Please view the full proposal attachments, analysis and supporting data in the following link
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.
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:
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.
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.
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.
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.
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.
Please see the link to the full proposal for all sources as mentioned in the beginning of the summary