Arca Tokenomics Proposal

Mechanism
1

Authors: Arca (@Matt_Hepler, @Andrew_Stein)

Please view the full proposal attachments, analysis and supporting data in the following link

Arca ANC Governance Proposal.pdf - Google Drive

Twitter Thread

Summary
This proposal aims to address the lack of utility within the current ANC token model and drive further usage across Anchor. Arca is a participant in the Terra ecosystem with LUNA, ANC, UST holdings and is a power user of the Anchor Protocol. We believe implementing token utility for Anchor earn depositors will positively impact the token price by creating substantial demand for ANC and a supply sink for the token.

This proposal will support Anchor Protocol’s self-sustainability over the medium term while creating more of a vested interest by depositors to participate in the governance process of the ANC v2 tokenomics. The anchor community has actively debated changes to ANC tokenomics to promote some type of value accrual since July of last year without any significant progress to date. Therefore, we are immediately bringing our proposal up for a vote by ANC governance stakers.

Current Issues/Problems Facing Anchor
The ANC token model is broken in its current form, evidenced by the protocol growing to $11.3Bn of TVL in less than one year of operations while the token has declined in price by 16%. Anchor’s growth has been responsible for the majority of the TVL growth in the Terra ecosystem during this time, but the economic value generated by the protocol has accrued to the LUNA token, which is up 233% from Anchor’s token genesis event on March 17th, 2021. We believe that the success of ANC and LUNA/UST does not need to be mutually exclusive and that a simple change to ANC’s tokenomics will support a healthier and more sustainable Terra ecosystem.

ANC_TVL and Price Table Comps

The tokenomics in their current form lack utility for protocol users, which we believe is the primary cause of its poor performance since inception, despite billions of dollars flowing into the protocol’s renowned 20% earn feature on UST deposits, collateral deposits, and borrowing.

Additionally, the poor price action of the ANC token has created a negative feedback loop, causing Terraform Labs (TFL) to inject $450M of capital into Anchor’s yield reserve on February 17th, 2022 via the treasury of the newly formed Luna Foundation Guard. This capital injection decision by TFL was made off-chain by the LFG board, which we find the commitment via LFG indicative of Anchor’s importance to the entire Terra ecosystem, but not something dependable in the future for what is supposed to be a stand-alone, self-sufficient, DeFi protocol. Without a major change to ANC tokenomics, we believe the newly recapitalized yield reserve will quickly be drawn down again and require another capital injection in just a few months.

Arca ANC Utility Proposal
The following describes how our proposal will add utility for holding ANC by staking in governance and explains the potential benefits if implemented:

Overview
Any wallet with over $100,000 of UST deposited in Anchor must own and stake an amount of ANC tokens equivalent to 10% of the UST deposited to earn the full ~20% APY.

If the wallet does not hold greater than or equal to the 10% equivalent of the UST balance deposited in the ANC governance contract, then the UST deposited in Anchor earns accrues one half of the Anchor Yield (~10% APY total) with the net interest margin accruing to the Yield Reserve.

Rationale
This proposal is a simple way to implement the classic flywheel enabled by tokenization via turning Anchor customers (depositors) into protocol owners with a financial interest in promoting economic value accrual to ANC. Depositors currently have no skin in the game related to the Anchor protocol governance, nor any reason to hold the ANC token, but receive 100% of the benefits enabled by Anchor. We believe that the current mismatch in demand for deposits earning 20% relative to borrow demand has been driven by heavy demand from institutional investors.This is evidenced by the top 50 wallets depositing UST into Anchor Earn driving ~39% of total deposits.

Benefits
We believe that this proposal will create significant demand and favorable price action for ANC based on the $7.2Bn of UST currently deposited in Anchor earn and ANC’s $721M circulating market cap. The $100K threshold limits the impact to smaller retail investors and reduces the protocol’s complexity for new users. Further, a higher ANC price would fix the distribution APR, making it more attractive to borrow UST, creating more interest income for ANC, and preserving the newly injected $450M of capital in the yield reserve for the long term.

Conclusion

ANC is Significantly Undervalued vs. Peers

We believe converting Anchor earn users into stakeholders will support a strong rerating of the ANC price. Our analysis laid out below as of February 23rd, 2022, suggests 50% to 167% upside for ANC based on the circulating market capitalization to TVL multiple of DeFi lending peers. While these competitor protocols all accrue value and operate differently, we believe that this is a good proxy for the re-rating potential created by our proposal.

Another potential reason for ANC’s multiple to deserve a premium to DeFi peers are the multiples of CeFi competitors (CRO) and Nexo (NEXO), which have tokens that have similar utility to what we are proposing for ANC. The CeFi comps require users to stake a certain percentage of deposits (e.g. Nexo) or $ value (e.g. CRO) to receive certain tiers of benefits and have created tremendous value accrual to CRO/NEXO as evidenced by their market caps relative to DeFi assets, despite not reporting operational financial statements on-chain or being fully decentralized.

Closing Remarks
We welcome comments from the Anchor community on our proposal and look forward to driving value to ANC token holders by realigning interests among all parties. In the following section, we have provided additional background information to support our proposal’s rationale.

Background of Problems Facing Anchor Today
Anchor Protocol is the decentralized application backbone of the Terra ecosystem with $11.3Bn of Total Value Locked (TVL), 59% of the $19.1Bn of total TVL on Terra. Anchor has been integral to bootstrapping UST demand and is well known for paying 20% APY on UST deposits on the platform. UST deposits currently represent $7.2Bn or 64% of TVL with the remaining $4.1Bn of TVL consisting of $3.4Bn of bonded LUNA (bLUNA) and $696mm of bonded Ethereum (bETH) collateral against which users can borrow.

Anchor’s model is different from pure spread protocols such as Aave and Compound with variable deposit and borrow rates based on market supply and demand. Instead, Anchor is designed to promote UST usage via the deposits earning 20% APY, and loans denominated in UST with bonded (staked) Layer 1 assets as collateral. Anchor pays fixed interest on the deposits, and earns staking yields on Layer-1 collateral assets in addition to interest paid on UST borrowed.

LUNA is now the 4th largest Layer-1 asset with a market cap of $23.7Bn and 2nd largest chain by TVL, while UST has overtaken MakerDAO’s DAI as the largest decentralized stablecoin with a market cap of $12.3Bn. Anchor has been the key driver of UST’s adoption to date and critical to the success of the Terra ecosystem. However, despite the tremendous growth in Anchor Protocol’s usage with the application becoming the 3rd largest lending protocol by TVL, minimal value has accrued to the ANC token. With LUNA cementing itself as a top Layer-1 chain and UST adoption hitting escape velocity, we believe that economic value accrual to LUNA and ANC tokens is no longer mutually exclusive.

Lopsided Demand led to Depletion of the Yield Reserve
While Anchor has been integral in UST’s adoption, recent developments with the protocol have started to cause more harm than good to the entire Terra ecosystem. In December 2021, Anchor UST deposits earning 20% APY started to far outpace revenues to the protocol from collateral assets deposited and interest paid on UST borrowed. This dynamic resulted in Anchor’s “yield reserve”—or a safety reserve that the protocol maintains to ensure the fixed yield on deposits can be paid—being rapidly drawn down.

If the yield reserve falls to $0, then the “Anchor rate” deposit APY must be adjusted downward to a sustainable level based on the earnings generated from collateral and loans. The sharp YTD selloff driven by deteriorating macro conditions further exacerbated the yield reserve decline, as bLUNA and bETH collateral was liquidated to repay loans on Anchor that breached their 60% LTV limit, creating a negative feedback loop with even less protocol earnings to pay the fixed APY on deposits.

This sequence of events created fear around a “run on the bank” and Terraform Labs (TFL) stepped in to backstop the Anchor protocol via a $450M capital injection by the newly created entity, Luna Foundation Guard. This recapitalization began on February 11th with LFG starting to burn 9.5 million LUNA into UST and was completed on February 17th. Since the recapitalization was completed, the yield reserve has drawn down by $14mm or -3% in just 6 days, as UST deposits have increased by $692mm or +11% over the same time period.

This recapitalization is expected to cover the difference between the economic “real” yield of the Anchor protocol and the 20% APY paid on deposits for the next several months while ANC works through a tokenomics redesign. However, with Anchor UST deposits (interest expense) quickly recovering over the last two weeks, but minimal follow through on the collateral deposits or UST borrowed (interest income), we believe that this problem will surface sooner rather than later—barring a quick rebound in risk assets—which cannot be depended upon. With the $450M of fresh capital contributed and the Terra ecosystem showing impressive resilience and hardening ability to maintain the UST peg—despite getting hit from every side over the last month (macro risk asset selloff, Abracadabra leverage unwind, etc…)—we believe that this is an opportune time to implement a simple but effective change to the ANC tokenomics to 1) make the Anchor Protocol more self-sufficient over the next few months to protect the recapitalized yield reserve, while 2) a more thoughtful tokenomics redesign is hashed out and implemented by key stakeholders of the Anchor Protocol.

Lack of ANC Price Appreciation
Another issue facing the Anchor protocol contributing to the unsustainable imbalance between growing deposits and lagging collateral/borrow is the ANC token price itself. 40% of ANC’s 1 billion total supply is allocated to borrower incentives and used to offset borrow APR. Due to the decline in ANC’s price (currently 66% off from ATH of $8.23 11 months ago), the distribution of ANC has not been fully offsetting the cost of borrowing until the move higher over the last week. We believe that the market’s consensus view of the ANC token has shifted from a favorable way to play the growth of the Terra ecosystem to another “farm and dump” token that lacks economic value as a stand-alone business.

Sources
Please see the link to the full proposal for all sources as mentioned in the beginning of the summary

3 Likes
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Thanks for the proposal. I think most are in agreement that the ANC tokenomics need to change and it makes sense to specifically target Earn users (or protocols) to recieve full or boosted yields.

We need to be careful how we approach this and not use arbitrary figures (i.e. wallets over $100k need 10% ANC) and perhaps move to a deposit % based ANC allocation regardless of deposit size.

I would suggest we wait until the AMA tomorrow with the Anchor team who will explain their vision for the ANC token.

Cheers

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this is probably the most dogshit proposal ive ever read kek // https://twitter.com/ikysurai/status/1496678808333819904

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just split the 100 k in to 2 wallets. problem solved. :sweat_smile:

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Several things that are fundamentally wrong with this proposal:

  1. As others said, people can break up >$100k into multiple wallets, defeating the point.
  2. $100k is a very arbitrary number. Why not have everyone pay a proportional share and have skin in the game? Capable whales that can write scripts that auto-generate multiple wallets will evade this threshold anyway.
  3. As @ryanology045 himself said, this would discourage a lot of valuable b2b integrations (exchanges, apps).
  4. The Anchor team and community are working on a ton of ways to stimulate more borrowing (recent example here but there is a lot more). Why not see how they do first before crippling the depositor side?
  5. Speaking of @ryanology045 's ideas, here is one thread and here’s another one with more ideas for improving sustainability and ANC value. I particularly like the latter, which avoids the cons while potentially having much more positive impact in terms of avoiding parasitic yield grabbers is to lower (e.g. halve) the yield of smart contract depositors. This way, leeches like the Abra degenbox that actually are causing deposits to spiral out of control will do a lot less damage.
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Here is a much better idea IMHO:

Capping the tier 1 yield on the UST deposited to a 8-10% max and giving to the lenders only the possiblility to stake the Anchor tokens on special vaults in order to reach higher yield from the UST deposited. The more Anc token you stake the higher will be your yeld on deposited UST. ( only first grade math will be necessary to implement this thing)

It could be also a good idea to give High reward only to the portion of UST that are backed with a deposited collateral; for example if you have 1.000 UST worth of Luna deposited you can achieve an higher yield only on , let’s say, 1.000 UST deposited, reaching 20 % if you stake an additional 10% of the UST deposited in the Anchor vault.
in this way Anchor should collect enought reward from the deposit to fund the borrowing side ( some simulations has to be done )
to summarise:

Collateral: 1000 worth value of luna
Borrowed: 800 UST
Additional USD deposited: 1200 UST ( saving from paycheck)
Anc token staked: 100 UST ( UST worth value of ANC staked)

Yield on depoited UST : 20% on first 1000 USD + 10% on additional UST or 15 % average.

IN ADDITION as ryanology045 proposed we can whitelist bANC as collateral inAnchor and Mirror protocol to give the Anc depositors to leverage their ANC position.

it looks pretty fair to me, also consithering the fact that the depositor can leverage aUST and bANC on Mirror or other protocols.

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We appreciate the feedback from the community in the forum and on Twitter. The purpose of this proposal was to increase the utility of ANC and the sustainability of the business with a simple framework that can be integrated efficiently. While there are a number of ways to architect mechanics for a solution we believe this approach addresses a number of issues which have been consistently highlighted by investors and the community over the last six months. We believe our proposal has also been well received by investors and is reflected by ANC’s token performance since our submission. Below we have addressed some of the most frequently asked questions about our proposal.

$100k Threshold for rewards
We agree that the $100K threshold should be removed to prevent gaming the proposal by distributing the same deposits across many different wallets under the threshold. The intent of using a specific number $100k was to address the most concentrated area of Anchor Earn deposits (top 50 wallets drive ~40% of deposits) while supporting adoption by new and smaller users. We suggest applying a consistent 10% threshold across all depositors to streamline mechanics. This change makes our utility proposal easier to implement.

How do price changes of ANC vs. UST impact reward structure?
As a depositor that owns ANC, if the price ANC increases in value relative to UST you are able to sell ANC and maintain the same 10% threshold for the 20% rewards.

Easier solution is to only give full UST rewards if you own ANC, rather than requiring you to buy ANC?
If you own ANC the 10% threshold will be easier to achieve so this benefits those that currently own ANC with more utility. We believe without a new threshold the tokenomics are more consistent with the current status quo without addressing the broken rewards system.

How does this impact UST adoption?
We believe this will not impact UST adoption and will ensure the sustainability for ANC. Current reward rates for depositors of 20% are among the highest in the industry and we believe there is a consensus with investors that this rate is not sustainable over the long term without increased utility or further capital injections. Depositors have a choice not to purchase any ANC and would still earn 10% rewards. An improved tokenomics model and increased utility of ANC insures the sustainability of ANC as a stand-alone business model which is critical for UST adoption long-term.

Other recommendations
We welcome more complex and nuanced ideas around ANC utility including depositor tier levels based on ANC holdings, providing utility beyond the borrower incentives, and redirecting the future supply schedule to higher value generating purposes for a comprehensive V2 tokenomics structure that our proposal is intended to catalyze.

We will continue to incorporate ideas from the community with the common goal of ANC’s success, sustainability and value creation for token holders.

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Ok so the $100k idea is now scrapped.

What do you say to all the exchanges and apps that have integrated or are planning to integrate with Anchor as a stable yield service powered by staking rewards?

Now 1) ANC integration is a lot more complex, 2) their users would all be forced to take on ANC volatility.

Why would most IRL fintech/banking apps not be giving Anchor a hard no now? Isn’t this killing Anchor’s mass adoption potential, only in the name of pumping your bags?

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Hi Matt,

Cheers for the proposal. While I like the rationale and I’m a fan of the Crypto.com / Celsius style token models, I have a few concerns:

  1. We’ve never found a clean way to implement this kind of token model on-chain due to the need for constantly refreshing price oracles + calculations in order to determine the amount of ANC needed to be staked to earn the full 20% APY. Keen to understand whether your team has thought through some potential implementations for this on a technical level.

  2. Your suggested implementation also seems like it would break aUST fungibility. There are a few potential ways to deal with this but curious to understand how you were thinking about this.

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I proposed a similar solution to ANC utility back in June '21 and am happy to see the topic revisited and pushing towards a solution. A few thoughts:

  • The 100k cap was a good idea in spirit, though easily gamed, we should explore other ideas which accomplish a similar objective of rewarding the long tail
  • I love the simplicity of the approach, although investors have proven to be willing and capable of engaging in more sophisticated models (curve’s ve for example)
  • Speaking of ve, locking the 10% ANC would take it one step further
  • 10% is fine, but I hope more rigorous math is applied to reaching the desired ratio. Possibly a tiered system like Nexo’s should be modeled and compared as well.
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Why do we need to burden any user with ANC token staking at all? 99.9% of users will not want to have any interaction with it.

Instead, we could have 2 rates:

  1. 15% APY - zero fees. (aUST token)
  2. 19.5% - 0.1% deposit fee / 0.1% withdrawal fee. (a2UST token).

These deposit and withdrawal fees can automatically buy ANC tokens at market which can then be re-directed to a sustainability fund.

Those ANC tokens can be used to support borrowing in downturns and perpetuate borrowing support long after emissions end. Another benefit to the protocol.

This is a clean and simple solution. It avoids the whole issue of the ANC token being gamed or front run and takes the entire burden of buying, staking and holding a volatile token off the user.

The deposit / withdrawal fee can be reviewed and set via governance. 0.1% deposit / withdrawal fees are not unusual in Defi and something often seen in vaults like Beefy Finance.

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Hi Jose,
Thank you for your reply. Yes, in regards to your comments we have taken both of your concerns in consideration and believe there are solutions for both with the appropriate development resources.

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Throwing out another idea:

  1. Have aUST earn some base rate.
  2. Implement some vault/staking of aUST to earn addition yield above the base rate that accruals in UST and claimable, so as not to break the aUST fungibility.
  3. Have 2) tied to the veANC tokenomics that is being proposed which requires ANC locked for 1-4yrs.
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Well, it is clear there is renewed interest in ANC and the Anchor Protocol.

Arca, I applaud your willingness to come to the forum and think of new ways to drive value to ANC token holders. I believe the Twitter spaces yesterday was helpful for both the community and core team.

Seems the veANC model and this both was subject to critique - 4 years lock-up is too long, and 100k is arbitrary and easily divisible as @Matt_Hepler followed up with.

If we could incorporate the strong features of both into a hybrid model that would be best.

How about rewarding those with ANC deposits with a preferential borrow rate? This seems to incentivize more borrowing, balancing out the yield reserve, and incorporates your ideas of ANC collateral.

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Most people here have laid out some of the issues with this proposal.

One thing that not mentioned above is the cost of this. aUST compounds per block, so users wallets would have to be queried per block to pay the split aUST amounts. The gas fees here would be very costly for the protocol, especially since anchor is going cross-chain.

The other complexity is splitting the aUST contract. If the base rate is set at 10%, more than likely there would need to be another contract created to pay the boost 10%. Should something like this be done it would have to mitigate gas fees by not compounding the boost every block more like everyone week or month. This model can work in tandem with ve-model as well but it goes again the clean easy integration points @Kamil brought up.

That said, what about a simple withdrawal tax of 1% that is used to buy and burn ANC. This can act as a timelock for short-term rent-seeking use of the protocol. And is dead simple to implement.

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Anchor should be a dead simple stablecoin savings solution; this proposal is tricky to implement not only for the Anchor team, but also tens of apps and exchanges that already support Anchor as well as hundreds of apps and exchanges whose support is still to come - and it may not come if users are forced to take risks on a volatile token.

There are many ways to promote the value of ANC that don’t introduce obstacles/big trade-offs:

  • @bitn8’s idea above for a withdrawal tax
  • bANC as collat (borrow based on ANC, perhaps with preferential rates) and/or the v2 borrow model
  • veANC
  • A lot of other things are proposed in my thread from a few months back
  • Last but not least, keep in mind that start of y2 (so in a couple of weeks) ANC inflation is slashed over 4x. It’s a double halving. ANC will pump even if we do nothing about it.

Apart from directly changing the tokenomics, worth remembering that a part of protocol profits is already used to buy back ANC. If we find ways to improve profitability (encourage more borrowing), more ANC will be bought from the market. Ideas include:

  • Add a lot more collat options (see again the v2 borrow model)
  • Going cross-chain and promoting borrowing better
  • Integrate borrowing into consumer friendly apps with good UI
  • Someone should build flexible leverage tokens using bAssets (like Levana but with Anchor)
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This seems like a more fair and simple way to support the ANC token via the depositor side.

It would be interesting if someone can run the calculations on the expected price impact we would see on the ANC token. A 1% fee might actually be overkill, I guess we will find out once we crunch the numbers.

The other question is, what is the desirable or optimal price appreciation curve for the ANC token?

Also, Is there any particular reason we need to burn the ANC tokens? Perhaps they can be locked into sustainability fund to provide borrowing support in downturns or once emissions end. They could even form part of a formal technical compensation scheme.

2 Likes