We covered Celo’s lightweight identity in Part 1 of our series and we explored their stability mechanism and token economics in Part 2. We conclude our Early Look at Celo series with Part 3, where we had a chance to speak with Tim Moreton from cLab’s Engineering team to learn more about their governance system.
CoinList: Thanks for joining us, Tim. First, how would you describe Celo’s consensus mechanism and how does it work?
Tim Moreton: Thanks for having me! Celo is a Proof-of-Stake network — it has similarities with networks like Ethereum 2.0, Cosmos, and Polkadot. Celo uses a Byzantine Fault Tolerant (BFT) consensus algorithm, in which validator nodes agree between themselves on what transactions to include in the next block, even when up to a third of them are offline, faulty, or malicious. When a block is agreed, that decision is final. Compared to Proof of Work, this gives you higher transaction throughput, immediate finality of transactions (they can’t be undone), and a much, much lower energy cost.
CL: Diving in a bit deeper here, how are network validators chosen and how does voting work?
TM: Right, so the big challenge with a consensus algorithm is answering the question: “who gets to participate in this?” Proof of Stake is really a set of policies to answer that question.
BFT algorithms cannot (currently) scale beyond hundreds of validators, and can resist up to a third of participants being malicious. That means it’s not possible for every participant to be a validator, and that each validator selected must be subject to a combination of strong economic incentives to ensure the security of the network.
Celo selects validators through voting using a form of proportional representation — in fact the same algorithm used in elections for the European Parliament or in the US to assign seats from the census in the House of Representatives. Celo has a notion of Validator Groups, which are what users vote for. Groups maintain an ordered list of validators that agree to affiliate with them and share their risks and rewards. Groups have a strong incentive and opportunity to vet validators more carefully than an end-user could. Some may be independent entities, and professional staking operations might operate their own groups.
In designing the Proof of Stake system, one aim was to maximize network security while also building broad participation from many thousands of end-users, who may be regularly using the Celo Wallet but don’t have the extra time or inclination to spend studying the protocol and the past behavior of validators. Groups let users assign their votes based on a group’s brand, reputation, and past performance.
CL: You mentioned that Celo uses a form of proportional representation. According to Celo’s documentation, this proportional representation for validator elections and governance decisions are made through a bonded-stake-weighted voting scheme. Could you explain how this works in more detail for both validator elections and governance decisions?
TM: Any user can lock an amount of Celo Gold (“cGLD”) and use that to do potentially several things at the same time: they can vote in validator elections, they can use it as a stake for a validator or validator group, and they can vote in governance proposals. They can unvote, unlock and make their cGLD liquid again with a three day notice period (with daily elections, this means the “effects” of your vote).
CL: Shifting gears to the economic incentives employed in Celo’s governance, who are the network participants who receive block rewards and what is the breakdown of block rewards distributed?
TM: Rewards are distributed at the end of each epoch, which means daily. Elected validators receive rewards in Celo Dollars (“cUSD”), as most of their costs are likely denominated in fiat currency. Their rewards factor in a number of things including uptime. A percentage of each elected validator’s reward is given to its group as ‘group sharing’.
Users who have locked cGLD and used that to vote for groups that have elected one or more validators receive voter rewards: I would expect this to be around 6%, but it varies depending on whether the protocol needs the amount of cGLD locked up to be higher (to make vote-buying attacks harder) or lower (to provide more liquidity). Voter rewards are automatically reapplied and compounded.
Celo’s epoch rewards also support an on-protocol Community Fund, for grants to developers and contributors, and a Carbon Offsetting Fund that means that the carbon produced by all the Celo protocol’s elected validators and other infrastructure is continually offset.
CL: Many projects in crypto, even Bitcoin and Ethereum, have run into the issue of incentivizing developers and ongoing technical improvements. Celo, on the contrary, includes a built-in system for proposing and implementing technical improvements to the protocol. How does this process work and how do you incentivize developers to submit these improvements?
TM: That’s right. The system helps support the community in setting the direction of the project and makes it easier to coordinate and implement a range of protocol changes.
A Governance contract allows any cGLD holder to propose and vote on upgrades or changes to any of Celo’s core contracts. This includes the Proof of Stake mechanism, the stablecoin protocol, the lightweight identity protocol for linking your phone number to an account, and the governance process itself. It also includes spending the proceeds of the Community Fund. While the blockchain codebase itself can’t be changed via on-chain governance, a number of important parameters can be set that way, including the block gas limit.
CL: Moving on to tokens issued on Celo, Celo allows for additional stable value currencies to be issued on the network besides cUSD. How does the process of introducing more stable value currencies work and how does that affect the reserves?
TM: I would imagine this is something the Celo community looks at longer-term, once cUSD is well established and there is a good understanding of its economic behavior. However, the protocol lays the groundwork for new currencies today. Stable value currencies implement an extended ERC20 interface, meaning that new tokens can be plugged in relatively easily. For example, supporting gas payments in a new token is a matter of adding its address to a governance-controlled whitelist. Ultimately, it’s a series of governance proposals.
CL: Celo Gold holders can also vote to change the reserve base. How does this work and could you provide an example of how this would play out?
Part of the shared reserve is held as cGLD, and part includes other crypto assets like bitcoin and ether. The protocol directs the balance of assets tracking a reserve target allocation, which is stored on-chain, and can be changed via the governance process. So, for example, a proposal could add a new reserve asset or change the weight of an existing asset. If this proposal is approved, the reserve would be rebalanced to reflect this target allocation.
CL: Finally, Celo allows for the introduction of local currencies backed by their own reserves to be issued on the protocol without needing to go through the governance process. Could you talk about this concept in more detail and provide an example of how this would work in practice?
TM: I am really excited about the potential for future innovations on money that Celo could facilitate, like local and natural-asset backed currencies. As with additional stable value currencies, this is something I would envisage the Celo community will look at longer-term once the platform is well established. Since Celo is an open platform, anyone can use it to deploy smart contracts. It is fully EVM compatible, so I hope we see a whole range of new and existing DeFi services join the Celo ecosystem. There is no reason that assets added in this way couldn’t become part of the shared reserve’s portfolio or even become accepted for transaction gas payments (as above).
The “Early Look At Celo” Series
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