Dealing with yield and reserves

In the last week, there’s been a huge development around the declining 20% yield kerfuffle, and the solutions to keep it stable.
for example:

  • some suggested that we should use proof of time mechanism (the longer you stay the bigger the yield)
  • some offered capped yields (which didn’t go very well)
  • some asked to decrease yield in UST and give it in the form of $ANC (like paying dividends with stocks instead of cash)
  • staking aUST and receiving saUST to get the other half of the yield.

there are more ideas, but non of them solves the real underlying problem: if anchor protocol is not a profitable protocol it won’t be able to sustain this yield.

Generating profits is one way to free the protocol from donations and reserve refills.
Now, I know that it sounds harsh, but if there’s one thing that keeps a business alive it’s incoming cashflows. Make no mistakes, this protocol is a business, and it’s working for us ANC holders as well as for non-holder users and the everyday granny.

So how do we generate income?

Lending
Part of the solution was mentioned in the conversations this week: we should lend more.
But how can we reach borrowers? To answer that we need to break down who is a borrower:

  1. The typical bLuna\bETH staker that wants the APR for borrowing.
  2. Emerging protocols and Dapps who wants budgets and collaterals.

The best practice is to focus one group of customers. In my opinion the latter is a better option, because these groups asks more then the first group so the payment is bigger, and this incentivize new protocols onto the ecosystem…

Borrowers
Pretty simple, we stake as usual and borrow as usual. The problem here can be split to 2:
a. After having the opportunity to borrow and get money out of it, it’s hard for customers to pay for borrowing, even if it’s on -2%. that’s a psychological bias called “anchoring” - We relate prices to the first time we saw the priced item. In simple words - it’s not attractive anymore.
b. Assuming that borrowing is attractive for simple users, we have to have more collateral options. We started with sAVAX, but we need bBTC if there is any chance that could happen, and bring forth the bDoge initiative, as well as other major store of value coins and tokens.

Many protocols have started to use UST, we almost passed the doge in circulating supply.

Delegation
This protocol does not have to do much more, because it can delegate it’s profit mechanism to it’s institutional borrowers. In this way anchor will profit on the work of the ecosystem, and the reserve can be filled up so we won’t need to be concerned of reserve drainage.

$ANC Utility
Another solution is to make use of the ANC tokens, which I won’t try to solve because I didn’t got too deep on the VeANC changes, and my ideas might collide with the mechanism.

In conclusion
The best way, in my opinion, to keep the yield rate between 18%-20% is to increase the protocols income. It can be done by angel investing in new dapps and protocols, so profits will then be delegated back to the reserve.
Also, we need publicity. The more people hear about this, the more potential it has.

Ps. The most attractive benefit of this protocol is it’s yield. Any solution to save the reserve with tampering with it can cost us the #1 reason (and almost the only one, because borrowing is complicated for the simple granny user) for a user to use the protocol.

Thank you for reading!

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I deeply agree that the protocol itself needs to be competitive.
Also, about the utility of $ANC…

  1. ANC-UST LP compensation is over.

  2. governance authority is not attractive to most investors.

  3. veANC mechanism is meaningful if the protocol generates revenue. In short, it doesn’t seem very meaningful right now.

As the price of $ANC suggests, most investors choose to dump $ANC into the secondary market because the current $ANC is useless like the previous AXIE ecosystem’s $SLP.

Simply reducing deposit interest is the same as life-sustaining treatment for terminal cancer patients. it can live little longer, but the certain death awaits. We need to break the vicious cycle by changing the fundamental problem.

There must be a way to use the overflowing UST for $ANC. We have to focus on this. UST is flooding in beyond our control, but $ANC is disastrous as opposed to Anchor Protocol’s growth.

6 Likes

Agree with everything said here.

Very well thought out!

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The current system doesn’t work, so I think we should focus on making V2 work.

I think there should be two big changes, governance should switch to the different reward systems, like PRISM and xPRISM, xMARS and MARS and SUSHI and xSUSHI. This would reward governors much more.

Second is wither array of collateral assets, the current problem with LUNA, ETH, and AVAX as collateral is they don’t generate enough income on their own. While LP pairs that get rewards would generate enough.

And this is a win-win, if the APR of fees of LP pairs is good like for MIR-UST, ANC-UST, the loan would be self repayable. While protocol would take rewards and earn more money.

And the reason why people would use LP pairs, instead of LUNA, ETH, AVAX, and so on, is they are more stable, meaning loans take against of them are less risky.

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People are starting to see that revenue is the way to sustainability. We just need to think from the eye of the consumer - raising rates and decreasing yield is counter productive to what the protocol offers.

We should come up with more services to get multiple sources of income.
maybe divide consumer yield from dapps vaults. Let all anchor based protocols use it for a different rate then consumers. maybe pay with $anc for that. Let’s get creative!

I need my point of view to be clear - changing core protocol services will hurt it’s value more then price drops and temporary hiccups

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