The Algorand (ALGO) Governance Program Explained
For those of us in the crypto space, we see a lot of news about the various projects out there, why THIS is the next best thing, and how this token will make us the next quadrillionaire.
In the last several months, there’s been a lot of talk about Algorand’s first governance cycle, and its high participation reward return rate. I’m here today to give you a bit of background on what this exactly is, and what this means for you.
What is Algorand (ALGO)?
Let’s start with the basics. Algorand is a blockchain-based cryptocurrency platform created by MIT Professor and former Turing Award recipient, Silvio Micali. It aims to achieve a balance between decentralization, scalability, and security, a problem seen across all cryptocurrencies known as the “blockchain trilemma”.
Algorand follows a Proof of Stake model, where users are randomly selected to reach a consensus and validate transactions on the blockchain and each user’s voting strength is proportional to their “stake”, or the number of tokens they own.
Algorand Governance Project
On April 12th, 2021, The Algorand Foundation announced their ‘Decentralizing Algorand Governance’ proposal. The proposal aims to provide the Algorand community with the power to determine the allocation of resources and the future direction of Algorand’s growth, with the number of votes being proportional to the amount of Algo committed by the individual.
This proposal (and program) was open to all ALGO holders, with anyone wanting to participate and become a ‘Governor’ required to send a marginal stake of ALGO to a designated Algorand Foundation address. ‘Governors’ are simply ALGO holders who stake their ALGO for at least a 3 month period and in return are licensed to vote on economic and policy decisions for the protocol.
To incentivize Governors to vote, there is a reward pool that is split across the four quarterly periods. At the end of each period, Governors who have committed a certain amount of Algo for that period will be given a percentage of the reward pool proportional to their committed Algo. For this first Governance period, the reward is approximately 18% APY.
How Algorand Governance Works
Governance will work as follows – during the Registration Period (October 1st, 2021 to October 15th, 2021 for the current Governance period), holders of Algorand will be able to sign up to participate as a Governor. With the current Registration period closed, 1.88B Algo have been committed, yielding approximately 17.5% APY return for Governors in the first quarter.
However, do not despair if you were unable to commit to the current Governance period – Each year, there will be four quarterly Governance periods, with a minimum of at least one voting session per period. New Governors can register at the beginning of each period and will be eligible to vote and receive rewards at the end of that period.
The first voting session will open on November 1st, 2021, and will remain open for two weeks. This first session will be related to the rewards distribution mechanism for 2022 voting periods – either lower rewards with no penalty for withdrawing one’s commitment during a quarter (other than the loss of rewards) or higher rewards with an 8% penalty for withdrawing one’s commitment before the end of the quarter.
Governors must participate in all voting sessions in any given Governance period to receive their rewards, however, it is understood that not all holders of ALGO may have the background or knowledge to vote appropriately. To facilitate this, the Algorand Foundation will offer all Governors the option to delegate their vote to the Algorand Foundation via a simple UI input.
How Are ALGO Rewards Calculated?
Rewards for ALGO are calculated twofold. At present, all holders of ALGO in a participating wallet receive 4.7% APY as part of the existing participation rewards, until the end of 2021. Participating in Algorand Governance will not affect whether you receive this participation reward or not.
Each Governance period will have a certain amount allocated to a rewards pool by the Algorand Foundation (60M ALGO for the current governance period). This amount is divided by the total amount committed by Governors to determine the APY returned to participating Governors. So for example, if 1B ALGO is committed by participating Governors, the return should be 60M/1B = 6% per quarter or 24% APY.
As of October, 2021, 1.88B ALGO is committed for the first governance period, the APY is approximately 3.2% per quarter, or 12.8% APY.
Add on the 4.7% participation rewards and Governors can expect a return of approximately 17.5% APY. Note that in coming years, the Algorand Foundation aims to remove the participation rewards and simply have the governance rewards to encourage holders of Algorand to participate in the shaping of its future, however for the time being all holders of Algo can enjoy the 4.7% APY they receive passively.
Final Thoughts on Algorand’s Governance Program
With so much excitement over Algorand and its capabilities, it is important to note that there are still certain limitations and things to be wary of. For example, the move towards decentralization will be neither immediate nor fast – the Algorand Foundation still holds 85% of the token, and as such will be in charge of the majority of decisions to be made currently. However, these rewards will slowly be disseminated over time via participation rewards and governance rewards.
With all this in mind, Algorand seems to hold a lot of potential in the future. It is doubtful that it will be an immediate speculative diamond, however with the technology and team behind it, as well as the juicy rewards and community participation, Algorand will be something to keep an eye on over the next couple of years.