Algorand Community Governance: Period 4 Review

Contributors: Massimo Morini, Chief Economist, and Michele Treccani, Head of Market Analytics and Research.

Governance Period 4:

Period Start: Jun 30, 2022

End of Commitment: Jul 14, 2022

Period End: Sep 30, 2022

Committed Stake: 3.7 Billion Algo

Circulating Supply at Commitment: 6.931 Billion Algo

Governors: 27,570 wallets

The fourth Algorand Governance vote is now complete. Confirming the trend that we have observed across a whole year of decentralized governance, participation grew as a % of circulating supply to 53.5%.

Two voting measures were proposed on the ballot for the fourth period of Algorand Governance. Both measures had the goal of moving resources from more passive forms of participation (soft staking) to more active ones, DeFi. Governors had the opportunity to improve the conditions for DeFi users that also wanted to be governors:

• Measure 1 allowed the setting of higher Governance rewards for DeFi users participating in Algorand Governance.
• Measure 2 allowed the introduction of the commitment of LP tokens as a Governance stake for Algo liquidity providers in decentralized exchanges.

Voters supported a change in the status quo for both measures.

Measure 1 was passed with a 66.27% majority.

Measure 2 was passed with a 92.16% majority.

This marked a difference from the previous governance period, with one measure supported with near unanimity, while the other was rejected. This time the result was more homogeneous across both voting measures.

The vote also marks the first introduction of different players in governance. In period three, a different measure aimed at involving DeFi in governance had opposite results. The change in the result is easily explained with the fruitful debate which started with the previous vote and continued with the new one, leading to the current two proposals, which is summarized at the end of this communication, with references for interested readers.

The vote had an immediate effect on the new commitment window for the fifth governance period that started on October 1st and will now close for sign-up on October 21st (11:59:59 SGT). The necessary upgrades to allow the changes are now deployed, with some further specs for users staking LP tokens being finalized now. A more detailed explanation is provided below.

Vote distribution by Algos and by wallets

As with the previous votes, we can break down the results by stake and wallets. We present below the vote results for the two measures, aggregated by the size of the wallets and expressed as the number of Algos and 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.

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

Support for A is clear in all categories. The additional approximately 10% for A we see for wallets larger than 1,000 Algos has to be expected: smaller players are usually less involved in DeFi.

For Measure 2, we see an even larger support for A. Here we also see a larger discrepancy above 1,000 Algo holding wallets, and this is not surprising since this measure was the most technical, and more of interest for larger and more technical participants.

Vote dynamics during the period

Thanks to the transparency of the blockchain, we can observe the dynamics of the vote in real time. For Measure 1, the dynamics of the vote in terms of stake is reported in the figure below.

Support for change (option A) was leading at the beginning of the period, supported by a couple of larger voters (the vertical jumps in the lines) and by several smaller voters across a longer time (the less steep, irregular increases). Then a very large voter reverted the result, putting the conservation of the status quo (option B) in the lead. This lead lasted for several days of deep debate, until, around the middle of the period, a lasting sequence of smaller and larger voters gave an increasing lead to A, that one very large B vote towards the end of the period did not manage to overturn.

For Measure 2, the lead of the supporters of a change for a governance more inclusive towards DeFi was more constant across the period, as visible in the next figure.

Vote Result implementation

The introduction, definition and implementation of these two measures has happened through a continuous debate with the Community, which started in the previous Governance period and continued through this one in the dedicated pages of the Foundation Forum. The debate has been extraordinarily high level, leading to some of the specs such as the criteria for liquidity pool, the initial focus on Algo pools, and the maintenance of a DeFi list. Some voices proposed even more radical forms of DeFi support, while some others would have preferred to maintain the status quo. The support to these measures was in any case dominant across the different categories of decentralized governors, as confirmed by the vote. The debate went on beyond these specific measures regarding DeFi users. There were many proposals regarding a shift from rewards to stakers towards rewarding more economically active players. Many advocated the need to extend governance rights to users providing vital services such as node running, and some proposed drastic reductions of the amount of rewards towards pure soft staking, although, as one can expect, there were also voices radically opposing these views. One generalized request has been to see as soon as possible the implementation of the xGovs and the establishment of a procedure for community proposals, since both solutions were approved in the first half of the year.

The next governance period has a particular relevance since, as it happened in Q4 2021 for 2022, the Algorand Foundation is going to set the range of rewards for decentralized governance in the next year, and the possible evolution of the engagement of the governors. In preparing this step, the Foundation will continue to be led by the dialogue of the community to make sure that decentralized governance becomes more and more inclusive towards different users, more effective in the involvement of decentralized governors at all steps, and serving the purpose of the growth of the ecosystem.

The proposal of Measure 1 does not impact the commitment and voting procedure for Governors that continue to commit and sign-up through the Governance app or through the solutions provided by DeFi apps, such as Vault or Liquid Governance that were available already in the previous periods. Platforms offering new solutions have to apply to the Foundation with their Governance solutions to be included in this program, so that their users who participate in governance will be eligible for extra rewards. The DeFi lists, built by the DeFi platforms, are monitored and checked by the Foundation, and it will be used at the end of the Governance period to proportionally distribute the additional 7M Algos. The obvious requirement is that solutions are for liquid DeFi apps and fit the rules of governance like in the case of the Vault and Liquid Governance. This increase in rewards will relate to all the DeFi users participating in Governance through these solutions, and automatically also all users committing LP tokens according to Measure 2, since they are obviously DeFi users.

Measure 2 proposes the inclusion of Liquidity Pool Token in the Governance Framework. The identification of the eligible LP Tokens follows the criteria of liquidity, in particular, the requirement of at least 10,000 Algos deposited on August 15, 2022. The final list of the eligible LP Tokens has been published here and it is the result of a discussion with the community and the DeFi projects in order to filter out any residual possibility of manipulations. For the future, the inclusion of new pools/new assets will follow the suggestions from the community. More information on this is outlined in the Next Steps section below. In case of the second measure, that included in Governance new assets, the procedure to stake LPs directly has been made already available for the current commitment period. Additionally the Foundation is easing the process of updating smart contracts for staking LPs as explained here.

The Foundation is also extending, both for LP tokens and for Algos, within DeFi or not, the commitment period for a further week till October 21st, 2022 (11:59:59 SGT).

Governance Debate and Next Steps

The introduction, definition and implementation of these two measures has happened through a continuous debate with the Community, which started in the previous Governance period and continued through this one in the dedicated pages of the Foundation Forum. The debate has been extraordinarily high level, leading to some of the specs such as the criteria for liquidity pool, the initial focus on Algo pools, and the maintenance of a DeFi list. Some voices proposed even more radical forms of DeFi support, while some others would have preferred to maintain the status quo. The support to these measures was in any case dominant across the different categories of decentralized governors, as confirmed by the vote. The debate went on beyond these specific measures regarding DeFi users. There were many proposals regarding a shift from rewards to stakers towards rewarding more economically active players. Many advocated the need to extend governance rights to users providing vital services such as node running, and some proposed drastic reductions of the amount of rewards towards pure soft staking, although, as one can expect, there were also voices radically opposing these views. One generalized request has been to see as soon as possible the implementation of the xGovs and the establishment of a procedure for community proposals, since both solutions were approved in the first half of the year.

The next governance period has a particular relevance since, as it happened in Q4 2021 for 2022, the Algorand Foundation is going to set the range of rewards for decentralized governance in the next year, and the possible evolution of the engagement of the governors. In preparing this step, the Foundation will continue to be led by the dialogue of the community to make sure that decentralized governance becomes more and more inclusive towards different users, more effective in the involvement of decentralized governors at all steps, and serving the purpose of the growth of the ecosystem.

¹The largest wallet, and the only one larger than 100M, was removed from bucket comparison, since it does not correspond to a whale but to the aggregation of Liquid Governance voters. Indeed for this wallet the voting result is in line with expectation: in Measure 1, DeFi users in liquid governance voted A with an overwhelming 95% majority.

²In Measure 2, Liquid Governance voters supported A with 97%, even larger than the support to A in Measure 1.