I commented early on that deciding which DeFi protocols get to also distribute governance rewards based on TVL on those platforms is a terrible idea and this response takes that into account which is great.
I don’t think splitting the rewards into two pools as suggested will help much- as per game theory those pools are likely to find an equilibrium based on risk/reward and I think the risk with an audited DeFi platform is low enough that we would see some institutional investors come in to the “higher risk” pool and essentially negate the split. We would also still have a large amount of Algo’s locked up doing nothing in the first pool.
I hate to negate an idea without proposing an alternative solution but it’s difficult to find one where active participation is consistently rewarded more than passively voting on governance.
I think asking people to lock Algos to vote is very secure as you know they are definitely invested in the future of the platform but inherently problematic due to sucking up all liquidity and essentially locking billions of value doing nothing else than voting for the future of a chain they aren’t using.
The other problem with the current governance system is that it was always going to be controlled by a few centralised entities that hold the most Algo such as the foundation and exchanges.
I propose a fundamental change to governance.
What if instead of locking Algos to obtain votes every address had an associated “activity score” it could be as simple as the sum of their transaction fees over the last X months - When it comes to a governance vote you could be rewarded votes proportionally to your activity score. This can be modified in various ways depending on security needs / what you want to incentivise. For example, the easiest way to make this more secure is scale activity score with volume transacted but this will reintroduce the issue of large central entities receiving the lions share of the votes, although, perhaps to a lesser degree.
If you wanted to incentivise TVL on DeFi platforms with this system you would need a mechanism where smart contracts are able to reward activity score for locked Algos as they are “actively” participating in DeFi - This would need an approved auditing system similar to my initial suggestion for deciding which DeFi platforms get to issue governance votes.
On a seperate note I also see value in simply seperating rewards from governance.
This would free up the 70m Algos designated for governance period 4 which could be put back into participation rewards so institutions could maintain their safe interest rate.
This will have the benefit of separating institutions who just want safe interest on their Algos from those who actually want to take part in governance.