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:
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.
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.
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.