Increasing the Yield Reserve

Anchor Protocol’s ~20% APY interest rate is the heart and soul of Terra’s future growth. Pylon, minting new mAssets in a future version of Mirror, Orion and many of the most interesting projects on Terra build on top of Terra because of this high, stable interest rate on UST. We have to protect this stable yield much better than we are doing so today.

Anchor has consistently needed to dip into the yield reserve daily since the crashening event. The yield reserve currently sits at around 4.3 million UST. I will skip over the math and assume that the deposits, borrow, bLUNA collateral deposited and respective interest rates persist with the exception of moving the deposit interest rate up to 19.5% (as per governance vote that will make this the new minimum rate). This will leave the protocol depleting roughly 23,000 UST per day from the yield reserve, which should be sufficient for 186 days of this steady state persisting. Obviously, all of these variables are constantly in flux as is the price of LUNA, which could lead to the yield reserve being left in a dramatically better or worse position than implied with my basic calculation with simplifying assumptions.

There’s a significant amount of interest in creating on-ramps to Anchor across the Terra-verse. We see Orion, Kash, Saturn (or whatever the successor name is) and numerous other projects that are looking to become on-ramps to Anchor. Who knows, we may see Coinbase or another major financial institution try to join the fun as an Anchor deposit on-ramp in the future. We have a lot of projects that could dramatically increase the deposits on Anchor, but very little is being done to increase the borrow side of the equation. The incredible yield of borrowing on Anchor should take care of that in the long run, but during this volatile crypto environment, we should ensure the yield reserve is large enough to support any potential major influx of new deposits onto Anchor.

If we again hold all the variables constant but have Anchor deposits double, the yield reserve will be fully depleted in 23 days instead of 186 days. The other variables would adjust a bit so it wouldn’t be quite this dire, but the point remains, the yield reserve is too small. The current tiny size of the Anchor yield reserve may prevent institutional money level on-ramps to Anchor deposits.

There are 3 easy ways to handle this problem:

  1. Take some of the LUNA community pool that is earmarked for Ozone, burn it into UST and stick it into Anchor’s yield reserve. This really should have been done before Anchor was launched initially, but there’s no reason we can’t try to rectify that decision now. If we take 5% of the Community pool, convert it to UST, we would have around 20 million UST to add to the Anchor yield reserve. This would show institutional money managers that they have a margin of safety and can put in hundreds of millions of dollars into Anchor deposits with a very high likelihood of realizing the ~20% APY.

  2. Take some of the ANC rewards that are being given to borrows and add it to the yield reserve. The issue with this is that we aren’t attracting enough borrow as is and this could only hurt the demand for borrowing. We would also be applying more negative pressure on ANC by the constant selling of ANC to create UST for the yield reserve.

  3. Do nothing. Hope that borrowing on Anchor will pick up again quickly and be high enough so that the yield reserve naturally increases on its own. I suspect it will just work out on its own, but we’ve seen net APRs persist in the 200-300% range for a while now and demand for borrowing hasn’t skyrocketed off the face of the earth.

While I don’t anticipate the yield reserve getting depleted to 0, it’s really hard to say what will or will not happen in the short-term in the crypto world. Then again, who saw LUNA coming down from 18 to 4 in the timeframe that it happened? The one thing I’ve learned in the crypto world is that we should prepare for downturns and prepare for worst case scenarios. Increasing the yield reserve now is meant to be a measure taken to mitigate doomsday scenarios.


I thought that one of the ways ANC generates the deposit yield is by staking deposited UST on other PoS chains also. If not, perhaps worth looking in to.
Other than this, as Defi evolves, you may see deposit yield compressing as more deposits come in. Alternatively, if the team has the resources to do it, another way is to hook in to tradfi’s yield generation machines like mezz debt portfolios. Or Terralabs eventually gets a bank license to be able to do that itself in jurisdictions that support those yield levels (you’d be taking some forex fluctuation risk, but nothing too bad if used to crypto vol).

Or drop the yield to 15 percent. Not sure why 20 percent was chosen in the first place. Doesn’t seem possible to maintain in any reasonable future state, and honestly, I think 20 percent feels too scammy and might be holding back adopters. I know it gave me some pause before I took the time to better understand the ecosystem.

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I don’t believe this is true. The deposit yield is funded by the staking yield of the collateral deposited and the explicit borrow interest paid.

The 20% was a mind blowing number when it was announced. Could Anchor survive with offering “just 15%” interest on deposits? Probably, but it seems the Anchor community is wanting to try this 20% experiment for at least a little while longer.

This could slowly protect the yield reserve, but I think the Anchor community should do a one time massive funding of this reserve to make Anchor Protocol appealing to institutional money. I can see no qualms from institutional investors about a 20% APY return on deposits. The issue they will be looking at is risk. Ballooning the yield reserve will significantly mitigate risk.

I think the fundamental problem with the 20 percent APR is on the borrower side of the equation (you highlighted in points 2/3). Not sure who would borrow at current rates without the ANC incentive which runs out in a few years (my understanding). I suspect 20% is good for headlines (though we have been at 18% for the past few weeks) but I think it makes sense to bite the bullet here and not wait for a big surprise rate drop in the future. A one-time cash infusion feels like kicking the can down the road. Who knows what the market will look like a few years from now but given the current state of the world, it is hard to imagine anyone borrowing at more than 10 percent on a collateralized loan which puts a cap on Anchor’s long-term sustainable APR (well below 20 percent in any case).

@ColonelSanders, thanks for bringing this up. There is some debate in another thread about the emergency use of the Anchor community funds in this capacity as well. @Kamil originally suggested we authorize the Anchor community funds as a backstop. I think there is broad agreement with the proposal’s goal (protect reserves), but some expressed concern around the “extreme” nature of selling the community pool. @ryanology045 suggested that we wait, observe and re-assess when reserves reach $3 million UST.

I think it is critical that in the short term, we buttress yield reserves (my suggestion has been that we should operate with at least 12 months of reserves; more discussion on this topic in another thread). I am open to all options on achieving this–ANC community funds, LUNA community funds–and I continue to be of the view that we should move expeditiously. You want backstops in place before the storm.

Note, however, that we are treating the symptom here and not the disease. Aside from some of the structural issues we have uncovered through the recent volatility, the protocol operates with negative unit economics because of the lack of a compelling borrower value proposition. Welcome everyone to add their ideas for fixing this in this thread.

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That is right, we can’t do this because then the deposits would have price risk.

This hits the nail on the head. Does the community (or terraform labs) have any serious ideas under consideration for addressing the disease (sustainable funding of the ANCs deposit rate)?

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Ah, thanks for clarifying. 2 Qs:

  1. So the bLuna deposited to the borrow function on Anchor is then staked and THAT funds the ANC deposit yield? How does that happen because LUNA staking yield is sub 18% pa?

  2. Also, are there any proposals on the anvil to expand the collateral pool, as that would obviously open up ability to seek higher staking yields for other assets besides LUNA.

  3. If 2 occurs, who makes the decisions and strategies for how to obtain best staking yields from collateral? Terraform labs or someone else?

Finally, if you’d like to point me to any repository of all the above info so I don’t keep bugging with more qs, that’d be cool too.

The entire amount of bLUNA deposited as collateral earns a staking yield. It isn’t the full 11.4% though. Some percentage is used for ANC buybacks and some % goes to validators. This yield currently is not enough to cover Anchor’s deposit interest rate.

There has always been plans to introduce bETH, bATOM and other POS coins. The problem is that if the bonded POS coin has a higher staking yield than bLUNA, a borrower would expect to pay a smaller explicit interest rate as he is foregoing his staking yield. We should not expect other bAssets to produce significantly higher effective staking yield + borrow interest rate relative to bLUNA.

A revenue stream outside of Anchor seems like the ideal solution to this problem.

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Got it, v helpful. Thanks.
Wondering what ideas terraform labs has for making the Anchor yield sustainable. A revenue source outside of Anchor implies that they may have to build that revenue source or acquire it.

I agree that the borrowing side is the long-term issue. Remember that the loan is over-collateralized though.

Anchor is young so I’m hopeful that the attractiveness to natural borrowers will increase. It’s obviously not sustainable to offer 100-200%+ APR incentives

the lack of a compelling borrower value proposition hits the nail on the head here!

Does the problem also get solved if luna price goes up? As collateral increases, and staking yield is a function of this, and also ability to borrow against it increases. Isn’t that the big elephant in the room, luna price is a third what it was when Anchor was launched. Will be very hard at $6 to square the circle. Luna whale says 35% (presumably of free circulating luna) is bonded, at 66million which we see from the Anc dashboard.

If you take the 66m and look at smartstake liquid circ of 134.5m, it’s 48% of liq circulating. Not sure there is much more borrowing headroom regardless of solutions to drive it from luna, at $6 or less.

Seems like Deposits on Anc at the moment going up $10m a day. Proper growth. Should this filter back to the positive feedback loop on Luna price?

I’d vote for number 1 here - should buy us time for a v2 (with improved mechanisms to incentivize borrows).


Tapping into the Terra community pool would be a great one time boost to the Anchor yield reserve that can give depositors a greater confidence that high yields are not going away anytime soon. The success of Pylon depends on Anchor’s ability to generate a high and at least somewhat stable yield. If that ceases to be true even for a day, there could be some terrible consequences that ripple across all of the protocols that rely on Anchor’s stable yield.

From a practical standpoint, I imagine we can’t have ANC stakers alone vote on “raiding the Terra community pool” right? Do we also need a vote from LUNA stakers as well?

I assume using the Terra community pool requires a Terra community vote. I posted a topic on the subject on Agorra. Join the discussion over there: Capitalizing Anchor's Reserves - Governance - Terra Research Forum

Need alternative revenue sources besides borrowing. For most people, once you get burned (liquidated) once you don’t want to do it again.

These high borrows yields aren’t enough for people now.

I said in other threads to just duplicate Orion’s mechanism into ANC or drop to 15%.

Primary goal is sustainability, because nothing matters if isn’t.

That’s a really bad approach my man. With yields as high as they are for borrowing on Anchor, you can get liquidated multiple times in a year and still come out ahead.