IMO armor isn't absolutely broken, but it could definitely have some work done to make it enjoyable for players who can't deal with it immediately while still largely retaining its power, like an armor reduction every time it gets hit. The GU team has already put out a statement that seems to suggest an armor re-balancing is coming soon, so hopefully it'll be a well-balanced change.
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What you propose to reduce armour for each hit the creature takes is pretty cool. In principle I think the problem with "armor" is that other abilities like "burn" or "deadly" are almost obsolete to deal with it.