Folks Finance Liquid Governance Guide

Learn how to use Liquid Governance and upgrade your Governance game

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Welcome back to the Club, gov!

With the deadline for Governance period #3 quickly approaching (April 14th), you may be overwhelmed with so many options for committing to Governance. Choosing between Folks Finance, Algofi, GARD, and directly through the Foundation can be a challenge – but don’t worry. 

The Club has your back.

After releasing our Algofi Vault and GARD guides, we’re back with a Folks Finance Liquid Governance Guide. Below we’ll cover what Folks Finance is and introduce you to their Liquid Governance feature. We’ll also cover how to manage your portfolio and craft a strategy to earn on your unlocked Governance liquidity.

To make this guide easier to navigate, we’ve included the table of contents below:

• What is Folks Finance?

• Liquid Governance Overview

• Portfolio Management

• Liquid Governance Strategies

• Liquid Governance Guide

• Risks Overview

Gov Tip: You can search these keywords to quickly jump between sections.

Okay, let’s dive in.

What is Folks Finance?

Put simply, Folks Finance is a crypto lending market that allows users to lend and borrow ALGO, ASAs, and stablecoins through a user-friendly UI. However, it has a unique incentive system that rewards good actors when they repay their loan or provide liquidity through the Lock & Earn feature. 

Users who perform either action will receive rewards tokens called frTokens (i.e. frALGOs) that they can trade back to the protocol for additional ALGO rewards, and for the next few months the protocol will be distributing an additional 2MM ALGOs from the Aeneas rewards program in addition to frTokens.

Gov Tip: Lock & Earn is a feature on Folks Finance in which users lock their assets for a fixed period of time (i.e. 2 months) to receive a higher APR. Learn more here.

Folks Finance has two more unique features: the Rewards Aggregator and Liquid Governance. The Rewards Aggregator is the redemption mechanism for frTokens in which users can choose to redeem their frTokens instantly or vest them for extra time to earn more rewards. 

Gov Tip: You can learn more about the Rewards Aggregator and frTokens here.

And Liquid Governance? Keep on reading to learn how this feature is a game-changer for our ecosystem. 

Liquid Governance Overview

With Liquid Governance, Folks Finance has introduced the first ALGO liquid staking Governance program. Governors who commit their ALGOs to Governance through Folks Finance will receive a new asset named “gALGO” – which is pegged to the value of ALGO – in a 1:1 ratio. gALGO can be deposited, leveraged as collateral, or taken off the platform to participate in other DeFi protocols.

Liquid Governance provides governors with another option to unlock their liquidity

Naturally, this feature is inherently similar to both Algofi’s Vault and the GARD Protocol as it serves a similar function; however, unlike both of those gALGO doesn’t require users to take a collateralized position against their Governance stake. With that being said, you can only unlock gALGO’s liquidity by using it as collateral at this time.

Gov Tip: Official gALGO partnerships have yet to be announced; however, xBacked and PactFi have heavily hinted at incorporating gALGO into their protocols. Users will likely be able to use gALGO as collateral on xBacked to mint xUSD and provide liquidity in pools on PactFi.

For Governance Period #3, user voting won’t be incorporated into Liquid Governance. For this upcoming period, users will delegate their vote to Folks Finance who will assign all votes to the Foundation’s recommended option. In the future, users will have autonomy over their own vote similar to Algofi’s Vault & GARD.

At the end of the Governance period, governors will burn their gALGO to redeem their committed ALGO and Governance rewards. Folks Finance will take a 5% fee from the rewards accrued for providing this service.

Visual overview of how Liquid Governance works

If you play this correctly, it could be quite lucrative. In the next two sections we’ll cover how to manage your portfolio and craft a Governance strategy that works for you.

Portfolio Management

Before you use Folks Finance’s Liquid Governance, we’d recommend you determine your portfolio allocation to determine how much of your ALGOs you will commit to Governance vs. DeFi vs. stablecoins. 

Gov Tip: If you’re an NFT trader, make sure to allocate a portion of your portfolio to NFTs. We typically carve out a portion of our DeFi allocation for NFTs.

How you allocate your portfolio is a personal preference based on your risk tolerance, so we can’t give you too much guidance. However, the example portfolio and our guidelines below can be a good starting point:

Gov Tip: Crunch your numbers and determine what your optimal allocation is across Governance, DeFi, stables, and NFTs. Picking a Liquid Governance strategy will become clearer after you do so.

Now that you’ve determined the best way to split your portfolio, you should formulate a strategy that works best for you for this upcoming Governance period. 

Liquid Governance Strategies

Disclaimer: Reminder that this isn’t financial advice. We’re presenting these strategies as thought starters and we encourage you to do your own research to make these strategies fit your own personal needs and goals.

In the following guide we will present strategic frameworks for three different DeFi skill levels: beginner, enthusiast, and pro with tips on how to level up each. We recommend choosing the skill level appropriate for you to start, and then progressing through our level up tips to take on additional risk slowly.

Gov Tip: Go slow and small at first if you need to – there is no shame in learning first. There will be plenty of opportunities to make ALGO in the future. Remember: we are early!

Based on our portfolio allocation assessment, we have decided to follow two key guidelines:

1. Collateralize DeFi stack: Because we take on the most risk with our DeFi allocation, we’ve decided to to test Liquid Governance with our DeFi stack instead of our Governance stack. 

   • Rationale: We get the benefits of earning Governance rewards on ALGO we previously weren’t earning them on, and we keep our Governance position safe from any potential exploits while maintaining control over a majority of our voting power.

1. Borrow ALGO against gALGO position: We’re borrowing ALGO against our gALGO position instead of other assets to avoid the risk of liquidation.

   • Rationale: You can always swap your borrowed ALGO for another asset later if you choose to, so it’s better to protect yourself from the risk of liquidation by borrowing ALGO.

While there is no risk of liquidation, there are serious risks around the borrow rate on ALGO increasing more than the Governance rewards rate. If that is the case, Folks Finance’s ALGO borrow rate could exceed the Governance APR and make this strategy unprofitable. Although this is unlikely – especially with the rewards structure in place – it is something you should consider and prepare for.

Okay, let’s dive into the strategies below.

DeFi Beginner

Strategy Summary: Execute a relatively passive strategy to increase your Governance rewards by resupplying your borrowed ALGO to Liquid Governance. Minimize your risk by committing a majority of your ALGO to Governance through the Algorand Foundation.

Reference the portfolio allocation and steps below to get a feel for how this strategy is executed:

While this is a relatively passive strategy, if overused by the community it could have an adverse effect as it could not only increase the borrow rate but also lower the Governance rewards APR. Due to this it’s important to manage your risk even on strategies that are relatively passive like this one.

See below to learn how to manage the risks of this strategy:

You can level this strategy up a few different ways, but keep in mind you run the risk of owing much more if the borrow rate increases drastically:

Gov Tip: If you convert your ALGO to USDC or USDt, recognize you will be going short on ALGO for the next few months. As mentioned previously, there’s a possibility the price of ALGO dramatically increases before you’re able to convert back to ALGO and pay off your debt. This could minimize your overall returns if you need to buy back in at a higher price.

If you prefer to take more risks to potentially earn more rewards, check out the DeFi Enthusiast strategy below.

DeFi Enthusiast

Strategy Summary: Provide liquidity on PactFi to take advantage of the best APRs in the ecosystem currently and earn additional Aeneas Rewards. This is a more active strategy that could maximize your returns, but it comes with an added level of risk that must be managed properly.

Reference the portfolio allocation and steps below to get a feel for how this strategy is executed:

While we encourage you to do your own research when it comes to choosing liquidity pools on PactFi, we’ve listed our preferred pools below for your reference:

1. Algomint Boosts (104% - 123% APRs): Algomint is providing additional rewards on ALGO/BTC and ALGO/ETH which are both excellent pools for users who want exposure to additional bluechip assets

1. ALGO/USDC (85%): For users who want to minimize their exposure to other assets, the APR offered on this pool might be exactly what you’re looking for while providing a passive way for you to DCA in and out ALGO

You’re exposing yourself to the risk of impermanent loss with this strategy, so make sure you understand what that is and how to mitigate it. With that being said, the APRs offered on PactFi at this time will likely minimize any impermanent loss you experience.

Gov Tip: This Binance Academy explainer is a great introduction to impermanent loss.

See below to learn how to manage the other risks of this strategy:

You can level this strategy up a few different ways:

If the returns on this strategy aren’t enough for you, check out the DeFi Pro strategy below.

DeFi Pro

Strategy: Leverage your gALGO loan to trade crypto, ASAs, and  NFTs during Governance period 3 to maximize your returns. Executing this strategy requires more research and work than the others, but has the potential to provide the highest return. However, as you know, more rewards are typically always offset with more risk. 

Gov Tip: This strategy can go south really fast, so don’t risk more than you can afford to lose. And only execute this if you’re an experienced trader. 

Reference the portfolio allocation and steps below to get a feel for how this strategy is executed:

Here are some guidelines for you to consider when determining how to trade your asset(s) of choice:

1. ALGO: Set a target price and sell your position for a profit. Buy back in at a discounted price once ALGO’s price pulls back to ensure you can pay off your debt and still walk away with a sizable profit.

1. goBTC / goETH: Mimic the plan in the above bullet, but with goBTC or goETH. The benefit to this strategy is you can trade directly into ALGO to avoid having to time another trade.

1. ASAs: ASAs are very volatile and as such can have days of big gains or losses. You want to trade in and out of these positions quickly, so it’s best to determine what your target exit price is and stick to your plan. Don’t let greed be the reason you’re not successful.

1. NFTs: Invest in bluechip and mid-tier projects with growth potential and sell them for a profit

Gov Tip: Choosing the correct assets will determine if this strategy is a winner or not, so we encourage you to do a significant amount of research and/or have experience with technical analysis. Don’t play this on a ‘hunch’ or what a crypto ‘influencer’ is saying. That’s how you get rekt’d. 

And here are some strategies to consider to earn while you wait for your target price(s) to be achieved: 

1. Lend your ALGO, goBTC, and/or goETH to Folks Finance or Algofi to accrue additional rewards while you wait for your ideal price action.

1. Provide & mine liquidity for your assets of choice, but note this introduces the risk of impermanent loss.

1. Stake your ASAs whenever possible (i.e. DEFLY and OPUL on Algofi).

1. Get involved in the NFT communities and participate in giveaways and any new generation releases to earn additional NFTs that you can flip for a profit.

1. Lend ALGO out on Alandia while you rotate between assets and wait to buy back in. Target shorter loan periods to ensure you have access to your capital frequently in case your target price is achieved. 

   • Only provide loans to packages with projects you’re confident in to ensure you can make your ALGO back in the event the borrower defaults on their loan.

1. Supercharge your stablecoin position with the USDC/USDt LP on PactFi

See below to learn how to manage the other risks of this strategy:

You can level this strategy up a few different ways:

Gov Tip: If you were to level-up this strategy, you must be able to manage your risk without emotion to ensure you don’t get burned. Sometimes that involves cutting losses sooner rather than later, and other times that involves taking profits when everyone is screaming to hodl. Have a plan for both scenarios and stick to it.

Now that you have an understanding of how to manage your portfolio and the strategies you can deploy, let’s review how to use Folks Finance’s Liquid Governance feature.

Liquid Governance Guide

To begin this process, you will first need to supply and commit ALGOs to Governance through Folks Finance. But before you do that, navigate to Folks Finance and connect your wallet.

How to Supply ALGOs to Liquid Governance

After connecting your wallet, navigate to Liquid Governance:

Select ‘Mint’ to begin the process, input the amount of ALGO you’d like to commit to Governance, opt-in to gALGO3, and sign the transactions with your wallet to finalize the process:

Once you’ve minted your gALGO, you can view your gALGO balance, total ALGO committed, and your estimated rewards under “My gALGO3”:

Now that you’ve committed to Governance through Folks, you can collateralize your gALGO position.

How to Collateralize Your gALGO

Navigate to the Deposit page and select “gALGO3” to begin this process:

Input the amount of gALGO you’d like to collateralize, opt-in to fgALGO3, and sign the transactions with your wallet to finalize the process:

Gov Tip: You will use fgALGO3 to borrow against and to redeem your gALGO3 at the end of the period.

Now that you’ve deposited gALGO, you can take a loan against your position. To do this, navigate to the Borrow page and select the asset you’d like to borrow:

As discussed earlier, we will be borrowing ALGO against our gALGO to avoid a liquidation event.

Change your collateral type to “fgALGO3” by using the drop down menu, and then input the amount of ALGO you’d like to borrow. Use the Health Factor slider to determine how much of fgALGO3 you will be collateralizing.

Create an escrow account and finalize the borrow process by signing your transactions with your wallet:

When you’re done, you can view your lending and borrowing information from the Dashboard tab:

Note the Borrow APR doesn’t include the ~5% you will receive from redeeming your frALGO

And that’s it, gov! You’re now a Folks Finance’s Liquid Governance pro. 

Pretty simple, right?

Before you go, let’s review the risks involved with using Liquid Governance.

Risks Review

Borrow Rate Increases: The Borrow APR for ALGO could increase to the point that it is higher than the Governance APR. This has the potential to make the use of the Liquid Governance unprofitable depending on the strategy users take (i.e. DeFi Beginner strategy above).

Liquidation: If users borrow assets other than ALGO against their gALGOs, they introduce the risk of being liquidated. You can learn more about Folks Finance’s liquidation methodology here.

Smart contract failure: By interacting with the protocol, users expose themselves to the risk of smart contract failures / hacks. Despite dApps undergoing rigorous audits, there is always a chance of this in DeFi. 

Oracle Risk: In addition to smart contract failures, there is the risk the oracles used by the protocol provide incorrect or stale data. 

Not Self-Sovereign: By committing ALGOs to Governance through Liquid Governance, users forfeit self-sovereignty of their ALGOs. Users forfeit the right to vote, avoid liquidation and regain control over their ALGOs without having to pay the protocol off first (if a loan is taken).

Gov Tip: This is not unique to Folks Finance and is true with any DeFi dApp you lend, stake, farm, or provide liquidity on. When you take these actions, you forfeit your self-sovereign rights over your assets.

If you want more information on how to use Folks Finance, you can check out their official guide.

As always, thanks for dropping by the Club. Until next time, gov!

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Disclaimer: This isn’t financial advice! As we say in crypto, don’t trust – VERIFY! Do your own research and don’t ever invest more than you’re willing to lose. Like any DeFi project, Folks Finance comes with risks. The project can fail, smart contracts can be hacked, assets could be compromised, users can be liquidated, Oracles can provide inaccurate data, etc. 

Be safe out there and make sure you do enough research before you decide if Folks Finance is right for you.