So I did some math… this isn’t going to work.
- Average daily deposit growth rate over the last 50 days has been +0.99% per day (TVL went from $8.54B to $16.98B);
- Average daily protocol deficit (YR depletion) over the last 50 days has been -1.37%/day and is currently at -$4.2177M (deficit is increasing because yield from borrows is not growing anywhere near that rate);
With Prop 20 rates will most certainly be reduced to 15% (or lower) because the protocol is currently losing waaaaay more than the projected 1.5% per month APY cuts. Deposit demand is unlikely to slow down while interest rates are >= 15%. At that rate they are still some of the best “stable” yields in DeFi.
Once the threshold of 15% is crossed, it will be interesting to see how the market reacts. The schedule for the APY reduction is:
- April - 18%
- May - 16.5%
- June - 15% (will be interest to see how market reacts here and below, will keep decreasing if borrow demand does not match deposit demand, I think it’s unlikely we see borrow demand match with levered deposits)
- July - 13.5%
- August - 12%
- September - 10.5%
- October - 9% (around here is where I think the wheels come off because <10% you can get as good or better APY with the same or less risk. If we see mass redemption of UST to something else, UST will depeg, even with BTC backstopping.)
- Another significant YR back stop ($1B+, keeps getting bigger);
- Immediate reduction in the levered deposits; or
significant borrow demand increase or deposit drop (very unlikely)
The YR will run out before we even hit the scheduled 15% rate.
This chart is showing ~96 days left of YR but it’s only taking the total YR divided by the current deficit. With a -1.37%/per day deficit trend the YR will run out well before that.
If we keep on the same deposit growth trend, by June there would be ~$41.21B UST in Anchor. Since Anchor accounts for ~72.5% of UST in circulation, we’d have a market cap of ~$56.84B UST. Even with $10B in BTC, unless there is significant utility/demand for UST by this time, UST will only be ~17.5% backed. With a massive redemption as demand for UST dries up you could rationally expect UST to potentially depeg to as low as that value (heh, at least it’s not $0?).
I don’t think UST would actually depeg that hard but the main issue here is this Prop 20 doesn’t solve anything, introduces more complexity, and the math just doesn’t work.
In reality we’d better have another backstop or the YR is going to $0 quick with much more mass redemption risk than the last time just two months ago. We just keep kicking the can down the road and it becomes riskier and riskier.
If we assume that 50% of UST deposits on Anchor (40% of total UST market cap) leave when yields dip then even a ~$20B dump of UST is still gonna be painful.
This is needs a rethink! The biggest problem is levered deposits. The second biggest problem is borrow demand.
At this point it would be better to do a hard drop to a fixed 10-15% APY and just have LFG backstop it again when the YR runs low. This would likely bring in a short term shock but is much less risky in the long term and retains a fixed rate that is still market competitive. This kind of APY drop would actually makes a meaningful dent to extending the YR now so that future subsidies aren’t so expensive.
Then the focus needs to be on how to generate massive borrow demand and non-Anchor UST demand.
@ryanology045 @bitn8 happy to DM to discuss.
If this Prop goes through it will make more sense to just join the degens until the yields are no longer attractive and then move on. I think there is huge risk here.