Understanding the Algorand Pipelined Auctions guiding the proposed decentralized governance.

Introduction

The Algorand Foundation has tabled a proposal to decentralize governance on the protocol. In the proposal, Algorand plans to allow token holders bid to become governors on the network. Here is a link to the proposal announcement. Becoming a governor on Algorand is voluntary and all prospective governors must participate in an Algorand auction to become governors. Successful bidders after the auction lock their tokens for 1 year. The basic governance auction is a blockchain implementation of the popular Dutch Auction. The Dutch auction is used by some companies when they plan to issue an initial public offering (IPO). The US government (US Treasury) uses the Dutch auction mechanism to sell its securities such as T-bills, T-notes, and T-bond. It is, however, crucial to emphasize that the Algorand Dutch auction is not a security issued in that...

  1. It uses tokens instead of the US Dollar or any national sovereign fiat.
  2. The auction is used to determine the governance-reward rate rather than in interest rate
  3. Governors lock their tokens in an escrow instead of lending them to the Algorand foundation. The Algorand Foundation cannot utilize the locked tokens for any purpose. 


The Basic Governance Auction on Algorand


The governance auction on Algorand is open to all Account holders on Algorand. Note that an account may have tokens locked up for other purposes other than for governance purposes. All Algorand accounts that decide to lock their accounts for governorship become a subset of the universal accounts. The Algorand Foundation floats the auction for a set of Algorand tokens. Bids are taken for every 100 blocks. A user with an X number of Algos can decide to commit G amount of those tokens in the Auction for the price they want to pay. 

  1. The Algorand Foundation will specify the rewards pool - the total number of tokens available to be rewarded to governs
  2. The G-locked tokens are signed with a different governance-participation key which different from spending and consensus-participation keys

For instance, 

  • during the first auction round for the first 100 blocks, a Ux account with 1000 ALGOs
  • Account Ux has 100 ALGOs locked in another smart contract other than governance
  • Account Ux now has 900 ALGOs which he can bid in the first Auction.
  • If the account bid 500 ALGOs in the first round and won, the 500 ALGOs are locked in the governance escrow and the account now has 400 ALGOs available to bid in the next round or left in the account for spending. 

Each stage of the auction has its rewards rate based on the number of tokens up for auction and the number of governors who win the bids during that stage. A user can use a bidding application to place advance bids as the stages proceed so that bids are received ahead of the session. On the other, the user can choose to monitor the bidding process in real-time and provide details on available tokens left for the next bidding round or during the current bidding session.


Pipelined Algorand Blockchain Auctions

From the previous section, there are some things to note. 

  1. A user who wins a bid will have tokens locked up for up to a year and will earn a reward rate for the Dutch auction session. 
  2. However, Algorand executes auctions every month which can come with a new rewards rate than the previous session.
  3. New tokens enter the ecosystem, and these users should be allowed to participate in the auctions. That is, a current bidder can acquire new tokens and should be allowed to bid for more governorship stake. New token holders altogether join the ecosystem and should be allowed to participate. 

The above points raise some concerns. First, an existing user who already has tokens locked up for a previous auction realized that the current auction offers a better rewards rate than the previous one. Such users may act irrationally in ways that may harm the network if they are not allowed to participate in subsequent rounds with locked tokens. 

To solve these complexities, Algorand proposes the pipelined blockchain auction which allows users with locked up tokens in previous bid rounds to participate in later rounds with the locked-up tokens. If they win, they can seamlessly switch all or part of locked up tokens to the new reward round. A pipelined auction specifies its governance rewards rate, which applies to both governance-accounts and non-governance-accounts to bid. 

Conclusion

Complex, as it may be this auction process, allows for different scenarios that play out in how people participate in the Algorand governance auction. Auction rounds will be executed 12 times a year, but each bid won is applicable for a 1 year period during which the tokens are locked up. Users with governance accounts can participate in subsequent auctions if they feel there is a better rewards rate by pipelining their current locked tokens. For more technical explanations, see this document