Evolving Community Governance

Massimo Morini, Chief Economist, and Michele Treccani, Head of Market Analytics and Research, April 9, 2022.

The state of the Algorand blockchain network in 2022 is very different from what it was when the Algorand Community Governance was set up. Not only size, value and participation have increased, together with ASAs, technical improvements and apps. We see entire new layers of activity, such as the network of competing decentralized financial applications, and the layer of decentralized governance itself.

These two layers contribute crucially to the fulfillment of the original purpose of Algorand. The growing DeFi apps can eventually leverage the efficiency and security of the Algorand protocol, while Decentralized governance stems from the growing decentralization of the stake and the appearance of diverse realities and economic needs in the ecosystem. One of the current main challenges for Algorand is to ensure that decentralized Governance and decentralized Finance compound together to make the network grow faster, rather than competing with each other in attracting users. This is a worry we already expressed in a previous post, but we can think of other possible clashes such as DeFi or Governance designs preventing or distracting users from validating transactions and securing the network. While many DeFi applications are looking for their own solutions to these issues, the Foundation input to the rules of Governance can be a force turning potential issues into material opportunities.

Indeed, clashes between different layers of a blockchain have already been experienced by other, older blockchains. Ethereum starts to see the light at the end of a long path to change the foundation of its protocol, moving to proof-of-stake from the old proof-of-work initial system, which was increasingly clashing with the goals of finality, sustainability and efficiency of its large DeFi network.

Algorand can rely on a forward-looking cryptographic protocol, that started since the beginning from the efficiency of Pure Proof of Stake, with proven finality and scalability, and free of an embedded system of incentives. As the example of Ethereum leaving proof-of-work and mining shows clearly, such initial reward systems can help attract holders in the early stages but are hard to modify when the needs of a blockchain evolve. Algorand took a different path, preferring not to load the core protocol with economic roles, but rather distributing stake and incentivizing activities and loyalty through layers of services and rewards different from the core consensus protocol.

Today, decentralized Governance, an enduring need of any decentralized environment, is the main layer of economic reward. It is based on the common undistributed resources of the network, and as such its evolution needs to follow the evolution of the blockchain economic needs. Governance is flexible and embeds a natural evolution system, represented by the capability of the community to evolve its rules through voting. In the last vote, for example, the Governors decided to introduce a new layer of Governors, the xGovs, entitled with the right to bring community proposals to be voted by the full governance community. We are now in the process of discussing the additional duties and responsibilities of the xGovs, and the best way to remunerate those activities. In this post we want to spark some reflections on the possible evolution of Governance, its driving principles, and the ways to smoothly embed/integrate governance participation with the other processes/activities relevant for the entire ecosystem.

The Governance of a blockchain network, as well as the Governance of a pool of resources within a blockchain, is a paradigmatic example of governance of common resources. Some of the most relevant considerations on the topic came from Elinor Ostrom, who in 1990 was awarded the Nobel prize for her “analysis of economic governance, especially the commons”. Her research is often synthesized in 8 principles. Very few of these principles are so deeply connected to the material or geographical nature of physical commons that they are not directly applicable to the reality of a blockchain. On the contrary, most of them represent precious guiding principles useful to evolve a decentralized governance system when its level of complexity grows.

The Ostrom Principles of Governance

The first Ostrom principle requires to state clearly who is entitled to participate into the common resources and their governance. We know the answer in a proof-of-stake blockchain: your rights are measured by your commitment, which is the skin-in-the-game you put in the economic environment, i.e. the size of your Algo stake.

The next two principles read as follows: as many people as possible need to be involved in decision making, and yet there is no one-size-fits-all approach to common resource management. This suggests ways to evolve governance in order to avoid possible fallacies in the design and building of governance systems. In a blockchain reality, the above principles read:

• The governance system of a decentralized community must be inclusive, remaining as much as possible open to everyone. Therefore the governors are potentially all the active participants, that in blockchain means all the holders of the blockchain assets. The right to govern must be acknowledged to everyone, and this makes governance the most fundamental form of commitment towards the network, and the fundamental layer of incentives for all the participants.
• The governance system of any common goods needs to recognize the heterogeneity of players, and therefore of their interest towards the common goods, together with their different level and type of commitment and skin-in-the-game. The latter principle is completely aligned with the principle of proof-of-stake, corresponding to giving players a power proportional to their stake, but goes beyond that. If the commitment or services required to governors, and the associated incentives, were of the ‘one-size-fits-all’ kind, participation will be prevented for all those not fitting the size that fits the majority. Even more importantly, the governors would be forced to choose between governance and other services within the blockchain, defying all purposes of governance and thus preventing an effective inclusion.

The fourth, fifth and six principles are more focused on the duties, and the rights, of the users-governors. There needs to be monitoring of the compliance with the rules, and the breach of them needs to be sanctioned, with tools in place to avoid uncertainty and resolve conflicts. The possibility of using smart contracts and the transparency of the blockchain make these principles of accountability more applicable in a blockchain than in any traditional system. The presence of a framework of rewards and sanctions (starting from the lighter ones, like exclusion from the decisions and loss of the rewards) has already become central to many crucial public blockchain services.

Finally, Ostrom points out that governors need to be deciding their own organization, and they work more efficiently in a system of ‘nested enterprises’, which refers to building responsibilities among Governors in nested tiers (Ostrom, 1990).

A practical opportunity to evolve Decentralized Governance

How could a decentralized governance system implement these principles? In the xGovs discussion, a need to aggregate this layer of Governors, deciding on community proposals through DAOs, has emerged: see for example this post. In terms of the required commitment in DAOs, the post proposed that xGovs left their rewards in the DAO for at least one year. This is for sure an interesting possibility, since this way xGovs can prove their long-term commitment without any form of additional locking of their principal capital, reducing at the same time the short-term inflationary pressure of newly issued rewards.

The above observation of the reality of a maturing blockchain, with the interaction between Governance and other blockchain activities, suggests already how the xGovs and the other Governors can further or differently prove their commitment to the network:

• they can participate in a relevant economic activity, willingly accepting some additional risks. In the short term, participation in an economic activity for governors can take the form of participation in our growing DeFi ecosystem. The additional rewards, coming from the Governance and DeFi resources, should be set proportionally to the risk taken. This is in accordance with a classic financial principle: committing for a fixed term in a risky activity is rewarded more than just holding for a fixed term.
• they can forfeit their rewards for a longer period of time, for example like in the initial xGov proposal described above, accepting elements of variability such as the transfer of rewards from the xGovs that leave earlier to the remaining ones. This can already be a form of reward, to be added to the increase of their weight in supporting proposals, proportionally to the length of their commitment in the DAO.
• they can participate in core activities such as running participation and/or relay nodes. In the short term, the easier node running activity is running Consensus nodes, and this can enjoy any desired mix of the two above forms of remuneration, or other tokenized recognition of their commitment.

We think that the above directions, could constitute fundamental guiding principles useful to the evolution of the Governance Framework, for reaching the goal of inclusivity and integration with the relevant processes in the ecosystem.

In particular, following the principle of self organization, we believe that they could constitute a possible path for the broad Governance community. The Governors will have to express their views on the most relevant activities for xGovs and for the other Governors, the way these activities can be combined or layered as ‘nested enterprises’ in governance, and the proper level of the different rewards for the three different forms of commitment, including the possibility to compound them. Beyond this little contribution, we know that only a strong support from the ecosystem could lead to a swift introduction of all or some of the opportunities discussed here in the future reality of governance.