The Definitive Algofi Vault Guide
The Definitive Algofi Vault Guide
Learn how to use Algofi’s Vault and upgrade your Governance game with our strategies
Welcome back to the Club, gov!
Governance period #3 is upon us and the deadline to sign-up is quickly approaching (April 14th). While this typically meant ~3 billion ALGOs would be locked away for three months, we now have the choice to unlock a portion of our liquidity through lending features by committing to Governance through protocols such as Algofi, GARD, and Folks Finance.
Unlocking liquidity from Governance will bring on the next era of Algorand DeFi, and the battle for Governance liquidity has begun. Whoever wins this battle will position themselves to be a leading Algorand protocol for years to come.
The one contender with an early lead in the community is Algofi. The team and protocol have been on fire lately, and their new Vault feature is the latest addition to their offerings.
In this definitive guide, we’ll cover what Algofi’s Vault is and how to use it as well as 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 a table of contents below:
Governance Vault Overview
Portfolio Management
Vault Strategies
Vault Guide
Risks Review
Gov Tip: You can search these keywords to quickly jump between sections.
We have a lot to cover, so let’s dive right in.
Governance Vault Overview
Put simply, Algofi’s Vault enables governors to unlock their Governance stake through Algofi’s Lending Protocol. Users who participate in governance through the Vault can borrow assets (ALGO, STBL, USDC, goBTC, & goETH) against their position to use for staking, trading, yield farming, etc. And the best part? Users can vote in Governance and earn rewards directly through their vault.
Gov Tip: Users will also earn Aeneas rewards while the program remains live.
So how does this work?
For the sake of not getting too technical, Algofi’s vault creates a unique Algorand account that the user controls through the protocol. When a user supplies ALGOs to their Vault, Algofi creates and provides users with a new asset named “Vaulted ALGOs” or “vALGOs” which has the same price and collateral factor as ALGOs. While users can participate in Governance with their vALGOs and borrow against them through Algofi’s lending protocol, users can’t borrow vALGOs.
Gov Tip: If you want a more technical breakdown of this, you can check out Algofi’s official documentation. On the backend, the Algorand account created by Algofi when you commit to their Vault is the same account as the Storage Account for their lending protocol which is what enables the feature. You can learn more about the Storage Account here.
To summarize: Users commit ALGOs to Governance through Algofi’s Vault, receive vALGOs that they can lend back to the protocol to borrow assets against, and vote via the Vault to receive governance rewards.
To maximize this game-changer to our ecosystem, you must first have a clear understanding of how to manage your Algorand portfolio. If this is something you need help with, you can review the Portfolio Management section below.
Portfolio Management
Before you get started with Algofi’s Vault, we’d recommend you determine your portfolio allocation (if you haven’t already) to determine how much of your ALGOs you will commit to Governance vs. DeFi vs. stablecoins.
Gov Tip: If you’re an NFT trader, it makes sense to also allocate a portion of your portfolio to NFTs. On our end, we typically carve out a portion of our DeFi stack for NFT investments.
Here’s some guidelines we follow on our end:
Governance: At the Club, we view our Governance stake as a long-term savings vehicle like Bitcoin. We want this to be as risk-off as possible to ensure it survives the long-term.
DeFi: This portion of our portfolio is for experimental investments (i.e. lending, mining liquidity, ASA / NFT trading, etc.) and where we take on the most risk. Our main goal with these funds is to find successful and repeatable medium to long-term investments, and roll the profits into our Governance and stablecoin stacks.
Stablecoins: Every good portfolio has cash (or stablecoins) on hand to take advantage of buying opportunities in the market (i.e. ALGO, ASAs, or NFTs) and in crypto we have plenty of options to earn yield on our stablecoin positions. Our risk tolerance on this position in our portfolio is somewhere between Governance & DeFi.
How you split your funds across the above is a personal preference based on your risk tolerance, so we can’t give you too much guidance. However, a good starting point could be 70% Governance, 20% DeFi, and 10% stablecoins.
If you’re an NFT investor, your portfolio might look something like this: 70% Governance, 15% DeFi, 10% stablecoins, and 5% NFTs.
Gov Tip: Crunch your numbers and determine what your optimal allocation is across Governance, DeFi, stables, and NFTs. Picking a Vault strategy will become clearer after you do so.
Now that you’ve determined the best way to split your portfolio, you can formulate a strategy for this upcoming Governance period. If you want some frameworks to follow, review our Vault strategies next otherwise skip directly to the ‘Vault Guide’ to learn how to use the Vault.
Vault 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 gauge your risk tolerance.
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 for this first Governance period with the Vault feature available:
Collateralize DeFi stack: Because we take on the most risk with our DeFi allocation, we’ve decided to to test Algofi’s Vault feature 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.
Borrow ALGO against vALGO position: The ability to borrow ALGO against your vALGO position is the most alluring feature of the Vault. By implementing this strategy, you avoid the risk of liquidation since vALGO’s value is pegged to ALGO.
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 (outlined more below).
Gov Tip: The truth is we don’t know how affected the borrow rate will be by the introduction of the Vault. Due to this, it may be best to play this first period safe by collateralizing your DeFi stack instead of your Governance stack. Yes the returns will be less, but so will be the risk. Once we have more data, we may consider collateralizing a higher amount.
Okay, let’s dive into the strategies using the below example portfolio:
Total Balance: 10,000A
Portfolio Split: 70% Governance (7,000A) / 20% DeFi (2,000A) / 10% Stables (1,000A)
DeFi Beginner
Strategy: Execute a relatively passive strategy to increase your Governance rewards by ~50% while minimizing your overall risk.
How to Execute the Strategy
Commit DeFi stack to Vault: Once committed, borrow ~50% of your vALGO value in ALGO
Commit borrowed ALGO to Vault: Commit your borrowed ALGO to the Vault to increase your Governance rewards
Updated Example Portfolio
8,000A committed to Governance through wallet of choice
2,000A committed to Governance through Algofi’s Vault
1,000A borrowed against vALGO position and resupplied to Vault
How to Manage Your Risk
Although there isn’t a risk of liquidation if you borrow ALGOs against your vALGOs, there is a risk that this strategy is executed by many governors. If that is the case, Algofi’s ALGO borrow rate could exceed the Governance APR and make this strategy unprofitable.
To mitigate this risk you can do the following:
Keep track of the ALGO borrow rate to make sure you’re aware if it begins to approach the Governance APR
If your situation allows it, slowly pay off your debt over the course of period 3 to avoid having to pay a higher rate in the future
Have a stablecoin position on hand to ensure you can pay off the entire debt in a worst case scenario (i.e. borrow rate skyrockets suddenly)
Don’t convert your borrowed ALGOs to stablecoins because if the price of ALGO goes vertical towards the end of the period, you’ll be unable to buy back in to pay off your debt and come away with a profit
Level Up Strategies
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:
After borrowing and re-supplying ALGO to the Vault, you can then borrow more ALGO against your new position and commit that to the Vault. You can repeat this looping process as many times as you’d like.
You can borrow the max amount against your vALGO position to resupply to the Vault
You can commit more to the Vault initially to increase the amount you can borrow against your position
Gov Tip: Remember that the more you borrow against your vALGO position, the less passive and risk-off this strategy becomes.
If you prefer to take on a bit more risk, check out the DeFi Enthusiast strategy below.
DeFi Enthusiast
Strategy: Execute a more active strategy to maximize your returns, but with an added level of risk that must be managed properly. To maximize this strategy’s potential, you must go short or long on a blue chip asset (or assets) and be prepared to execute trades quickly.
Gov Tip: This strategy can go south really fast, so don’t risk more than you can afford to lose. And if you wouldn’t consider yourself a DeFi pro, it is best to play this strategy with blue chip assets such as ALGO, goETH, and goBTC. ASAs & NFTs are extremely volatile and it takes an experienced person to consistently trade them successfully.
How to Execute the Strategy
Commit DeFi stack to Vault: Once committed, borrow ~50% of your vALGO value in ALGO
Determine the asset(s) to long or short: Are you bullish or bearish on the market for the next three months? You can use the Vault to capitalize on either. Let’s use ALGO as an example, but note you can do this with goETH and goBTC as well:
Shorting ALGO: Convert your borrowed ALGO to STBL, USDC, or USDT and wait for ALGO’s price to go down to buy it at a discount. Ideally you should be able to pay off your debt and come away with a sizable ALGO profit that exceeds the Governance rewards you receive.
Longing ALGO: Wait for ALGO’s price to go up and sell your borrowed ALGO for a profit, and then buy back in once the price action cools down to ensure you can pay off your original debt while coming away with a profit.
Earn while you wait: Earn additional yield & Aeneas rewards on Algofi while you wait for your ideal price action:
If you shorted ALGO, you could provide liquidity to the NanoSwap LPs
If you longed ALGO, you can supply your borrowed ALGO to the lending protocol or you can pool them in the STBL-ALGO LP
Note: If you choose the latter, you introduce the risk of impermanent loss.
Gov Tip: Step #2 will more or less 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.
Updated Example Portfolio
8,000A committed to Governance through wallet of choice
2,000A committed to Governance through Algofi’s Vault
1,000A borrowed against vALGO position and supplied back to lending protocol or to LPs
How to Manage Your Risk
Have a stablecoin position on hand to ensure you can pay off the entire debt in a worst case scenario (i.e. the asset you wanted to short goes vertical towards the end of the Governance period)
Keep track of the ALGO borrow rate to make sure you’re aware if it begins to approach the Governance APR for period 3
If your situation allows it, slowly pay off your debt over the course of period 3 to avoid having to pay a higher rate in the future or needing to tap into your stablecoin position
Level Up Strategies
You can borrow the max amount against your vALGO position instead of 50%
You can commit more to the Vault initially to increase the amount you can borrow against your position; however, if you commit your entire Governance stack we’d recommend you consider a lower borrow utilization
If going short, you can borrow USDC instead of ALGO to mitigate the risk of an increased borrow rate; however, you will be increasing the risk of liquidation instead.
If this strategy feels tame to you, check out the DeFi Pro strategy below.
DeFi Pro
Strategy: Actively trade crypto, ASAs, and/or NFTs during Governance period 3 to maximize your returns. Executing this strategy takes more knowledge, research, and work than the others, but if done correctly it would likely have the highest ROI. However, do note, this strategy exposes you to the most risk.
Gov Tip: Similar to the DeFi Enthusiast strategy, this can go south real fast. We wouldn’t recommend you execute this strategy if you don’t have a significant amount of DeFi and trading experience.
How to Execute the Strategy
Commit DeFi stack to Vault: Once committed, borrow ~50% of your vALGO value in ALGO
Take positions in the asset(s) of choice: Are you bullish on ALGO or other crypto, ASAs, and NFTs over the course of period 3?
ALGO: Lend your ALGO to accrue rewards while you wait for it to hit your target price, and then sell your position for a profit. Buy back in at a discounted price once ALGO’s price pulls back.
Blue chip Crypto: Mimic the plan in the above bullet, but with a different blue chip asset such as goBTC or goETH. The benefit to this strategy is you can trade directly into ALGO to avoid having to time another trade.
ASAs: Similar to the two previous strategies, but with ASAs to try to capture even more growth. 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.
Similar to blue chips, a benefit to this strategy is you can trade directly into ALGO to avoid having to time another trade
NFTs: If you would prefer to take advantage of Algorand’s exploding NFT market, you can invest in projects with high growth potential and sell them for a profit. If you DYOR, you’ll find there are a lot of great deals on blue chip and up-and-coming projects out there currently.
Earn while you wait: Earn additional yield & Aeneas rewards on Algofi while you wait for your ideal price action:
Lend your ALGO, goBTC, and/or goETH to Algofi to accrue additional rewards while you wait for your ideal price action
Provide & mine liquidity for your assets of choice, but note this introduces the risk of impermanent loss to this strategy
If you take a position in DEFLY, you can stake it on Algofi to earn additional DEFLY
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
Gov Tip: Similar to the DeFi Enthusiasts strategy, step #2 will more or less determine if this strategy is a winner or not, so again we encourage you to do a significant amount of research on the projects you’re investing in and/or have experience with technical analysis if you’re trading.
Updated Example Portfolio
8,000A committed to Governance through wallet of choice
2,000A committed to Governance through Algofi’s Vault
1,000A borrowed against vALGO position and redeployed in different ways depending on the assets you choose
How to Manage Your Risk
Do your due diligence to research any ASAs or NFTs you invest in to avoid scams and rugpulls
Avoid earning options that introduce impermanent loss to the equation
Have a stablecoin position on hand to ensure you can pay off the entire debt in a worst case scenario (i.e. the asset you wanted to long dumps towards the end of the Governance period)
Keep track of the ALGO borrow rate to make sure you’re aware if it begins to approach the Governance APR for period 3
If your situation allows it, slowly pay off your debt over the course of period 3 to avoid having to pay a higher rate in the future or needing to tap into your stablecoin position
Level Up Strategies
If trading crypto, you can rotate between goBTC, goETH, ALGO, and ASAs to capture the maximum amount of gains
If timed correctly, you can capture gains from BTC, ETH, and alt-season in that order
If trading NFTs, you can invest more in up-and-coming projects that have more growth potential to maximize your gains
This will likely only work for those who have a pulse on the current NFT space
You can borrow the max amount against your vALGO position instead of 50%
You can commit more to the Vault initially to increase the amount you can borrow against your position
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 how to make the Vault work for you, let’s review how to commit to Governance through Algofi’s Vault next.
Vault Guide
Like Algofi’s other features, the Vault UI is clean and easy to use. As of April 4, 2022, users can do the following through the Vault:
Supply ALGOs to your Vault
Commit to Governance
Borrow against your vALGO position
Remove ALGOs from your Vault (as needed)
In the future users will also be able to vote and claim their rewards directly from the Vote.
Gov Tip: Users can also participate in consensus through the Vault if they choose to do so. You can learn more on how that works through Algofi’s official documentation here.
Let’s review how to use the Vault, starting with supplying ALGOs to it.
How to Supply ALGOs to Your Vault
After connecting your wallet, navigate to the Vault:
You can manually input the amount of ALGOs you’d like to supply or use the sliding scale. Once you have entered the amount you’d like to supply to the Vault, click supply and finalize the transaction by signing it with your wallet:
It’s that easy, gov! However, supplying ALGOs to your Vault doesn’t automatically commit them to Governance. You have to do this manually, using the ‘Govern’ tab. Let’s review how this is done.
How to Commit to Governance
You’ll find that this process is nearly identical to supplying ALGOs to your Vault.
Select the ‘Govern’ tab and either manually input or use the slider to select how many ALGOs you want to commit to Governance. When you’re ready, select ‘Commit’ and finalize the transaction by signing it with your wallet:
You will notice that your status went from ‘Ineligible’ to ‘Eligible’ during this process, so make sure this change occurs after you commit to Governance:
Now that you’re committed to Governance and you’ve received your vALGOs, the last thing to do is to borrow against your position so you can unlock a portion of your liquidity.
How to Borrow Against vALGOs
When you navigate back to the lending market, you will now see your vALGOs listed under your supplied assets so make sure they’re there. Then you can collateralize your position by selecting the asset you’d like to borrow (i.e. ALGO):
Select ‘Borrow’, input the amount you’d like to borrow, select ‘Borrow ALGO’, and finalize the transaction by signing it with your wallet:
And that’s it, gov! You’ve now used Algofi’s Vault to commit to Governance and collateralize your position.
Pretty simple, right?
If you need to remove your funds from the Vault before the end of the Governance period, that is a simple process as well.
How to Remove ALGOs from Vault
Navigate to the Vault, select ‘Remove’, and input the amount of ALGO you’d like to remove:
You’ll receive a warning message if the amount you’d like to remove will put you below the amount you have committed to Governance. You will need to select ‘Continue’ before you can finalize the transaction by selecting ‘Remove’ and signing the transaction with your wallet.
Note that the amount you can remove from your Vault will be lower than your total amount if you haven’t paid back your total loan amount. You must first repay your debt in order to remove 100% of your ALGOs from the Vault.
Gov Tip: Also note removing whatever ALGOs you can before paying back your loan will increase your borrow utilization.
While forfeiting your Governance rewards is never ideal, it may be necessary to manage your risk. Speaking of risk, let’s review the key risks to using Algofi’s Vault before we wrap up.
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 Vault unprofitable depending on the strategy users take (i.e. DeFi Beginner strategy above).
Liquidation: If users borrow assets other than ALGO against their vALGOs, they introduce the risk of being liquidated. You can learn more about Algofi’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 the Vault, users forfeit self-sovereignty of their ALGOs. While the Vault is 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 Vault, users still forfeit the right to 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 Algofi 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 Algofi’s Vault and how the mechanics work on the backend, we highly recommend their official guide which is a wealth of information even if it can be a bit dense at times. The video guides are a great resource if you find yourself stuck at any point.
Let us know what strategies you plan to use in the comments below or on Twitter(@AlgoGovClub).
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, Algofi 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 Algofi is right for you.
Wow. Thorough.