Algorand Community Governance: Period 6 Review

Governance Period 6:

Period start: Dec 31, 2022

End of commitment: Jan 15, 2023

Period end: Mar 31, 2023

Committed stake: 3.81B ALGO

Circulating supply at commitment: 7.197B ALGO (Jan 15, 2023)

Total rewards: 70.5MM ALGO

Governors: 22,427 wallets

General governance rewards: 53.2MM ALGO to 22,427 wallets 

DeFi rewards: 15MM ALGO to 6,056 wallets

Funds earmarked for other programs:

  • xGovs: 2MM ALGO
  • NFT Museum: 300K ALGO

More users than ever before participated in governance during Period 6 (GP6) and the period had the largest amount of ALGO committed so far – a slight increase on the previous period. 

Just over 53% of the circulating ALGO was committed to governance by the time the commitment window closed on Jan 15, 2023, which confirmed the trend that we have observed across a whole year of decentralized governance. 

The voting measures focused on the allocation and targeting of DeFi rewards through governance.

Measure 1

Boost allocation to DeFi rewards by 5MM, from 15MM to 20MM ALGO.”

Based on an empirical observation from previous governance periods, the reallocation of rewards from general governance to DeFi rewards has contributed to the growth of our DeFi ecosystem. It has incentivized passive users to have more active participation and attracted users coming from other ecosystems.

Due to the increase in the total number of participants in DeFi, measure 1 proposed to boost DeFi rewards by 5MM (an increase from 15MM to 20MM ALGO), reallocating funds from general governance rewards to DeFi rewards. Voters were overwhelmingly in favor of option A (yes, boost DeFi rewards to 20MM ALGO), with a final proportion of almost 90% to 10%. 

We further analyzed the results in terms of wallet size: fish, dolphin, and whale-sized wallets. Even when we group them by wallet size, we still see similar proportions in all three categories. The dolphin wallets had the most votes against the measure, yet even this was minimal with above ¾ still voting to boost the rewards. We found similar evidence when analyzing the results with the alternative “1 wallet = 1 vote approach” – in fact, this made the results mildly less polarized.

Measure 2:

Use up to 5MM of the ‘Boost’ for Targeted DeFi Rewards.”

Measure 2 was conditional on the passing of measure 1, and governors were required to vote on this measure independently from their preference in measure 1. This was in order to have the most inclusive and representative vote on the precise allocation of the extra DeFi rewards.

This measure proposed that the extra 5MM ALGO approved in measure 1 should go towards projects that fit certain criteria, according to the Terms of the Program – hence referring to them as “targeted DeFi rewards”. The distribution would work in accordance with principles such as how much weight a project has in the space. At the same time, it aims to allow for more freedom to choose the most efficient way of distributing those extra rewards.

The goal is to try to overcome some possible rigidities of the current governance rewards distribution framework that arise due to the three-month cycles of committing and voting. It also aims to give DeFi projects more flexibility in how these rewards are structured and distributed among their user base, allowing them to target rapid growth, deepen DEX liquidity, and incentivize users who would come to Algorand in the middle of a governance period.

Accountability and fairness are ever-present pillars within this freedom: eligible projects must distribute the extra rewards in their totality to users and at the same time must provide transparency to the community about how the rewards are distributed at the end of each quarter. Those that fail to distribute rewards directly to users will be ineligible for subsequent periods. The eligibility criteria and the total value locked (TVL) calculation method for each project are described in the Targeted DeFi Rewards Report, alongside the list of projects that qualified for this first round of the program.

The voting results for this measure essentially followed the same proportions of measure 1, with an overwhelming majority supporting the creation of targeted DeFi rewards, with an almost 90% to 10% proportion. These proportions are confirmed also by looking at the different wallet cohorts in the table below, thus confirming the universality of the vote result. The Foundation, together with the Algorand community, will assess the impact of the related targeted distribution by looking at the individual reports that the projects will publish once distribution by each of the projects is completed.

Impact of MyAlgo Hack on Governance:

During GP6, the MyAlgo hack impacted extensively our community, with the first clues of the attack emerging in the last days of February 2023, as reported on @MyAlgo and @Algo_Surf Twitter pages, and

The economic impact of the hack is still under investigation. While some attacks are still unfolding, it’s clear that they affected a large portion of the community, regardless of wallet size.

Moreover, despite the fact that the breach impacted a particular wallet protocol and not the overall security of the Algorand blockchain, it’s clear this attack had an impact on the perception of security in our ecosystem. 

In this situation, it’s crucial to address the extent of the attack as objectively as possible, in order to avoid the spread of irrational fear, uncertainty, and doubt (FUD). 

Examples of legitimate concern would be: 

  • Could the MyAlgo hack hijack the governance vote?
  • What are the side effects of the hack to Algorand Governance?

Using the information available on the set of affected wallets, which may be incomplete, we assessed the possible impact on governance. We found that the wallets rekeyed allegedly by the hacker amount to roughly 24MM ALGO committed in governance. 

Granted that there is no evidence of a coordinated hacker vote in governance, if we compare the 24MM ALGO with the total commitment of 3.8B ALGO, it’s clear that the vote could not have been manipulated by the hackers. Therefore we can safely infer that the security of the governance program has not been impacted by the hack.  

Another possible side effect of the hack could be: 

  • Governors panicked and exited from Governance because of the fear of losing their funds. 

First of all, it’s important to stress as communicated several times (see here for example) that the best countermeasure for the hack was/is to rekey the wallet in order to avoid losing funds and at the same time not lose governance status. Nevertheless, a small fraction of the governors swiftly moved their funds and lost their voting power.

Lastly, we want to address the hack impact on the governance process by comparing the evolution of the total commitment with the previous governance period. For Periods 5 and 6, the final commitment was around 3.7B, therefore it is interesting to visually compare them. 

In the chart below we show the temporal evolution of the commitment in Period 6 and Period 5, in order to better capture analogies and differences, starting from the first day of commitment. 

First of all, in Period 5 the commitment window was extended by a week in order to allow the inclusion of DeFi participation, passing from the usual two weeks to three weeks. It’s interesting to note that the extra week helped increase the total amount, but only in the very last days.

We can safely assert that the Sam Bankman-Fried (SBF) scandal had a larger impact than the MyAlgo hack in pushing fearful governors to exit. It seems that users expected a higher systemic impact from the SBF scandal than an idiosyncratic impact from the MyAlgo hack.  

At the same time, we can observe that the MyAlgo hack, even if it impacted the total commitment, did not spoil the governance voting session. The majority of the committed ALGO remained valid for the vote and governors were able to express their preferences and reveal strong polarized results, thus definitely excluding any doubts of possible vote alterations.