What Does ‘Including DeFi Participants in Governance’ Mean?

Read this before you vote

Thomas Upfield
8 min readMay 24, 2022
Your unofficial Algorand Foundation guidebook

The official explanation of what including DeFi platforms in governance means for you and the Algorand ecosystem as a whole is short and raises more questions than answers. This article assumes you have read the explanation and then seeks to help you read between the lines by studying the incentives at play, potential pitfalls, and how risks can be mitigated. Hopefully, after reading this you will have a better idea of how to vote.

The Proposal

The Algorand Foundation is recommending that DeFi platforms be made into governors and given double the voting rights of regular governors.

The Rationale

It has been suggested that the governance mechanism whereby ALGO tokens are locked up for 3 months at a time yielding a riskless 9%+ return has crowded out DeFi projects and hurt the ecosystem.

Below are some risks.

DeFi Users Have no Skin in the Game

Governors currently must do 3 things:

  1. Pledge ALGOs to governance: The whole point of using Algos for governance was supposed to be that the value of the utility token of the blockchain is exposed to the value of the entire ecosystem.
  2. Hold pledged ALGOs for 3 months: The whole reason that individual governors have to hold their tokens for 3 months is that if they make bad votes then they too will also lose money.
  3. Vote: The number of valid votes is exactly equal to the number of ALGOs committed as long as they were held as promised.

It is proposed that eligible DeFi projects would do the following:

  1. Register with the Algorand Foundation and be approved.
  2. Keep their TVL above 10mn Algo-equivalent, on average over the two-week signup window for the governance period.

And their voting power would be double the TVL over the period from the first day of the signup window until the day before the voting session opens.

Saboteur Governors

This means that bad actors will not have to hold their positions after they vote simply by registering their (2x) votes through an approved DeFi platform. They can also take advantage of the perverse power dynamics mentioned below.


This also means that by swapping into stablecoins and then placing these in a lending protocol rational economic actors will have twice as much say over the direction of the ecosystem than those who are fully exposed to the future of the ecosystem through holding ALGO. This can only be bad for the ecosystem.

Problem Solved (?)

“The Algorand Foundation encourages projects to allow their users to express their preferences individually”

The above risk of nurturing bad actors stems from the expectation that these actors will get a (2x) vote in proportion to the amount that they have staked in DeFi. If this was not the case then we wouldn't have these risks… we would have much worse ones…

Corruption, Bullying, and 51% Attacks

These risks come into play when DeFi users are not given a vote proportional to their DeFi investment.

Corruption and Bullying

In a scenario where the DeFi platform reserves the right to use the votes allocated to it howsoever it pleases then…

Imagine you are a large player or VC and you want a vote to go a particular way, you could buy a ton of assets and then invest them in a DeFi platform that will allow you to express your votes in proportion to that investment. The problem with this strategy is that it is capital intensive and not certain to yield results, so instead (or in addition) you decide to:

Bribe your way to success: You decide to buy the management of the DeFi platform(s) for a fraction of the amount it would cost you to win the vote by honest means. You could do this subtly with invites to all expenses paid events, future job offers, etc, or maybe blatantly with cash/token transfers.

Bully your way to success: You…

  • threaten to withdraw X million Algo-equivalent in TVL from the DeFi platform(s) that don't do what you ask; you tell them you’ll instead place the value with their competitors if they don't do as you ask.
  • Promise to invest X million Algo equivalent in TVL into their platform if they do as you ask.
  • Remind them that at their next funding round it would be helpful to them if both parties stayed on good terms.

It has been suggested that there would be nothing wrong with people and institutions deciding where to place their tokens based on how the DeFi platforms do vote/plan to vote:

From #governance in the Algorand Discord

There are three problems with this line of reasoning:

  1. Only the big players have the sort of access to the people running the platforms needed to facilitate backroom deals.
  2. A single large player can move Xmn Algo equivalent with the press of a button, average Algonauts would find it much more difficult to co-ordinate in order to move that amount of value.
  3. When people invest in DeFi projects they prioritise the APR reward against the risk of loss, governance decisions will always come a distant third place, and therefore DeFi platforms will not be held to account.

51% attacks

This can occur in a scenario where users of a DeFi platform vote and then the platform votes 100% with the majority decision. An enterprising whale (and perhaps co-conspirators) can ensure a 51% majority prior to voting in order to effectively quadruple their voting power (in comparison to traditional governors).

Entrenched Oligopoly, Slower Innovation

Enforcing a baseline TVL of 10mn Algo-equivalent (or whatever) reduces the ability of smaller players to participate in the governance program, these smaller players will therefore not be able to compete with the established platforms, they are more likely to go bust or not to be built. This is bad for innovation and bad for DeFi on Algorand.

Lower Algo Price

After reading the rationale below think of what will happen when Algorand’s early backers (who also understand this) switch out of Algos into stablecoins so they can stake their assets risk-free whilst earning rewards and doubling their influence!

Increase in the velocity of money

This will increase the velocity of Algos in circulation and so ceteris paribus it should be inflationary, i.e. locking Algos prevents them from being sold and so reduces supply on the market and increases supply, this measure achieves the opposite.

Reduce the relative utility of Algos

It would also dilute the usefulness of holding Algos as any token (in a DeFi platform) would then be a governance token whereas currently, only Algos are.

Reduce the financial benefit of holding Algos

Currently, only Algos can benefit from governance rewards. If all tokens can stake a claim to a portion of the fixed governance rewards on offer then a much smaller proportion of rewards will go to Algos.

This is how one might tweak the existing proposals to make the best of a bad idea.

Scrap 2x Votes

DeFi Platform users will have less skin in the game and less risk than those governing under the established system therefore they should be allocated less than 1 vote per Algo equivalent TVL, especially those contributing stablecoins to DeFi who should really be allocated no extra votes.

Users would still be incentivised to allocate to DeFi because of the extra rewards and because some extra voting power is better than no extra voting power (i.e. the status quo); DeFi users also get the returns provided natively by the platforms themselves.

Force Projects to Give Their Users Their Allocated Vote Preferences Individually

As discussed above anything else invites corruption. This should be a condition of approval into the scheme.

Scrap the Minimum TVL Requirement, KYC Instead

A given baseline TVL is an easy way to protect the governance program by preventing poor quality projects from taking part, and in the long run, it can be programmed into the prerequisite smart contracts needed to run the governance program in an automated fashion… HOWEVER for the reasons outlined above it would be better to go down a KYC route vetting the management and founders of projects, this will already have been done for the majority of projects under consideration anyway because they would've received grants or other forms of funding in advance.

Later down the line when decentralised identifiers is a thing this could be incorporated into the KYC system.

These are the remaining pitfalls for which I don't have an easy solution.

How can DeFi users be forced to pay for bad decisions?

It’s basically impossible for the Algorand foundation to track all the individual DeFi users of each platform and so it's impossible to enforce a locking period as is currently the case with the governance program.

Besides, anything enforced by the Algorand Foundation here would be more regulation stifling competition. It’s really an unsolvable problem under this proposed scheme.

Some ideas about how to improve decision making.

Properly Consult With the Community

The community has been given a take-it-or-leave-it choice on Including DeFi Participants in Governance, this feels like a fait accompli.

We should be told what the alternatives that were rejected are and why. How do other blockchains include stakeholders other than utility coin HODLers and what can we learn from them?

The official explanation reads like promotional material, this is irresponsible; the Foundation should also be warning us of the risks they have identified.

Don’t Rush

Let me just convey to you the reason why we structure it [the governance proposal] this way, the number 1 reason is a sense of urgency … we need it now!— Shai Halevi (architect of the proposal), Algorand Foundation May Community All-Hands, 7mins 15 seconds.

I agree that the ecosystem needs the Algorand Foundation to act swiftly to propose solutions to its problems, so it is good to see that they are actively doing this. However, as a community, we need time to prioritise what is important, for example, a system that does what it is supposed to without creating perverse incentives.

Invent a Systematic way to Make Decisions

Overall I believe that this proposal exposes the lack of a proper system for transparent and robust decision making that properly uses the talents our community has to offer.

A Proposal — Launch a Competition

A great way to engage with the community in the future whenever a change to the Governance Program is needed would be to announce a competition with a cash prize, entries can be released to the community for discussion for a set amount of time before being revised and tweaked and a shortlist selected by the xGovs (but advised by the community) be presented to Governors for the final decision.


As the founder of wheredefi.com (a DeFi comparison website in development), you would be right to think that I want DeFi to have more of a say in governance. I also recognise the problem set that this proposal by the Algorand Foundation seeks to solve and agree that it’s an important problem to solve.

That being said the solution as presented by the Algorand Foundation is not the right solution, it has a lot of unintended incentives which will in the long run be detrimental to the ecosystem.

Many of the risks identified in this article can be easily mitigated and at the very least I hope this can be done. The best scenario would be for the Foundation to realise that the Algorand community deserves better than rushed policy decisions with a little last-minute consultation, when it comes to a governance vote we should be told all the options and all the possible risks as well as all the possible benefits.

Personally, I would prefer that this proposal be rejected. Option B is the one for me.



Thomas Upfield

From financial services to my own startup. Born in the U.K. just back from H.K. — Building WhereDeFi.com the next hottest DeFi comparison site on Algorand