Who will want to borrow UST against 30% APR when there will be no more ANC incentives to attract borrowers after 4 years?
Doesn’t this mean that borrowing rates should then start to match USD fiat borrowing rates?
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A question I bet a lot of us are wondering about!
Probably too far down the road for now, but I imagine the LP-pair will have to rely on swapping fees. Borrowing against 30% APR might be feasible if Luna has grown in size enough to provide some form of stability, but then the liquidations would decrease too. Well, I don’t know!
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One thing to keep in mind is that we are not currently releasing ANC at the targeted rate to have 100M of inflationary rewards in year 1.
It looks like ANC rewards will last much longer than 4 years at today’s rate.
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The borrow APR should go down by a lot in the future, it could even become negative.
Consider the example where I deposit $100 worth of Luna collat and borrow $50 UST (extreme amount @ 50% LTV). The typical staking APY for Luna is 12%, so within a year Anchor captures $12. Whoever deposited the $50 UST that I borrow needs 20% APY, so they’d get paid $10. In the end, the protocol keeps the $2 difference even if my borrow APR is 0%.
Considering a more typical case where LTV is 35%, my collat rewards would only need to pay for 20% of $35, which is $7. The protocol still captures $12 as the collat amount is the same, but now keeps $5 in profit.
If there are not enough loans, this average $5 profit can be used to subsidize a negative borrow APR in the absence of ANC incentives.
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That’s interesting indeed, where can we find the expected versus real rate of ANC release?
What a crystal clear answer, thanks very much! The example you provide really solves the long term viability question that many people are expressing their doubts about. This should be more clearly communicated on the Anchor websites.
You forgot that also you need to return more than you borrowed.
So on 1k UST borrowed for a year, with 3k of collateral.
After a year you return around 1.3k
And the collateral generated around 0.3k.
So in total the protocol made 0.6k of profit on 1k of debt.
Then you need to pay 20% APY for the person who was lending the money, net profit is 400$.
This is not exact of course, since we are not lending money at 100% of deposited money.
Also in mid-term I expect borrow APR to actually increase. I think the deposits demand will outpace borrowing demand, and that will increase incentives to borrow. We have a lot of major catalysts that will drive demand for high yield savings account, but we have only one thing for borrowing(cross chain support)
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very well explained 
The ANC emission rate to borrowers varies based on the demand for borrows, where the emission rate drops when there is enough borrowing to support the 20% earn APY. Right now, this is the case, and the emission rate is at 1/3 of the maximum allowed emission rate, the minimum allowed emission rate (100M/yr is the max, and 33M/yr is the min.). Assuming things stay the same, ANC incentives to borrowers should be able to last for a period of 12 years.
However, having a native mechanism that will make borrow demand flourish even without incentive distribution would be desirable. One feature that could enable this is to distribute a portion of bAsset rewards to borrowers, allowing them to create leveraged positions on staking rewards. This would be a unique feature of Anchor that is not found in any other money market protocols, although more research/discussion on how this can be achieved will be beneficial.
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Interesting indeed, where can we find current emission rates?
Even at 0% interest rates I don’t see the value proposition for a borrower absent incentive rewards - it simply isn’t competitive with current market rates. If staking APY is 12% you are forgoing $36/year on every $300 in Luna to borrow $100, effectively paying 36% interest. Interest rates would have to be significantly negative to attract borrowers until the real interest rate is in line with market rates. Am I missing anything?
You are foregoing the staking APY yes but access to capital now can be more valuable than a 12% return in a year. I’m building a product on Anchor and wrote an article that touched on this, here’s the relevant bit:
You may ask: why borrow anything at all if your collateral is already worth more? There are several reasons. For one, you may want to hold on to your digital asset if you expect the price to go up, but you also need cash to pay for some immediate expenses. Second, as you may be aware, it has been a common practice for wealthy people across history to receive generous credit lines based on assets such as real estate that they were able to put up as collateral. Similarly, you may want to access extra capital leverage using this method to invest in a business or some other venture.
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I understand the motivations of borrowers - I’m saying that once rewards run out, why would a borrower pay 36% interest when they can borrow for significantly less across other DeFi protocols?
They most likely wouldn’t need to, 36% can go down to 0 or negative. Check my response from 2 days ago ^. The algorithm dynamically adjusts APR to incentivise sufficient borrowing.
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Aes does not mean a 36% borrowing APR, but rather a missed staking return of $36 per year for every $300 worth of Luna with a staking APY of 12%. By minting bLUNA, you will miss these returns, while only being able to borrow $100, thus effectively paying $36 to borrow $100.
@Kamil , Why would anyone choose to borrow against such costs when it is cheaper at other defi protocols?
While you get ANC incentives (currently predicted to last between 8 - 12 years), you would do it because ANC rewards can outweigh what you’d miss out on if staking.
Later on the borrow APR would go down by a lot and can even turn negative to make loans affordable.
In addition, you may want to hold on to your digital asset if you expect the price to go up, but you also need cash to pay for some immediate expenses. Second, as you may be aware, it has been a common practice for wealthy people across history to receive generous credit lines based on assets such as real estate that they were able to put up as collateral. Similarly, you may want to access extra capital leverage using this method to invest in a business or some other venture.