GARD Protocol Explained
GARD Protocol Explained
Learn what GARD is and how it will unlock your Governance stake
Welcome back to the Club, gov!
Today we’re going to dive into a problem unique to Algorand’s DeFi ecosystem, and the protocol that aims to perfect the solution to it.
We all know Governance is the safest way to earn passive income on Algorand while helping to secure its decentralization. However, when we commit a majority of our ALGO bags to Governance, we’re essentially locking away potential capital that could be used to earn higher yields across the DeFi ecosystem.
Let’s break this down further. According to DeFi Llama, the Algorand ecosystem ranks #38 with a total value locked (TVL) of around $82m across AlgoFi ($58m), Yieldly (6m), Tinyman ($17m), and PactFi ($700k). However, if DeFi Llama included the 2.8b ALGOs locked in this previous Governance period, Algorand would be placed right outside the Top 10 at #11.
Gov Tip: TVL measures the overall value of crypto assets locked into a chain’s ecosystem or individual DeFi protocols. It is the key metric used to gauge the popularity of a particular ecosystem and its dApps.
In fact, if the Algorand community could unlock just 25% of the liquidity locked away to Governance, our DeFi ecosystem would rank within the Top 20 at #19 with a TVL of $5.8b. When you see these numbers, it's clear the future growth of Algorand’s DeFi ecosystem hinges on the ability to unlock Governance liquidity.
This leaves us long-term holders and supporters of Algorand with a dilemma: how much of our Governance stake, and in turn voting power, do we want to allocate to the riskier DeFi ecosystem?
But instead of dealing with this challenge, wouldn’t it be great if you could unlock a portion of your Governance stake without having to uncommit it from Governance?
Enter GARD Protocol.
Let’s dive in.
What is the GARD Protocol?
Simply put, the GARD Protocol is a lending protocol that uses collateralized debt positions (CDP) to mint GARD, the protocol’s native stablecoin. In other words: users, dubbed ‘GARDians’, will need to lock their ALGOs in a smart contract to acquire GARD.
Gov Tip: If you’re unfamiliar with collateralized debt positions, check out the section titled ‘What are collateralized debt positions (CDP)’ in this MakerDAO explainer from Binance Academy. MakerDAO is the protocol that inspired the GARD team, so reading the entire article might be worth it if you’re unfamiliar with the protocol and its native stablecoin DAI.
GARDians don’t forfeit the right to their Governance vote as they can still participate in voting directly on the GARD Protocol. However, after minting GARD, users will need to strategize ways to obtain a higher APY than staking in Governance alone while accounting for GARD’s fees to make the process worth it.
Since GARD is an over-collateralized algorithmic stablecoin, 1 GARD needs to be backed by $1.40 in ALGO or 140% of the value minted in ALGO. Once the ALGO is locked, users can mint GARD and the CDP will automatically set a liquidation threshold of 115% (more on this later). When users fall below this threshold, part of their position will be liquidated and entered into a Dutch Auction. This mechanism exists to ensure GARD remains pegged to $1 USD.
For its initial release, GARD will target Algorand Governance participants; however, the team plans to become a cross-chain asset. This will open up the possibility for other assets to be leveraged as collateral across chains (i.e. Bitcoin or Ethereum).
The GARD Protocol will work towards implementing a DAO-structure in which GARDians will be able to leverage their governance token dubbed ‘GAIN’. GAIN holders will be able to vote on a variety of items such as fee revisions and feature updates while also receiving a portion of the protocol’s earnings.
GARD is set to launch in the next few weeks and the team hopes to be live before the beginning of the next Governance period.
Governance & the GAIN Token
The GARD DAO will make the decisions needed to keep the protocol running smoothly, and be composed of holders of the protocol’s governance token (GAIN). To participate in the governance of the protocol, users must stake (or lock) their GAIN in a smart contract for the entire voting period.
By holding GAIN and participating in governance, users will be able to:
Vote on:
fees that users are charged (i.e. opening and closing fees)
the organization that will further develop the protocol (i.e. DAO Manager)
other general changes to the protocol such as new functionality & governance options
Receive rewards from participating in the protocol’s governance (i.e. a portion of the TVL of ALGOs in the treasury)
The GARD DAO will have a manager who will be responsible for web application management, protocol extensions, adding new DAO votes, deploying Treasury funds to maintain the GARD peg, and changing the pricing data source for the protocol. For their work, the DAO Manager will receive 18% of the revenue each quarter. At first, the DAO Manager account will be controlled by the GARD team, but the DAO manager will be voted on each quarter.
In the long run, the DAO Manager’s power would ideally decrease as all key decisions will be programmed into smart contracts as the protocol reaches maturity.
Potential GARD Strategies
If you decide to use GARD after it launches, the reward needs to outweigh the risk. For us, we’re going to aim to double our APR for the period while also covering for the protocol’s fees (4% to open & close CDPs). For example: this period that would have meant returning at least 14% from our minted GARD (10% for Governance APR + 4% fees).
Without knowing what partnerships have been set-up across the ecosystem, it’s hard to explore how to achieve this fully; however, here are some thought starters:
Participate in the dutch auctions of liquidated assets on GARD and sell them for a profit
Swap GARD to assets that you can loan, stake, and farm on Algofi
Become a liquidity provider of assets of your choice on DEXs such as Tinyman, Algofi, or PactFi
Preferably with LPs that have tokens that you can farm (i.e. goBTC-STBL on Algofi)
If available, you may be able to provide liquidity to a GARD LP (i.e. GARD/ALGO)
Swap GARD for ALGO, ASAs, or NFTs and sell them for a profit after price appreciation
In other words, you’d be using GARD to go long on ALGO, ASAs, or NFTs
Swap GARD to YLDY and chase yields on Yieldly
What are the risks?
It wouldn’t be a Gov Club post without talking about the risks. By reviewing and understanding the risks, you will be able to assess your risk tolerance level and come up with plans of action to avoid losing money in the event the market turns for the worst.
With that being said, let’s review the key risks of using GARD:
Liquidation: To mint GARD and stay in good standing, users must commit at least 140% of the value minted in ALGOs and keep their collateral ratio above 115%. GARDians are encouraged to stay well above the 115% ratio to ensure they remain in good standing with little oversight. According to the founder of GARD Rylie Rueda, those who borrow 20% or less against their CDP should be able to remain safe from liquidation (but isn’t guaranteed).
When users’ ratios drop below 115%, GARD utilizes a Dutch Auction system to sell their collateral directly on the protocol. This mechanism ensures there is enough collateral locked in the protocol for GARD to remain pegged to $1 USD. With that being said, there is no clawback on the protocol and users will still hold any GARD minted and have any excess collateral returned to them after the liquidation fee is taken.
Gov Tip: This is why it’s so important to know your liquidation price and have a plan to avoid liquidation. Do your math and always have a plan in place that you can take action on quickly. We recommend having a stack of ALGOs in your wallet that you can deposit into GARD to lower your liquidation price or have a stack of GARD ready to pay off your debt. Practice that plan so you’re prepared.
Always remember higher rewards are almost always offset with higher risk. You can mint as much GARD as possible and chase higher yields, but this comes with a higher chance of liquidation & forfeiting your rewards . Everyone has their own risk tolerance, but we’d recommend you take on lower risk when it comes to your Governance bag.
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 when it comes to DeFi.
Oracle Risk: In addition to smart contract failures, there is the risk the oracles used by the protocol provide incorrect or stale data. Since oracles are used to calculate the collateral ratio of a CDP and the value of collateral in account, the risk of incorrect data can lead to an unwarranted liquidation event.
Not Self-Sovereign: By locking ALGOs in a CDP smart contract on GARD, users forfeit total control of their Governance stack. While the protocol’s CDPs are custodial in the sense they are associated with the original owner and users can directly execute whatever actions they want to (i.e. Governance voting) from their GARD account, users still forfeit the right to avoid liquidation and having their ALGOs sold via a Dutch Auction.
Gov Tip: This is not unique to GARD 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.
What are the fees and how does GARD make money?
There are two key fees on GARD that users should be aware of:
Opening & Closing Fees: Users must pay a 2% fee to the protocol’s treasury when they mint GARD, and another 2% fee when they close their CDP.
Liquidation Fee: When users are liquidated, not only is the original GARD debt repaid to the treasury’s reserve, but an additional 20% of the remaining GARD balance is also paid to the reserve. The rest of the collateral (80%) is returned to the user that was liquidated.
Gov Tip: The initial opening and closing fees will be initialized to 2%; however, both fees can range from 0-3% and can be changed by vote of the DAO / GAIN token holders.
If you’d like to do more research on GARD, we recommend you review their whitepaper which dives even deeper into how the protocol works. And make sure you subscribe to the Club so you don’t miss our GARD Strategy & Beginners guides coming out over the next few weeks.
As always, thanks for dropping by the Club. Until next time, gov!
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, GARD 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 GARD is right for you.