Maybe the long-term rate is 20% or 18% or 15% or 13%. Whatever it is, there’s inherently a problem with having a relative high fixed stable rate APY on deposits if we are dependent upon staking yields of collateral and explicit borrow rates. There will be significant periods of time where Aave, Compound and other lending protocols will offer meaningfully lower interest rates on borrowing. The ability of Anchor to stay solvent will be hard without an external cash flow. Addressing that issue now by bringing in LUNA from the Terra community pool generated via seigniorage will give investors confidence that Anchor will be able to deliver on the high APY that it advertises. Creating a permanent cash flow from the community pool to Anchor can significantly improve Anchor’s ability to stay solvent in even the most dire crypto environments.
If the Anchor yield reserve is beefed up now with a new plan to in place to continuously fund the yield reserve beyond just inflows from explicit borrow and staking yields of collateral, institutional money will come to Anchor. There is virtually no chance we will see big money flowing into Anchor without a change in how we’re funding the yield reserve.
There are no explicit borrow rates. Within the last 30 days, the borrow rate has fluctuated from -35% to -300%.
The yield is already being subsidized by a significant amount of token emissions. There doesn’t need to be a discussion about yet another subsidy until this one is exhausted. It’s also too difficult to know what will be needed at the end of token emissions because the Anchor and Terra staking rewards situation is hard to predict 4 months from now much less 4 years from now.
If the issue is the subsidy isn’t large enough, the common sense thing to do is to increase the rate of token emissions.
I think this is just a difference in semantics for us. I’m viewing the “net interest rate” for borrowing as having 3 components:
staking yield from collateral deposited
explicit interest rate - UST that you are paying to service your loan
Anchor emissions - ANC rewards you receive for borrowing
I understand utilizing the community pool from Terra for the purpose of shoring up Anchor’s yield reserve may seem extreme. This is a strategic option available to Anchor that the other major blockchain lending protocols do not have. By not utilizing this advantage, Anchor’s growth will be stunted and we will continue growing by adding typical small defi investors. I want the Anchor community to be aiming for a different clientele than what we have seen in the past. We want Coinbase to facilitate deposits onto Anchor. We want major banks to facilitate deposits onto Anchor. We want billionaires parking idle capital into Anchor. None of that will happen anytime soon without some major changes to the Anchor yield reserve.
There’s a reason that investors are accepting lower interest rates on stablecoins in Aave, Compound, Yearn, Kucoin and the list goes on. Maybe part of it is that Terra and Anchor need to do marketing. The bigger issue in my mind is risk. Anchor’s yield reserve is tiny and that is an unacceptable risk for many investors.
The part where I’m not understanding where you are coming from is that Anchor does not have a problem with attracting deposits. It’s likely that Anchor capacity isn’t unlimited, especially at 20%. There are Terra native apps coming that will saturate most of the deposit capacity for Anchor regardless of unrelated 3rd parties integrating (not to even mention Chai).
This is a three month old protocol. There is no emergency with the yield reserve. Even if the yield reserve is somehow exhausted (which again is improbable if we manage ANC emissions wisely), no funds are lost.
There is simply no reason to completely change the economics of Anchor (and Luna for the matter which could have its own consequences), when there’s a roadmap to address the system deficit.
@ZenDog I think you are right that we shouldn’t panic into changing anything yet. I’m curious at what level of yield reserve you would switch your preference to taking some action? Do you agree with the $3m level that @e-gons mentioned was consensus?
I’m not opposed to accelerating ANC emissions right now. There shouldn’t really be a reason to unpeg from 20% and draw the reserve while we have emissions remaining (or implementing some type of algorithmic solution such as steepening the emissions rate when the reserve is being drawn).
That being said we should look at a proposal like 25% increased ANC emissions for 6 weeks. Something very temporary that can be reassessed prior to its conclusion.
What I am opposed to is implementing new levers that completely change how Anchor works when we haven’t even tried to pull the ones that are already built in to the system. Doubly true when Anchor is basically still in beta and will look completely different 6 months from now.
That being said, we should look at a proposal like 25% increased ANC emissions for 6 weeks. Something very temporary that can be reassessed prior to its conclusion.
I would vote for a temporary increase in ANC emissions. The lack of efficacy thus far makes me skeptical of the probability of success, but the proposal has asymmetric returns and is worth a try.
Yup - would love see the community gather thoughts around the new interest rate model. I’ve recently kickstarted some efforts on Anchor v2 preparation, which would include measures to improve borrower incentives.
B. Authorize the use of LUNA in the Terra community pool as a backstop
→ Sounds like a workable option. Though still a short-term measure, it should buy the protocol enough time for a v2.
Reading over this thread provided other ideas I have not thought of. I think the wisest decision is to use the ANC emissions as a lever when the situation calls for it.
@ryanology045 curious to hear your thoughts on the potential downsides of using the LUNA community pool. My initial reaction was against using either LUNA or ANC pools because it could set the precedent that the pool is an insurance fund for protocols.
In this case, I really like the idea of temporarily increasing ANC emissions, it reduces the number of dependencies that Anchor needs to rely on and can help prove that there are levers that we can pull to incentives behaviors we need.
@e-gons , I’m interested to see what you’re thinking in terms of new interest rate models (let me know if you want to brainstorm!). As new protocols such as Pylon and others build on top of Anchor and bake in the assumption of a 20% APY, it’ll drastically increase the pressure on Anchor and the yield reserve. Traditional lending/borrowing APRs are < 10% and yield farming rates are 10-15% (e.g. on curve). I think the Anchor rate would be equally attractive at rate that’s closer to this market rate.
ANC has a community fund, right? If it comes to this the ANC fund should be used, not LUNA fund. ANC holders have the power to vote on the interest rate paid out to depositors, so they should also be the ones responsible if they vote for a rate that is too high. This shouldn’t come from a LUNA community fund. It would set a bad precedent…
Agreed. Borrowing UST with a “non-crypto” collateral such as mAssets will bring the whole thing to another level, since mAsset-stocks are much less correlated to crypto.
How would mAssets work? The whole premise of Anchor is that people will borrow using proof-of-stake assets that pay staking rewards. mAssets don’t pay staking rewards
I agree that we need to explore the yield bonding curve more instead of tainting the ANC value proposition by just lowering rates in a bear market. Setting rates based on lockup time is a creative solution that rewards those with long-term skin in the game that supports sustainability of the project
One way banks have been creative in tiering the interest rate payout is to create hoops for consumers to jump through with higher interest as the reward.
spend on the credit card = +0.5%
take a home loan with the bank = +0.5%
buy an investment/insurance product = +1.0%
We could launch a similar strategy to incentivize & reward users of the entire Terra ecosystem
stake Luna = +5%
trade on Mirror = +5%
borrow on Mars = +5%
provide insurance on Ozone = +5%
Of course, this tiered structure will be launched in conjunction with an overall base rate reduction. So base Anchor rate can be revised downwards to 10%, while these conditions will boost the maximum interest rate to 30% to reward engagement & activity. Of course, the buckets & actions need to be calibrated so that the total interest paid decreases.
This definitely adds complexity but it gives Anchor many more levers to tweak and eventually achieve sustainability.
A much simpler tweak will be tiered interest rates based on size. 20% for first 50k, 15% for next 50K, 10% for the rest. Of course, people can create multiple wallets to get around this but you immediately reduce the interest payments to “lazy” users. Plus, with aUST becoming a collateral in Mirror, it might be easier for people opening short positions to stick to one wallet.
Well, it seems likely the Anchor community is not going to come be able to get a governance poll out that will pass and be implemented before the Anchor yield reserve goes to 0. We probably shouldn’t give up on taking action just yet. Maybe we can agree to this:
Let’s raise Anchor’s allowed LTV before liquidation to go from 50% to 60% or maybe even 65% and remove the silly max borrow intended to protect borrowers from themselves. With what appears to be an inability to attract new borrowers in an amount to outpace the growth of deposits, we should try to get our current borrowers to borrow more. This is only a change in value for one parameter and should be pretty easy to implement. While this likely won’t be enough to completely stop the depletion of the Anchor yield reserve, it will buy us a little more time. This is a move that probably makes sense long-term as well.
Would making current borrowers borrow more make a big impact? considering, AFAIK most of the income comes from staking the bLuna collateral and not from interest from the credit.