Including DeFi Participants in Governance

The Algorand Foundation believes that active participation in decentralized finance (DeFi) is fundamental to the health of the Algorand ecosystem. Active DeFi is instrumental in attracting capital to the Algorand ecosystem, increasing the total value locked (TVL) on Algorand, and providing investors in the Algo multiple ways to earn return and access credit and other financial products. As such, it is our view that our governance platform should recognize and reward the contribution of DeFi participants, large and small, across a range of project types.

The proposal emerged from a call for ideas in a forum discussion that the Foundation started recently. We propose to include qualified DeFi projects in Algorand governance, allowing them to vote and receive governance rewards. Those projects will be responsible for voting in Algorand governance sessions and distributing governance rewards to their users through a transparent process.

At this moment, the DeFi participants are underrepresented in Governance, compared to their role for the Algorand ecosystem. In order to address this, and to further advance decentralization, we propose to include DeFi participants as governors and, as a temporary measure until the end of 2022, a doubling of the voting power of DeFi participants, as compared to Algo holders.

This proposal does not at this point contemplate changing the status of Algo-holding governors. They will continue to get their pro-rata share of the governance rewards based on their committed amount, provided that they commit their Algos for three months, and vote in all the voting sessions. Note that DeFi participants will get double the voting power, but not double the rewards.

Governors should decide between the following two options:

  • Option A: Granting governor status and twice the voting power to qualified DeFi projects as described below, whilst maintaining the same governance rewards program to Algo holders that commit for the governance period
  • Option B: Keeping the status quo, awarding governor status only to Algo holders that commit for the governance period, and to no other group.

The Foundation supports the more inclusive option: Option A. We remind the community that the Foundation does not vote in Governance.

DeFi Project qualification:

DeFi projects will qualify for participation in Algorand governance by first registering with the Algorand foundation, and then maintaining daily TVL on Algorand of at least 1M Algo-equivalent, on average over any two-week window during the governance period.

Qualified projects will earn the right to vote – on behalf of their users - in the voting sessions in the governance period. The voting power of a qualified project will be set according to the daily average TVL on Algorand of that project over the period from the first day of the signup window until the day before the voting session opens. Until the end of 2022 their voting power will be twice that daily average, then starting 2023 it will revert to being once the daily average. TVL computations will be based on a transparent policy aimed at minimizing distortions and ensuring fairness, regarding in particular eligible assets.

Qualified projects that voted in all the voting sessions in the governance period will get governance rewards to distribute among their users. The amount of rewards distributed to each project will be its pro-rata share of the governance rewards, using exactly the same formula as for Algo holders. The stake associated with each project will be the daily TVL of that project on Algorand, averaged over the entire governance period.

Projects that fail to vote in a voting session will receive no governance rewards for that governance period. Users of the platform in question will have no recourse to the Foundation for rewards in that case.

Through this measure, we at the Foundation are hoping to explicitly acknowledge the importance of our DeFi community through both rewards and governance responsibility. As such, we view it as an important component of our overall decentralization efforts. As we noted in our discussion memo, we foresee putting to future votes further extensions of these rights and responsibilities to other members of the Algorand ecosystem, such as creators, node runners, etc. We will also continue to explore alternative mechanisms to support these goals, for example through dedicated governance reward funds, depending on ecosystem needs at the time and most appropriate tools to meet those needs.