Anchor Earn vs Borrow. growing chasm

Tier-based would likely kill off Anchor. Not being able to get your funds out in case of FUD, due to whatever (crypto crash, slight UST depeg, APY reduction, etc.), or simply need, would materially reduce deposits, and cause an exodus - may be a mass exodus.

It would then likely necessitate use of a third-party app to rotate funds among multiple wallets (and creating and maintaining such) to get the best balance of liquidity and returns, and to trade locked-in aUST for immediately withdrawable UST. Gone would be the use of Anchor as a savings account, which is the whole point. (Anchor as a term deposit makes a lot less sense, and I doubt is viable.)

The complexity of using Anchor would increase many fold, being a major turn-off for use and adoption, and making third-party integrations so much more difficult (and things like Alice it may make totally nonviable). That’s a non-starter and makes no sense whatsoever. Easy to bypass it (trade locked-in aUST with clear aUST with another user, at a below 1:1 ratio of course), just creating extra complexity, risk, potential for scams and more attack vectors, and yet more ridiculously high fees for third-party app to trade locked-in aUST for withdrawable aUST (which would surely pop-up soon in response to such a move).

Not necessarily true. Osmosis has different bonding periods with tiered APYs (higher with higher bonding periods) and it continues to grow without any mass exodus whatsoever. There will be plenty of people willing to lock in for the longest periods for the highest yield. The only people who would be discouraged are who are not invested in Anchor for the long haul anyway and just care for quick leveraged return and then out.

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Not if those tokens are hard locked into the system so they cannot leave or be accessed.

Bottom line is Anchor should adopt something similar to Full Reserve Banking via the use of Time Deposits to generate yield for the platform.

Time deposits are an integral part of every bank. There is no reason that Anchor should be building up stockpiles of billions of dollars of unproductive UST. Without time locks, it isn’t prudent to be actively using those funds.

We are currently lending against Demand Deposits which is a small risk in of itself.

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A large % of time deposits actually displays confidence in the system. Nobody is going to lock up for 30/90 days if they don’t trust the system.

Why would there be an exodus if funds are locked up? If anything, knowing that billions of dollars of UST are locked up actually prevents fear of an exodus.

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Hello there.
I think it is time to really deep into what is going on and how we can react.

First of all, people are able to leverage UST on Abracadabra protocol because there is liquidity brought by someone. Who ? We dont know… maybe we will at the end. But what we can say is, these people accept to lose their APY% on Anchor and give them to others to use this leverage tool. But why do they accept that ?

Lets dive on the leverage tool. You deposit 100 UST and you can borrow 800 MIM, that you swap against 800 UST, you deposit on Anchor and you have an APY of 120%. Great. But in the process you are ask to pay a direct fee of 1% on your borrow position, or 8% of your initial position. Interesing right ? How long do you need to wait to get back to break even ? 120%/360, so you get 1% back every 3 days (more or less), so to get your 8%, you need 24 days. Humm interesting.

So by leveraging your position, in fact you give instantly your yield of 1 month to Abracadabra protocol. Now if you want to earn money, you have to wait more than 1 month. The result is : does this system is sustainable ? For sure, as we can see it now, it isnt. So people doing leverage are probably not the big winner here neither.

Then who ? Who get the instant money ? the fees, yes. Abracadabra protocol is the big winner and they are probably the one that are providing the UST liquidity to the system. By doing so they empty the reserve of Anchor and enjoy the mecanism of the stable yield.

This prove one things. Compensation of yield isnt sustainable in a degen world sadly, or at least not how its done today. Still it underline the fact that Anchor can have a big unbalance between UST deposit and collateral. Today its Abracadabra, but tomorrow could be something different and as long as there is degen, we need to find a solution to counter that. I have read proposition to raise the LVT of borrowers but this is not a solution as once is gonna be reach, same problem is going to come back.

I think its time for Anchor V2.

The first thing we can do is to get back to a real APY% (or even a malus) for people who deposit outside the system, just taking the EARN part, doing nothing else.
Incentivize people who use the protocol and participate to the well being, mabe using ANC token. We could incentivize people who deposit their UST and 8-10% of the value in ANC for a lock period. These people will benefit from the highest APY%
Incentivize to deposit collateral by increasing your yield as well in a similar way explain above for ANC.

I think many more solutions could be find but it is important to act soon. These change will eventually bring a lot of good for the futur of this protocol !

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Everytime somebody makes a deposit they receive a token as receipt. It’s that very receipt the one that can still be leveraged even though the tokens it represents are hard locked into the system.

“Currently, no country in the world requires full-reserve banking across primary credit institutions.” -Wikipedia

I think this sentence sums up pretty well how well this “Full-reserve banking” would end…
People expect to use this platforms as savings accounts with immediate liquidity

Exactly. Therefore you would see a mass exodus because people want to have control over their money and have it be liquid. And the ones willing to actually lock up their funds for long periods are probably a very small minority…

I am offering a suggestion to retain higher APY’s for users of the platform by locking in funds (30/90 days). This is fairly standard practice for both Full and Fractional reserve banks.

That doesn’t mean we get rid of instant access, but it means we can prudently make active use of idle capital for the benefit of all.

What is your suggestion for $3.7 billion of stationary UST sat doing nothing? I guess you think it’s a good idea to just let that build up?

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Making ANC more valuable might make borrowing more attractive and help slow the bleeding of the yield reserve.

If a percentage of anchor’s earnings TVL was allocated to ANC stakers it would have more value than a GOV token and would increase distribution yield and make borrowing more attractive.

Would it be ok if 18.5% went to aUST holders and 1% to ANC stakers?

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If there is an actual real benefit with locking funds that would lead to better yields then it seems like a great idea. What I’m struggling with is picturing a scenario where it would actually be useful to lend (lock) for a certain period of time. How would Anchor put those funds to use exactly?

I agree with the fact that idle UST could be put to use. I actually have thought of many zero risk uses for idle UST. One would be to increase the LTV to 80% and in case of a liquidation use those funds with a flash loan to liquidate potential pending bids.

Then I think that the simplest thing to do would be to simply adjust borrowing APRs based on the deposit/borrow ratio/utilization in a very similar way to how AAVE does it. If you have excess ust then borrowing should become increasingly cheap. This would greatly incentivize borrowing and thus profits towards feeding the deposit APYs

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I wasn’t able to read every single comment in this thread but there were many valid points. I think the divergence between depositors and borrowers must be addressed to make anchor sustainable. The fact that many users trust anchor with their savings is a positive sign to me and probably nobody was expecting to have this success so quickly. As I see it, the main points to work on are:

  • Make borrowing more appealing: Since borrowers are paid in ANC it would make sense to strengthen the token, find more use-cases or increase the buyback rate, ANC is a key cog in this machine, it’s important for governance voting and gives value back to the borrowers.
  • I would love to see more collateral options. Adding tokens like Solana, Atom, Polkadot will for sure give a boost to the borrowing side, but I think this is in the works already.
  • Reinvest a portion of the deposits. If we aim at large-scale adoption then probably we would not want to rely only interests from collateral to fund Anchor. A considerable portion of the deposits sit idle, I think it makes sense to reinvest a portion of it. Some yield could be obtained from arbitrage opportunities (maybe it could be integrated with projects like whitewhale?). To minimize the chance that too many depositors withdraw funds at the same time we could offer different deposit strategies that give different yield depending on the lockup period, if users don’t want any lockup period they can get a lower yield, I think that is fair.
    I think this was all mentioned in previous comments, in short I think we have seen a great adoption of the protocol and as a result we need to shift the focus on strengthening the demand from the borrowing side and think how to use the idle portion of the deposits. Right now if we grow too much and too fast we see imbalances that can affect the yield. If we were able to reinvest part of the deposits in a safe way we would gain more stability and make the protocol more resilient.
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I agree with the fact that idle UST could be put to use. I actually have thought of many zero risk uses for idle UST. One would be to increase the LTV to 80% and in case of a liquidation use those funds with a flash loan to liquidate potential pending bids.

Having the protocol bid on liquidations would lead to trust issues and a decision, does the protocol sell imediatly or does it hold? If it holds, it can lose money (everyone is happy biding on Kujira until there’s an actual bear market and the price doesn’t recover for a while), there goes the guaranteed UST deposits, and if it sells it’s contributing to the liquidation of it’s own borrowers, bad image to have.

Then I think that the simplest thing to do would be to simply adjust borrowing APRs based on the deposit/borrow ratio/utilization in a very similar way to how AAVE does it. If you have excess ust then borrowing should become increasingly cheap. This would greatly incentivize borrowing and thus profits towards feeding the deposit APYs

That’s already the goal afaik, it’s fixed now as a bootstrap mechanism, and it has a volatile incentives platform for borrowers, but they always stated that the end goal is to have the APY free float, ideally close to 19.5%.

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I’d beg to differ. Anchor built a nice liquidation queue system and Kujira just built a front end that siphons fees on withdrawals. At a minimum, Anchor should just build a new UI on top of its liquidation queue or even just fork Kujira and redirect all fees that would have gone to Kujira to go towards Anchor stakers or the yield reserve.

There’s no team on Terra that I trust less than Kujira. They’re the same team that complained their original Harpoon UI frequently failed because it was getting front run by bots. Guess who ran one of those bots? It was Harpoon itself. There’s indisputable proof and they want to brush this fact under the table.

Not only should not everyone be happy with Kujira, but everyone should be unhappy with it.

You do realize that TFL ran a bot that was doing liquidations before the move to liquidation queues? There could be simple rules like Anchor only does liquidations in which they can immediately exit and take an arb profit. The big issue with this strategy isn’t bad optics. It’s that the presence of TFL or Anchor as a major liquidator would cause other liquidators to leave the system. Most of the serious liquidators from the pre-liquidation queue era (Harpoon included) have left the market.

Anchor should be prepared to make a lot of changes quickly, but as far as I can tell, it will be really hard to get out of this situation without TFL injecting capital into the yield reserve to at least buy some time to remedy the situation.

I can see you seem to hate Kujira based on your comment history, but developers on Anchor don’t really seem to agree with you. And as far as I understand, Kujira worked with Anchor and got their permission to set up Orca in the first place…

In my experience their team has been very professional, the new ORCA works great, and they engage very well on the telegram and constantly listen to the suggestions of their community and make lots of updates based on those suggestions. So I feel like you’re speaking about some alien entity…

Having Anchor build a front-end for liquidators is different that Anchor liquidating on it’s own, I argued against the second and I never mentioned the first. I won’t express my opinion on the Kujira team as it’s not relevant, but what they built, as simple as it is, it’s a net positive for the network and Anchor itself, liquidations are far more efficient and have less impact now, it’s undeniable. And yes I know Anchor built the contract, but Kujira led the discussion, as far as I am aware, and provided the mainstream access to it. I understand that you may have personal issues with them, but Kujira is not the focus of this discussion…

On the topic of TFL running the bot, yes I knew but I am also aware that it was a topic of discussion and suspicion in the past, while I never considered TFL to be acting in bad faith or in a “for profit” fashion, optics were bad and some people complained… It was a necessary evil back then, and it may still be, I’m not in the know of how much capital deployed in the queue is from TFL, but at least now retail as an easy to use tool, by Kujira now and maybe some others in the future.

Anchor webapp is open source, the community is free to build a liquidation queue front-end and propose it be merged to the main app, or simply deploy it as an alternative.

Anchor bidding on liquidations would only work if they treated liquidations as an arb - they could sell the bLuna liquidated to make the trade even in UST terms and keep the remaining bluna for Protocol Owned bAssets, providing permanent staking rewards to depositors.

However, this would essentially kill the market for bidding on liquidations (and negatively affect Luna price in downturns), as Anchor would bid down to the minimum premium to still make an arb profit, rather than many retail liquidators who are largely buying bLuna at a discount and keeping it.

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This is where we would need experience to come in and design a safe and reliable strategy.

For example, Origin Protocol (OUSD) is currently pulling 25% APY across $300 TVL using safe lending (Aave/Compound) and providing liquidity in Curve and Convex. Of course a lot of that yield is coming from the accumulation and sale of CRV and CVX reward tokens.

I am not suggesting it is a good idea to be moving billions of UST across chain, but static UST could be used in a similar way within the Terra Eco system, Mars Protocol lending and large liquid Astro LP’s, however there is impermanent loss to consider so would probably need to go off chain to obtain a stable yield.

Perhaps we can innovate. Maybe WhiteWhale can setup an arb pool that solely provides yield from arbitrage without extracting anything from Anchor?

At this point I have no idea how much yield we can supply back into Anchor, but it’s going to be infinitely more than zero.

Looking at using these funds to create a CDP that hedges the UST peg would be a great use of funds for idle UST. It is something I have been thinking about a lot. Having UST-MIM, UST-DAI pools on a DEX like astro or loop would be needed and flashloans to flash into these positions. Something else that Anchor could make fees on.

The idea is to make it more decentralized and diversified by having more liquidation providers. Lighthouse should be coming out soon with their own liquidation protocol which I am looking forward to.

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Flash loans would be an amazing opportunity for Anchor imo, I’ve also been wondering (and will try to formulate it better in the future) about adding a new genre of borrowing, fixed-term with a more attractive APR but with a fixed end-date, either pay up or lose the necessary collateral needed to repay the loan at a premium, liquidation rules would still apply as-is.

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It looks like TFL will top up the reserve

just a small point - that you can still have immediate liquidity on a tiered system (as is the case with many banks with similar products) - you just sacrifice your APR to a lower rate if exiting early (will not lose any capital). Very common setup with investment products - so I think people would not have a big problem with it.

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