Dawn Of Algorand DeFi: AlgoFi

Last month, we announced our investment into AlgoFi alongside USV and Pillar. The team has been moving at lightning speed. They launched AlgoFi — a capital markets suite including Algorand’s first money market and algorithmic stablecoin — on December 17th. Today they announced a $3M liquidity mining program alongside the Algorand Foundation. In just a few weeks over the holiday period — with no rewards — AlgoFi has grown to just under $30M TVL. 

The protocol began with a guarded launch. Liquidity caps were quickly reached. Heading into the new year, the team is now preparing to lift the gates and release the protocol into the wild. Representing Algorand’s first capital markets protocol, AlgoFi’s rewards program is ambitious. It is a sizable program for an ecosystem this early. It is also denominated in ALGO (2M) and does not include AlgoFi’s native token rewards.

The team has publicly stated that the latter will go live after governance contracts are deployed to Mainnet. 

This is happening through the Algorand Foundation’s Viridis Fund, a $300M warchest dedicated to DeFi. Viridis was first announced last summer, with the Foundation recently following up with Phase II of the program, Aeneas. Aeneas is focused on bootstrapping the “three pillars” of DeFi: a robust bridge, AMM and capital markets protocol. 

As we have seen in other ecosystems, these first few programs are critical. They often knock down the dominos that eventually translate into billions in TVL. Sometimes they are a slow burn, other times TVL rockets overnight. As we saw with the launch of Benqi on Avalanche earlier this year, a money market launch is arguably the most important catalyst for a nascent DeFi ecosystem. 

Once there is an efficient market for leverage, new worlds begin to open up. Without borrow power, the degens are tied to a leash. Who are the degens? These are the most important participants in DeFi. The early power users who ultimately define any protocol. They are mercenary and risk-seeking, apes that are always hunting for ways to juice yield. Their strategies are clever but risky. They collateralize coin A to borrow coin B, deploy into the latest farm for outlandish APYs, flip out of the farm once a new (and possibly fleeting) opportunity arises, only to lose it all when a sudden market cascade threatens their collateralization ratios. 

Our thesis is that Algorand is the meeting ground for the “degens” and the suits. Unlike any other L1, Algorand is uniquely positioned for the convergence of DeFi and TradFi – mostly because the technology can genuinely scale without giving up decentralization. 

But make no mistake: the creativity of the speculating masses will come first. The apes are still the unsung heroes of any ecosystem. If they engage, they can aggressively grow Algorand TVL. They will find the bugs. They will stress-test the system. It is their blood and tears that will get Algorand DeFi to a point that it is large enough for old world capital to begin deploying into DeFi. When that rain comes, it will pour; but until then it is the crypto-native piece that will define Algorand’s success.

“Connecting The Farmer & The Suits”: from our Algorand thesis published in July.

The AlgoFi team is leading the charge. They are very aggressive builders — on Twitter Spaces one day and shipping a new feature (or entire product: $STBL) the next. Before crypto, the founders were trading interest rates at Citadel. In some ways, they are the “archetypal” Algorand team: roots in the old world, willing to get their hands dirty in DeFi and a vision in mind bigger than just the farmers or just the suits

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