Foundation picking favorites by deploying liquidity - a mistake

The Algorand Foundation decided to deploy liquidity into Dapps which at first sounds like a nice idea. But instead of spreading their ALGOs they picked 3 Dapps and just deployed liquidity into them.

“The Foundation has deployed 36MM ALGO to Algorand native Lending Markets, Options Vaults, and Algo / gAlgo liquidity via Folks Finance, Algo Rai and Pact.”

They are making multiple mistakes that way:

1. Picking Favorites among Dapps. If the Foundation starts deciding on what Dapp makes it they are acting more like a government and additionally telling devs who think about coming to Algorand that people might prefer other protocols because the foundation helps them out more. Not an open market.

2. Disincentivizing supplying ALGO on Folks Finance. It is normal that the borrow APR on FF rises pretty high towards the end of the sign up period, but this incentivizes new people and new ALGOs coming in. It’s not too bad having a high borrow APR on ALGO as long as it only lasts for a few days, which was always the case. But why exactly should one now supply ALGO to folks when the foundation is keeping the borrow APR and in that way the supply APR low?

3. Deploying liquidity into a liquidity pool that doesnt need it. gALGO-ALGO had already a high TVL and the efficiency of the stableswap on Pact means it doesnt need more. Instead of deploying USDC, BTC or ETH liquidity on Algorand they picked one that doesnt really help anyone besides giving a protocol more TVL.

4. Giving the “ALGO is a security statement” more fuel. The Algorand Foundation decides at will which Dapp to help out by injecting more ALGOs, especially without a governance vote.

5. Promoting Folks Finance Governance leverage product without mentioning risks for the users and explaining they only will have 7 days to redeem their gALGOs (1-1). So if the Foundation can decide to inject liquidity at will they can also withdraw when they want to which means the borrow APR could rise again. They said they will monitor it but what if not enough new ALGOs come in such that they can remove their ALGOs? It’s stuck from now on?

Twitter post by AF: https://twitter.com/AlgoFoundation/status/1649084992738283520

reply by the CEO of Folks Finance: https://twitter.com/BenedettoBio/status/1649106577436049432

When it took months to get this approved, why not make it a governance vote? What are the reasons and values? Why is that all happening behind closed doors?

Thanks for sharing your concerns.

Daniel Oon wrote the following on Twitter to address those concerns:

thanks for linking it in here! while i appreciate the fast response i dont think these are sufficient reasons:

1. AlgoRai: the only reson seems to be VCs invested in it which sounds like a pretty bad reason. does AlgoRai have a liquidity problem? why is there a problem?

2. Folks Finance: yes over 10% borrow APR sounds bad at first, but this also happened the last periods and was a great way to get new people and new ALGOs into the lending market. the high borrow APR was always a temporary problem. additionally, it seems like the foundation thinks this is a temporary injection which is wrong. they apparently injected 30M ALGOs and only 10M ALGOs are available to borrow… this means at least 20M are stuck for now. the biggest problem might be how much they helped out with compared to the amounts supplied on Folks Finance in general. They have ~60% of the total TVL of their lending market (not counting gALGO because it cant be borrowed). That sounds like way too much and makes FF very dependent on the foundation to function

3. Pact: there seems to be a misunderstanding in how stableswaps work. they are highly efficient and the TVL/volume ratio is not as important here. additionally, they earn now trading fees which could have gone to people supplying liquidity on there which are not the foundation

I am thinking that the idea here is that gALGO is so heavily entwined in the ecosystem now that it would be in everyone’s interest to have more liquidity to stabilize the markets. While I see your points, I liked Oysterpack’s response to this in kimchi’s twitter thread. While I was surprised at the methodology as I wasn’t aware this was something AF had intention of doing, it makes sense given the explosive growth Folks and Pact are experiencing as demonstrated via defillama. Without this extra liquidity, given the numbers we are seeing now with only a few hours left to commit, many might be scared off from trying defi commits, which AF supports and governors have repeatedly voted to support as well.

GM @lobo,

Potentially 2 points here: (1) should Foundation deploy a portion of it’s treasury into Algorand DeFi at all and (2), if so, what Dapps should be selected?

On (2), the scope now has been limited to Dapps where we can improve liquidity w/o exposing treasury to obvious impermanent loss (eg. no Algo / BTC LP) or liquidation (eg. no borrow / lend USDT - Algo) risks. There may be further deployments we can make that fit this, but it does filter out a majority of possibilities straight off the bat.

There also may be good arguments for a wider scope and less caution in future, but that can be up for debate and better assessed once the effects of what’s been done are observed.

A big motivation for these deployments has been to improve liquidity, which some cite as a barrier to entry generally, and #3 (pact) would be a good example. If the volume and size of gAlgo / Algo swaps stays constant, the impact of our investment will simply be to a) make it cheaper swap (good thing) and b) dilute trading fees for non-foundation liquidity providers (not so good thing, and fair point to highlight).

The aim however is that bigger mass, and better liquidity that permits larger trades at lower cost, will bring more activity and volume to counterbalance dilution you identify.

sorry but do we really need people do be able to 4x leverage governance rewards given out by the foundation? is that the defi we want to focus on? i hope not

i want to also add two points (from the discussion in discord):

if the foundation wanted to help out FF because of high borrow APR why do it before the sign up ended? all you did was enabling people to degen more into 4x leverage governance and the foundations ALGOs being now stuck. algorand defi should not be focussed on enabling this kind of stuff and the foundation coming in only for this looks bad imo.

additionally, you set up a dangerous precedent. can i now expect the foundation to help out lending platforms if the borrow APR is too high? You did it once, so i can surely bet on you doing it again. or will you only do it for lending platform that have good connections to the foundation? these are all questions that wouldnt be there if there would be a vote about the >30M ALGO you just deployed and you cant easily extract again. the community has absolutely no idea what happened between you and FF and that is scary from my point of view, what are the reasons and values on why this would be a good use of ALGOs from the foundation?

By influencing the supply side of the liquid governance program, the foundation has in effect become the counter party for all the leveraged commits. Since we can assume it will likely reach an equilibrium (probably one where most leveraged commits won’t make a return, or at the very least close to no return, depending on where the equilibrium lands) what you have instead is the foundation essentially making APR off of the borrow, which in turn comes from governance. Thus creating a bizarre loop where the foundation in essence has indirectly paid itself.

People were doing much higher than 4x leverage on AlgoFi before Folks even existed. This seems like a straw man argument. There are funds set aside in Foundation wallet for exactly this sort of thing. Whether it was appropriate or not in this instance, I would say yes. Liquidity for supply and demand when there is a huge demand seems important to the ecosystem. I’m sure if AlgoFi didn’t control their smart contracts maybe they would have been helped out too.

thats not my point, its not about algofi vs folks its about the foundation now actively supporting this behavior (and the math says you cant do 4x on algofi just so you know, the ALGO efficiency + higher cf of gALGO on FF enables this). if the foundation would have deployed liquidity on algofi to enable this i would be still against it, i dont care about a specific protocol when it comes to this kind of stuff. just stop treating protocols differently, especially when the discussion on why to do this happened behind closed doors.

Communication in general seems to be the issue. I only just learned that this was even an option the whole time after asking around. If it didn’t need to be put to a vote, and it is helping the ecosystem, there were funds set aside for such a thing, and there won’t be losses associated with it…other than the fact that gALGO LP APR won’t be as high, I don’t really see the issue.

I agree this seems like something that should have been put to a vote, but I think the fact that there was a limited supply of ALGO available in the wallet where this liquidity came from would presuppose a limit to the power on-display here. That said, even if we had the mechanism to make such an emergency vote (hopefully xGov will help here in the future), and the Foundation agreed that the funds in this liquidity provision wallet were under community control, I think people would still be upset. I really think we’re “looking a gift-horse in the mouth” as the saying goes.

yes they would be, but they would have to accept what the majority of community wants. thats how decentralization works

It’s not really a gift though, it’s at worse going to encourage heavier risk taking that will incur in user loss (you can argue that they should’ve read the fine print, which is fair enough imo), and at best going to funnel the rewards they themselves pay, in the form of APR. So the equilibrium point at which we reach is one where every algo in governance gets less rewards, since more algos that weren’t originally going to participate took part in governance, and the foundation, indirectly received either the yield from those algos or more than the yield of those algos, depending on the final equilibrium reached.

The foundation excluded Algofi, Tinyman and Humble out of regularity issues probably. They are not as decentralized as Pact or Folks. Same thing about selecting gAlgo/Algo pool over others. (Thanks to Choppa&Averagezen for clarifying this in my head)

who says that? which metrics are you using?

tinyman and humble are also not US companies, so whats the problem?

actually the important point: why are we discussing which protocol is the most decentralized? we shouldnt fight over protocols. and why do we need to think about why they did something? they could tell us, the community is here why are they not talking to us beforehand?

First thing first. I’m not fighting over the protocols. I love all of them, especially Algofi (I have more liquidity on Algofi than Folks). I just tried to make another point.

You are right about communication. I also think it was so sudden. This should have not happened that way.

Decentralization… If I’m not wrong Algofi has some kind of control over the smart contracts unlike Folks. Tinyman and Humble uses airdrops for the farmers while Pact is doing it via smart contracts.

Has anyone asked them where the yield would go to? Would it return to this liquidity provision wallet to be used possibly to help other issues in the future? As long as they aren’t dumping it on the market and abide by the policy of not participating with this voting power then it’s the same as anyone adding liquidity no?

Not only the decentralization issues and airdrop of rewards vs smart contracts, but due to the fact that Pact had stablepool and Foundation was limited in options where IL wouldn’t be a factor, the only plausible strategy was gALGO/ALGO on Pact. That coupled with Folks’ ability to abstain from voting…seems like exactly what needed to happen if this trigger had to be pulled.

sorry but that is just BS. its the foundations fault that humble users cant use their decentralized farms and commit to governance, they said no to that

whats with the option of not providing liquidity at all? why does the foundation need to deploy liquidity? the stableswap is super efficient and the pool already has a high TVL

You may think the matter is “BS” but I don’t think it is. It’s not a matter of who did what, but a matter of using the right tool for the right job.

As for the option to not provide the liquidity at all. Clearly the Foundation feels it was necessary or they wouldn’t have done this. Given the high demand and the results we see, I’d have to push back on saying it wasn’t needed. The goal of the Foundation is to support the ecosystem and bring in new participants. This seems to check all the boxes. There will be more opportunities in the future for this kind of support to more projects in the ecosystem I would imagine.

i was about to write something that i might have regretted, but i will just ask you to gather all the information before commenting again on this topic to respect what humble and especially shaman did and are doing for the algorand community

and i say they are wrong on this imo. honestly them calling out the volume/TVL ratio says they dont understand how stableswaps work

What information is it you think I need to gather? I’ve been gathering for a bit now, so please enlighten me. I don’t feel I’m showing anyone any disrespect, I apologize if you feel that’s what I am doing. Your feelings are obviously very high about this so maybe take some time and compose yourself before doing any of these regretful things? Best regards.

This is definitely a transparency problem. If this much time is being spent on any decision, there is absolutely no reason why these topics should not be brought up and discussed with the community as a whole, whether that be an open forum or governance style vote. It may not ultimately alter the path chosen, but at the very least everyone is aware that it is a potential decision that needs to be made and can hear both sides of the argument. It would also provide the foundation with the ability to state their position and defend it prior to the change being made so that people can fully understand the WHY before any action is taken.

It would be fantastic if the foundation could provide a general roadmap of projects, issues or allocations they are working on with brief descriptions that the community could see and discuss openly. There may be items that are not able to exist on that list due to NDAs or agreements, but I do not see how this topic would be in that category.

Thank you for pointing that out. A protocol with smart contract upgradable should not even be considered, big red flag to me

in a perfect world we would only use protocols which are open-source and have non-upgradeable smart contracts or smart contracts that are upgradeable but controlled by a DAO. but it takes time to achieve that imo especially on such a young blockchain thats has its own virtual machine which isnt EVM compatible and thats why it shouldnt be about that yet imo