TLDR:
- Participate in Algorand Governance and earn ALGO Rewards
- Commitment Period ends 14th July 2022
- Committed Funds are locked for 91 days
- Hedge the lockup with Perpetuals to mitigate asset price risk
- Earn the difference between Governance Rewards and Funding Rates
Algorand
Algorand is a decentralized open-source blockchain network that uses a two-tier structure and a unique variant of the Proof-of-Stake (PoS) consensus mechanism to increase transaction speed and achieve finality.
ALGO is the native Algorand cryptocurrency, and is a cornerstone of its network structure. There is a hard supply cap of 10 billion ALGO coins of which about 7 billion are in circulation. Part of the new supply is brought into circulation by the Governance Period Rewards.
Governance Rewards
The decentralized, community governance rewards model has been designed to highly value and reward the commitment of Governors to the Algorand ecosystem and their participation in voting. Immediately prior to each three-month governance period, the Foundation establishes and funds an on-chain escrow account to hold governance rewards for that period.
70,500,000 ALGO
Governance Period 4 Reward Amount
Currently, we are at the beginning of the fourth period. As in the previous two periods, 70,500,000 ALGOs will be distributed to the Governors.
Algorand Governor
All Algo holders are invited to become Governors and vote on important decisions regarding ecosystem development. During the inception phase, any Algo-holding account can sign up by sending a zero-Algo pay transaction to a designated sign-up address, with the committed number of Algos encoded in the Notes field.
The Governors will have to commit an amount of ALGOs for a minimum of 3 months (length of a governing period). During this phase, the ALGO cannot be withdrawn.
Furthermore the Governor has to vote – otherwise he will get no rewards. Please see the Governors guide for instructions on how to participate in the fourth period of Governance.
Governance Rewards
The current reward can be found on the Algorand profile at stakingrewards.com. It shows the annualized reward rate for depositing ALGO into the Governance contract. The APR is based on the reward pool divided by the number of committed ALGO in this contract.
🚨 Problem with the current APR
The committed stake of ALGO will increase significantly by the End of Registration on July 14. External estimates of ALGO’s staking rewards (including ours) should be disregarded as a result.
How have rewards evolved in previous governance periods?
Let’s have a look into our StakingRewards Dataset 🔎
1. Previous Governance Period 3
Committed Supply
- First days: Not much ALGO supply committed
- Final days: About 4B ALGO were committed – more than in the second period
Reward Rate
- Fist days: Reward Rate started at ≈ 800 % APR
- Final days: Average of about 8 % APR over whole third period
2. Compared to Current Governance Period
Committed Supply
Reward Rate
- Looks very similar to previous period
- High probability of massive increase in Committed Supply the next days
- The Reward Rate is likely to decrease dramatically
Why invest in a volatile asset with 8 % Staking APR? Read on!
Delta Neutral Strategy
The fundamental element of the strategy is to get the Governance Rewards and at the same time be Delta Neutral on the ALGO asset price.
We assume that the reward rate could even be higher than the 8 % in the previous period.
Our Assumptions:
- Less committed stake during bear market → people don’t want to lock their tokens for 3 months
- Funding rates are significantly lower than the Governance Rewards
Hedging our ALGO Position
ALGO must be purchased for staking in Algorand Governance. To be Delta Neutral, a corresponding short position must be taken.
Perpetuals on ALGO can be purchased or shorted on various platforms. In the image below, the current funding rates are displayed on a one-year view.
In this strategy, we take a short position, which means that we have to service negative funding rates.
In relation to the current Governance APR, more than 30 % APR could be generated in a risk-free manner – but we assume a much lower APR during the 3 month.
Even compared to April of this year and the start of the 3rd Governance Period, these values have remained relatively stable. It was even possible to earn rewards, as the funding rates were even positive at some times.
Funding rates were only temporarily positive? Let’s dive deeper 🧐
DYDX offered in the previous Governance Period an average funding rate of ≈ 0.0085% per hour. So the exchange rewarded people who were short on ALGO.
This number results in an additional APR of 75 %.
Another advantage of DYDX is that it works in a decentralized manner. The service has not stopped working in the past, even in volatile market conditions.
As can be seen from the data, staker in the third Governance Period who followed a similar strategy enjoyed high rewards. In addition to Governance Rewards, they could earn high funding rates.
Total Return ≈ 8 % Governance Rewards on ALGO + 75 % Funding Returns on Perpetuals
Risks associated with this strategy:
- Perpetuals are risky financial products that can be liquidated in the event of strong distortions
- Platform risk of the hedge you have chosen
- Smart contract risks continue to exist even if Algorand has audits
Summary
These are exciting days in the Algorand ecosystem. All eyes are on how much of the ALGO supply will be committed to the Governance. The influence of the ongoing bear market on this strategy will be interesting to observe. The behavior of the funding rates will also be an important factor in the success of the strategy. If it goes as in the previous period, it will be highly profitable.
This article does not provide financial advice. Always do your own due diligence.