Authorize use of emergency community funds if reserves run out

I agree that selling off a sizeable portion of the community funds would have deleterious impacts that should be avoided at nearly all costs. The good news is that increasing the yield reserve by a factor of 2-5x would require less than 10% of the community pool.

That being said, given the recent improvement in utilization ratio and the upcoming implementation of prop 90, I think it is reasonable to take a wait-and-see approach with regards to this rather drastic measure. It is great to hear that bETH will be here so soon! Going multi-collateral will significantly de-risk the balance sheet.

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I couldn’t agree more this sentiment. Fear is mean reverting, the same for market Vol which is a measure of fear. It is rational to assess worst case and be ready for it, think recent black swan. However, 2 blackswans and the blackswan continuing is like a 10 Sigma here and acting here, is like selling SPX when it was 666.

I think we can all collectively come up with some protocol tweaks that don’t require dropping yield and losing ANC value proposition.

Off the top of my head, is a savings protocol withdrawal tax on short-term withdraw that happen within 30 days of staking aUST. Or there could be a small withdraw tax for everyone say .1%-1% This could go into the yield reserve and help with long-term stability. It could also be a variable tax based on the yield reserve level.

A similar thought would be an exit climate tax could be explored on ANC-UST LP pools for similar reasons, also tied to the reserve ratio. This rate could range higher say, 1-5%

I couldn’t agree more this sentiment. Fear is mean reverting, the same for market Vol which is a measure of fear. It is rational to assess worst case and be ready for it, think recent black swan. However, 2 blackswans and the blackswan continuing is like a 10 Sigma here and acting here, is like selling SPX when it was 666.

This is reckless thinking. Approving a backstop is nothing like realizing a loss on a position that is down. Neither the Anchor protocol or LUNA/UST were prepared for this and we are all suffering the consequences now. It is literally your job as the manager of a bank (other people’s money) to be prepared for the unknown unknowns. Assuming the next one will not be worse than the last one is unacceptable. Kicking the can down the road is fine, but we must accept the brutal truths and come up with “black swan” contingency plans.

I think we can all collectively come up with some protocol tweaks that don’t require dropping yield and losing ANC value proposition.

I think it is best to focus on improving the borrower value proposition. There is no good reason to borrow from Anchor today (rates are too high, too few fiat gateways, etc.). Without a compelling customer value proposition and sustainable unit economics, it does not matter how much we put in the yield reserve.

I do agree that improving the value proposition for borrowers is a required step. Although the fixes cannot be immediate, we could first starting with listing some of the improvement points.

@e-gons - do you mind listing some of the thoughts that you have? Will be valuable for assembling community attention on this.

I’ve seen alot about the reserve talk lately, imo, each suggestion has its good and bad bits, but the obvious one to me is adding more collateral, i dont see the point in lowering the apy% as the reserve has got months worth, and more and more collateral is being added daily, so adding to sell pressure of anc, to me shouldnt be an option, or else more anc will be given out to compensate the price going down, atm $500 borrowed is about 1anc a day, so to me adding more collateral asap, is the “Best” option.

I do agree that improving the value proposition for borrowers is a required step. Although the fixes cannot be immediate, we could first starting with listing some of the improvement points.

I focus below on getting our prices in line with the market. There are other issues I won’t address because I think they are already in process (i.e., the expansion of acceptable cryptoassets for collateral and deposits).

Goal: Competitive Interest Rates with Positive Unit Economics

A long-term goal should be to achieve competitive rates for both borrowers and depositors while achieving positive unit economics. For depositors, ETH competitors pay ~3% - 12% interest rates for stablecoin deposits vs Anchor’s 18% - 20%. However, interest rates for stablecoin loans are ~6% - 15% vs Anchor’s 30% (assuming the target 66.7% utilization ratio). ​Considering the foregone staking yield, the true cost to borrow from Anchor is more like 40%.

I can think of a few levers to improve unit economics and our competitive position:

  • Lower depositor rates
  • Leverage the collateral
  • Ancillary revenue streams

Lowering Depositor Rates

Let’s say we wanted to match the market at a 4.5% borrower rate (with 66.7% utilization with a 2% base rate) and break-even. With a 35% LTV and a 9.5% yield on collateral, I think the protocol would break even by paying a 15% depositor rate.

At 15%, Anchor would still pay best in market rates. Interestingly, @Kamil explored building an Anchor savings app and said that:

I found that the 20% rate might be too high to effectively promote with no-coiners. Most people I showed it to found it ludicrous and became immediately defensive. That is why for now, I’m defaulting to 15%

Given the above, it seems reasonable to consider a Threshold rate of 15% instead of the current 18% as one of our options to achieve our goal.

Leveraging the Collateral

Another tool is levering up the collateral. With a modest 1.35x leverage (borrowing against the collateral at 35% LTV), I think the protocol would be profitable, paying 20% to depositors while charging 4.5% to borrowers assuming 66.7% utilization, 2% base rate, 35% LTV, and 9.5% unlevered yield on the collateral. This option requires our thoughtful debate and consideration, given the increased risk of ruin and operational burden from the usage of leverage. We should proceed with extreme caution here.

Ancillary Revenue Streams

Another tool to subsidize the negative net interest margin is to use other revenue streams - such as transaction fees from the ANC/UST liquidity pool. Similar idea to how Thorchain’s upcoming “savings” account will use liquidity pool fees to pay interest. Is there a mutually beneficial arrangement with the Mirror Protocol worth exploring here?

Unsolved problem

The issue with all of the above is that the model is predicated on users not taking into account their staking yield as part of their cost of capital. There doesn’t seem to be a sustainable business in matching the market at 4.5% interest for a stablecoin loan while asking for collateral that yields 10%. The leverage can help to an extent, but I expect that ancillary revenue streams or some other innovation will be necessary.

Summary

Anchor’s depositor rates are 1.5x higher than the competition, but borrower rates are 2x-3x higher than competitors. Through some combination of lowering depositor fees, leveraging the collateral, and adding ancillary revenue streams, Anchor can improve its customer offering and operate sustainably.

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I’m new to the community, so forgive me if I’m missing something obvious here. Do we know when other collateral types will be available? This seems like the obvious way to boost borrowing demand, but I can’t figure out how far away that is.

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@ryanology045 mentioned that bETH would be here in June. It sounds like the Mirror is working on enabling bMIR (this won’t help much IMO) and yield bearing mAssets (lack of correlation to cryptoassets should help a lot) too. The more the merrier for us.

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ok, understood. I also think it makes sense to wait another month or so and see if things settle down before making any changes, but my concern is that when I look at the ecosystem, there seems to be a lot of projects that will leverage Anchor yield, but outside of additional collateral types, are there any projects focused on building significant borrowing demand? I can’t figure out how the borrowing is going to scale to meet the deposit demand.

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@ryanology045 @e-gons One simple way to increase utilization is to get more visibility on the lido site. Right now Anchor isn’t even on the ecosystem page. Aave is on the ecosystem page based only on a proposal submitted to add stEth. From what I can tell, Anchor is the best application on the market for making staked derivatives on lido useful and we have zero visibility.

With the rewards of anc doesnt that ofset the depositors rates? Or we talking about a change for long term after say the 3-6year mark when anc rewards start to dry up? Shouldnt we be thinking of a way to replinish them? So the borrowers are still earning more then repaying? My thought of it was ( Later down the track) could trade the airdrops for anc reward buyback? But even that would be a couple of year solution, i know there is currently the Gov staking buyback? Maybe we could decide to cap that at somthing and rest go towards the reward pool? Cause to me if we thinking long term, it would mean the earn/Deposits are at a higher point, so would incure higher buybacks by that time? If thinking short term fix? Added collateral will do more then any changes to APY%? Even though i do understand most dapps are lowering it, but that is expected with all the outside world fees etc. So how much more would they need to lower their Apy% if anchor lowers itself?

You are right, the ANC rewards pay borrowers to take out loans today and that is the plan for some time. But, the ANC is worthless unless there is a sustainable, cash-flow generating business behind it. Changing the rewards schedule kicks the can down the road. If we want to fix the core issue, we need a competitive offering. Where is the product-market-fit for a lending platform that charges 3x higher interest rates than competitors?

I would like to reiterate what i proposed earlier in the thread here by adding some small taxes as part of additional revenue streams for the yield reserve and disincentivizing bear market withdrawal. It’s a small dent but it helps. Thoughts?

Couldnt the rewards be used to auto repay, in background removing the interest, thus only showing rewards after the interest has been paid? having it all done on the backend, and on the front end its displaying 0 interest + rewards left over? Cause even though the interest is high isnt the goal to have rewards outway the interest for the duration of the loan? So you’re actually paying 0 interest?

I like your ideas for adding small fees for some withdrawals. We need high-margin, capital-lite ancillary revenue streams! Plus, there is precedent in the market. Yearn does something similar (e.g. in Vaults that will require incurring costs to get the LP their money back). Square and Venmo’s revenue models are (currently) centered on fees for instant withdrawals. These fees seem like a rational part of Anchor 2.0. Any other ideas like this?

You could automatically pay the interest down with the rewards. I think this could be an interesting UI feature of Anchor 2.0 (i.e. give borrowers the option to opt-in to auto-pay interest with rewards). It would make rates look more competitive.

But, we would still have a structural problem when the rewards run out. Savvy borrowers will do the math on their true cost of capital (incl. the forgone staking yields). So we still need some long-term fixes.

Ancillary revenue streams seem like the best option forward. Ideas like @bitn8 's can add up quickly when they have 100% flow-through to the bottom line. Some liquidity pool fees would be another interesting addition to the revenue mix–volumes (and profitability?) should be high when volatility spikes and borrower demand naturally contracts.

Awesome. Thanks for the support. This is exactly what i was thinking too:

I would also like to see it more aggressively implemented on ANC-UST LP in regards to Vol scaling fee.

Would like to hear more input @ryanology045 @dokwon

Would like to hear more thoughts and agree with @e-gons let’s find some more ways to get sustainable revenue streams going here that incentivizes the way we want the system to work.

Unfortunately I don’t think withdrawal fees would be a viable option here.

If a withdrawal fee were to exist, there would be three places where it could be attached to:

  1. UST deposits - Attaching a withdrawal fee here would be quite detrimental to Anchor’s key advantage of instant & free withdrawals
  2. ANC-UST LPs - This is actually handled by Terraswap contracts, which are outside of Anchor’s control and would require a contract change on their end
  3. bAsset collateral deposits/withdrawals - While the most doable option (compared to the above two), fees to here could have negative effects on borrowing demand

From the above, there doesn’t seem to be a good way of placing withdrawal fees imo.

Perhaps with Terraswap upgrading to include an admin (exchange pair owner) fee, a portion of ANC-UST exchange fees could be used to supplement the yield reserve. But again, this would require actions from Terraswap.

  1. UST deposits - Attaching a withdrawal fee here would be quite detrimental to Anchor’s key advantage of instant & free withdrawals

I agree that a blanket fee on withdrawals of UST deposits will have a deleterious impact on depositor demand.

Do you really think Anchor’s key advantage is instant & free withdrawals? In my view, the protocol’s only “advantage” is the ability to use yield-bearing collateral from borrowers to pay higher interest on deposits than competitors. This is really a first-mover advantage as others will follow this scheme. So, we need to turn first-mover advantage into a scale advantage. For scale, we need borrowers, hence this discussion.

Please reconsider @bitn8 's proposal to attach withdrawal fees on UST deposits in certain circumstances, such as a withdrawal within x days of deposit.

What about a yield curve?

Another option is to move the interest rate into a yield curve that pays different rates for different deposit lengths. For example:

  1. For the first 12 months, you get the Threshold rate
  2. In months 12-24, you get Threshold + y%, and
  3. After x months, you get the full Target rate.

We could give depositors the option to “lock-up” their UST deposits for the required time to earn the full interest up-front.

Benefit: This scheme rewards depositors for being sticky capital without charging them explicit fees and reduces our negative net interest margin.

Cost: A yield curve and depositor lock-ups could create a mismatch in the duration of liabilities (long-term) and assets (short-term).

Thoughts on a yield curve and ways to mitigate the duration risk? Given Anchor’s ambitions, I imagine you all had envisioned a yield curve at some point–would love to hear how you are thinking about implementing it.

  1. ANC-UST LPs - This is actually handled by Terraswap contracts, which are outside of Anchor’s control and would require a contract change on their end … Perhaps with Terraswap upgrading to include an admin (exchange pair owner) fee, a portion of ANC-UST exchange fees could be used to supplement the yield reserve. But again, this would require actions from Terraswap.

Okay, so it sounds like getting any liquidity pool fees to Anchor will take a Terra community vote. I think this is one of our best options (no impact to customer experience, this rev stream would spike when we need it the most, limited engineering needed to implement? etc.).

@bitn8, do you want to post something in Agora about LP fee sharing with Anchor? Is there a mutually beneficial relationship with Mirror worth exploring too? Given Anchor’s importance in driving long-term UST demand, I think the interests are aligned well to make Anchor successful.

  1. bAsset collateral deposits/withdrawals - While the most doable option (compared to the above two), fees to here could have negative effects on borrowing demand

I agree that fees on bAsset collateral are an untenable option, as they exacerbate the very problem we are trying to solve (real borrower demand to match depositor demand).

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I really like this idea and it’s solid thought. Circle’s new APY is like a money market account where you can’t get the full 7% unless you lock up your funds for a year and the rate drops for shorter lock-ups. Strongly behind this and would like to see others in the communities thoughts. @e-gons Maybe break this out into a separate thread here and let’s see what others think?

Also agree this would not be good.

Not sure I see the demand on MIR with ANC yet. Perhaps in time we will see something we can explore there. So far, I like the two ideas we have here, so let’s try to run with that.

I think it would be worth exploring posting over there and seeing what other say from the broader community. As well as the trade offs of any complexity it might have. I will get a simple writeup going and hopefully get it up there in the next few days.

Thanks