALGO in the system, receiving more (2x-3x) the weight in Governance, and diluting the other “less active” ALGO. The incentive is Governance - the reward should be aligned… Rewarding users who use DeFi Apps is a very spicy recipe for a series of unknowns and unwanted outcomes imho.

Reminder: In the first Governance Period #1, the initial Algorand Governance proposal came forward with a significantly concerning vote:

• (A) Keep current system of Rewards (Active=Receive, Inactive=Forfeit) [This won, thankfully]
  or
• (B) Implement a model where Inactive holders could forfeit Rewards AND Lose Holdings. [Lead to Centralization]
  It’s still unclear WHO proposed this concept or how it made it to a Foundation Community Vote, let alone the FIRST vote, but - Governance worked (despite pessimism and panic).

Option A Succeeded after receiving 56.58% of ALGO (also, 51.59% of GOVERNORS - which implies this was a majority on both fronts).

Since the Governance Period 1 -

• ALGO committed Governance (Staked) has gone from over 1.7B ALGO to over 3.9B ALGO = 58% Gov/Circulating or 40% Gov/TotalSupply.
• Between ~ 57-70K Governor Wallets out of 20-24 M+ Accounts (fluctuated over time).
• ALGO Stats: 6.7B Circulating, 1.77B Consensus Stake, 10B Total Supply.
  
  

Overview: # 1 & # 2 address Classification & Identification. #3 is responses to the hypothetical questions.

1. Classify Participating Holders into 5 groups, and each should have incentives that are not capable of being gamed, manipulated, or, creating points of centralization, to the detriment of the ecosystem or other participants. Mapping Participant Group to (Activity) and identifying the activities that are on-chain, verified by a trusted-party or Algorand and/or visible/transparent, may help define “Active Participant”.
   a. Spectator (Passive) = Hold/Hodl/Explore(on/off-chain?)
   b. Contributor (Active) = Stake/Commit/Transact/Interact/Inquire/Test/Learn/Critique/Play
   c. Governor (Engage) = Strategize/Discuss(on/off-chain)/Propose/Vote/Consensus
   d. Creator (Produce) = Execute/Build(dApps, Projects,Tokens/NFTs)/Supply Liquidity/Design
   e. Constructor (Compute) = Host Infrastructure/Network/Nodes/Validators/Relays/Archives or Develop Open-Source Capabilities

Caution: A key challenge witnessed on several protocols/blockchains is the potential for centralization to occur beyond “Constructors”, where even if the protocol solves Buterin’s trilemma, the mechanisms built and supporting the ecosystem can ultimately become points of centralization or a regression towards easy, like (De)Centralized Exchanges (DeX/CeX), Liquidity Apps (DeFi dApp) or (De)Centralized Stake Pools (DeP). For example: DeP resources can ultimately become a point of central power, failure, or vulnerability, especially if those mechanisms aren’t clearly decentralized or are controlled by few entities. Comparing to the potential success/failures of the largest player in the space, Ethereum has at least one example of Staking Pool, Lido, which combines Constructor & Creator concentration. For a deeper analysis (just so this doesn’t seem bias) - see one analysis here Blockscience Review

2. Identifying Participation & Considerations:
   a. Users/Wallets that commit ALGO Governance are beneficial for decentralizing the ecosystem, as this is the only true decentralized means of enabling individual stake (especially if each user were to run their own validator/relay)
   b. Users/Wallets who commit ALGO to DeFi are beneficial for the scalability of the ecosystem, as this is the optimal way to provide liquidity, however these “Decentralized” dApps or Protocols become points of Centralization, much like CeX (Centralized Exchanges).
   c. Rewarding Governance and DeFi simultaneously risks double-spend overlap and risks committed ALGO being pooled or disqualified due to concepts like impermanent loss (for LP) or other mechanisms. I.e. It may not be prudent to subsidize DeFi users with Governance rewards. Most DeFi protocols (regardless of chain), require locked commitment of the crypto/token, unlike ALGO Governance which uniquely permits Users/Wallets to commit without the ALGO being transferred from the Wallet.

3. Original Proposed Questions & Answers: Hopefully, the prior comments have not offended or annoyed anyone, thus far. However, I have spent some time reviewing a number of other blockchains, programs, whitepapers, reading/researching vulnerabilities, and yes, listening to every public engagement I can of Dr. Silvio Micali’s (who is one of a few people responsible for my gaining interest, along with my best friend and brother).

1. Question 1: How do we identify accounts that participate in DeFi?

Questions: To identify DeFi participants, an example like AlgoFi or Folks Finance, would be a good place to start in evaluating how to programmatically differentiate between Governors listed on Algorand Governance albeit not the only approach a dApp could take to supporting DeFi + Governance. This is not a critique or criticism of AlgoFi, as I do not have a substantial bias or position - this is merely an analysis.

• AlgoFi Vault for Governance (vALGO), Currently, as of 05/06/2022, has ~82.94M ALGO locked (or 2.1% of the 3.92B ALGO Governance staked) and 3.61K Governors (6.3% of the 57K Total Governors). According to the documentation is stored in Storage Account 1-to-1 with the User/Wallet. To the best of my knowledge, AlgoFi is not yet decentralized, so while this appears to be the optimal approach, there are unknown risks I am unaware of the specifics surrounding the control of any 3rd party vault/account/addresses.
• Folks Finance Currently, 05/06/2022, has ~12.5M ALGO in the Vault for Governance (gALGO3) or < 0.35%.
• Example using AlgoFi: One Transaction from a User committing ALGO to the AlgoFi Vault to Govern. This would be the first step in identifying the DeFi User/Wallet, as it may be the clearest method of identifying this. NOTE: When a user directly interacts with AlgoGovernance, Transactions have Note/Text that denotes: af/gov1:j{“com”:ALGOAMOUNT}.
• Suggestion/Idea: It may be prudent to identify when a DeFi dApp/Account that generates a Storage Vault Address (like AlgoFi) and it’s purpose i.e. AlgoFi Storage Vault - Governance, or, when that ALGO is committed to AlgoGovernance E.g. AlgoFi Transactions include a Note/Text like this Manager: mt for other transactions. Alternatively, an account flag or status note, might be another way to flag or remove interactions between DeFi & Governance.

<ALGO_TXN_ID>: 2XMKIU3NZ6FI6WOQUBQ6D6CVQ45NRJUWRRSWTBRL5EGXUL5JHKKA
<AlgoFi_Storage-Vault_Address>: RTIBT7HHAZFNEUXSLG42XOJKUDN7V2OAXE5BYIJM4HZ3BQ3RSV7HC4CS3Y
<ALGO_Wallet_Address>: LQG7RQGNQ5P7HQ56CDJ2IHVNDWWUNKWKQLCSUZAII5GFJIRTGJUOVXK3OE

2. Question 2: How many governance seats should DeFi participants be permitted?

Opinion: 50% or 1 for every 2 ALGO committed or a % to adjust for the risks of Governance tokens being “unavailable”. Determining how much ALGO is committed to a DeFi dApp and having a simple mechanism that can audit or verify the “Total ALGO” by account holding it (classified or labelled, preferably, to avoid double-bubble governance). Next, aggregating and cross-checking sums v.s. voters. Why? Decentralized Governance should be an incentive and results driven goal or milestone to ensure opportunity cost permits people to dedicate ALGO to Governance, Directly. All too often, we’ve seen intermediaries that aren’t decentralized or built as robust as the core protocol, fail to meet commitments, whether unintentionally or otherwise. Expanded Rationale below

i. Native ALGO (ALGOnative) = Holders “may” be able to commit ALGO for Algorand Governance either;

• Direct to Governance - User non-custodial wallet interacts directly official decentralized Governance program. (Most Decentralized)
• Custodial or Intermediary Wallet - User Interacts with Wallet which facilitates sync to Governance. ((De)Centralization Varies Per App)
• Custodial or Intermediary dApp/DeFi/Staking - User Interacts with dApp/DeFi which facilitates sync to Governance or provides alt wallet. ((De)Centralization Varies Per App)
• Custodial or Intermediary Decentralized Exchange (DeX) - User Interacts with DeX which facilitates sync to Governance. ((De)Centralization Varies Per App)
• Custodial or Intermediary Central Exchange (CeX) - User Interacts with CeX which facilitates sync to Governance. (Most Centralized)

ii. Liquid ALGO (ALGOliquid) = Native ALGO (ALGOnative) Holders “may” be able to commit/lock ALGO in DeFi program/vaults that swap for alternative ALGO-pegged liquidity token, or, even any equivalent concept.

• ALGOliquid provides a user the ability to lock ALGOnative, and then use both ALGOnative & ALGOliquid, separately. This is typically a 2x increase - since there is tangible and intangible ALGO.
• ALGOnative can be committed, locked, and deployed for governance AND act as liquidity collateral for use of ALGOliquid supported pools, swaps, delegated governance pools, stake pools, or any number of other ideas that can surface in the future.
• ALGOnative = Committed + Actively Participating in Governance receives rewards for Governance. 1 ALGOnative = 1 ALGOnative = 1 ALGO
• ALGOliquid = Committed + Actively & Passively Participating in Liquidity earns rewards for Liquidity. 1 ALGOnative = 1 ALGOliquid + 1 ALGOnative = 2 ALGO
• IMPORTANT: At the time of this writing, I am unfamiliar with all the methods a program, application, DeFi, DeX, CeX, or, person(s), can pool or manipulate a set of ALGOnative, whether they can transact on behalf of the users who commit their funds, have control over vaults/applications/signature authority, or other permissive actions to manipulate X amount of ALGO. I am also unclear of the possibilities for an application to permit ALGOnative and ALGOliquid from being leveraged both from the wallet without committing to applications (interesting to explore for prevention of sybil resistance or other vulnerabilities).

3. Question 3: How to reconcile changing participation levels over time? For example, how much weight should be given to a vote that happens sometime in the middle of a governance period, vs. how much to use for calculating rewards at the end of the period

Opinion: Eligibility criteria seems to handle this, unless I misunderstood it’s functionality. IMHO, No weights should be applied to participation over time, unless proposals are created with different time durations or priority/urgency levels, authorized by an xGov group/committee. If a Governor dedicates to Governance, commits ALGOnative at the start of the Period, Votes, and then loses, sells, or transfers their holdings, there are too many dynamics that enable someone to game the system without restrictions (as far as I can tell). Invalidating votes for ineligible accounts handles the matter of participating over time.

i. 1 ALGO = 1 VOTE! All Votes should be equal in importance or weight, regardless of the subject matter. If it’s an on-chain Proposal, the Proposal needs to be evaluated properly, and should be considered priority for scrutiny. Anyone who votes, at any time, is a valued participant in the ecosystem and a required part of it.

• All Proposals are not equal. If there is a reward mechanism for them, this might be a place to scrutinize participation levels, success metrics for proposals, and, qualified majorities.
• ALGO Governance is unique it’s it’s model of “Commitment” v.s. “Locking” (everyone else).
• Commitment allows a user to define the amount they want to use at the start of the period, but then become invalid if they don’t adhere to the commitment is Brilliant (no change).

ii. At all times, All dedicated Governors should have equal rights, rules & rewards, unless their ALGO isn’t fully “committed”. Giving importance at different points in time turns Governance into a FCFS model, and can become an opportunity cost that impacts engagement, subjectively.

iii. Participation v.s. Quorum. (I’d rather not open this can of worms because I don’t know if it needs to be addressed

4. Question 4: Should we have just a single governance rewards pool that is distributed among all governors, or should each segment have its own rewards pool? (E.g., 50% of the rewards go to DeFi participants and the other 50% to passive Algo holders.)

Opinion: This is a really difficult question to answer. All dedicated Governors should have equal rights, rules & rewards, unless their ALGO isn’t fully “committed” over the entirety of the Governance period. A single Rewards Pool for Governance, simplifies the incentive - as we want Governors. Typically, I’d say splitting Rewards Pools makes sense depending on the initiative or action - i.e. Proposals v.s. Votes, regardless of if it’s staked in Direct v.s. DeFi. HOWEVER, by separating the pools, it has both benefits and drawbacks for behavior. How? With a single pool, users will choose the platforms to use (which will most likely be more DeFi-centric), because the rewards would not limit the continued adoption of DeFi over Direct (which means staking centralization - no bueno). With separates pool, more people will be incentivized (forced) to use both DeFi AND Direct Governance simultaneously, until one becomes less profitable. If both, Direct ALGO Governance and/or Indirect DeFi Governance are to share a single pool, the governance weights and rewards seem a more logical natural incentive than 2 fixed pools. Separate Pools make sense if we could define the Target adoption of both Direct & Indirect Governance Participation.

Question 4 (cont.): Algo holders who commit to holding their Algos in their account for [three months], would get [one] governance seat for every Algo they commit. We are asking for feedback here, and the parameters are up for discussion. For example, should we modify the three-month period? Should we ditch the commitment altogether and move to a low-watermark system instead?

Opinion: I wouldn’t change the commitment, eligibility, or, 1 ALGO = 1 VOTE for Direct ALGO Participation. As for watermarking, log implementations on Zookeeper and RAFT (snapshot) or storage on Kafka (time), don’t seem to satisfy the scalability or decentralized nature that the current model seems to address.

5. Question 5: DeFi projects that average at least [$10M TVL] as listed in DefiLlama would be tasked with providing the Algorand Foundation with a list of active accounts and their balances. These accounts will get [three] governance seats for every Algo-equivalent that they hold (using daily average).

Opinion: I’m opposed to any indirect participant receiving more power than a direct Governor. Just my 0.02 ALGOs. If anyone were to receive more voting seats, I’d wonder how this conversation would look if we were discussing a Constructor (i.e. validator)

Question 5 (cont):
“Each project will give the Foundation a list just prior to opening each voting session, and another list at the end of the governance period. The voting power of each account will be determined by the former list, and the rewards will be determined by [the minimum] of all these lists.Again, the above is just an example, quantities above like the $10M TVL and three seats are of course up for discussion.”

Opinion: Lists of users wallets are the result of no notes or on-chain instructions being captured in a manner that enables openly available transparent information for all to see or explorer-based visibility to determine how much each DeFi provider has accumulated.

Thank you so much for reading this far, and know that I will do my best to keep up with the rest of you brilliant people. We are lucky to have a great foundation upon which to start this convo - I just fear focus and distractions can undermine us.