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.