Algorand Governance Rewards Are Putting Pressure On Defi In The Ecosystem

For those of you that don't follow Algorand closely, Governance is a quarterly DAO process that rewards participants with Algorand. Over the last two periods, those that participate through Defi protocols have received boosts to their rewards of ~+7%.

So why’s this causing an issue? Over the last 24hours, we’ve seem users withdraw from lending protocols to participate in Governance.

These withdrawals have caused a shortage in Algorand lenders pushing lending APYs up to 40%+ on both Algofi and FolksFinance (Algorand’s two largest Defi platforms according to DefyLlama).

Unfortunately, caught on the other side of these APY rises are the borrowers. With lending APYs above 40%, you know APYs for those that are borrowing aren't looking to healthy (55.54% on Algofi as I write this message).

So, again, what’s the problem? Isn't this demonstrating defi works and the protocols are operating successfully?

Unfortunately, the platforms both allow you to leverage against your Governance Pool. This means, uneducated users may have leveraged themselves above 4x within the governance process (participated in governance -> borrowed algo -> participated -> borrowed -> you get the picture).

So again, why’s this bad? The current unregulated nature of defi has made this risk/reward play too easy without providing users with full information. What's worse, Algorand’s Foundation has actively encouraged normal users to participate in this way putting them at risk.

But, all is not lost. I'm hoping this scenario can be pivoted in defi’s favour. In theory, these APYs should force users to rectify their positions or entice new lenders into the market due to the strong returns able to be received.

Interesting time in Algorand’s ecosystem.

Algorand Governance Algofi