Proposal for tiered borrow incentives, earning rates

Anchor Gov Proposal

Tiered borrow incentives, tiered earning rates

Over the last 6-months, deposits in Anchor have increased from around $600m to over $1.75bn. During this time, there have been several market shocks that led to mass liquidation of Luna as well as borrower collateral. While measures have been taken to improve reserves and prevent UST de-pegging, we think the utilization ratio will need to improve to support the next phase of Anchor growth.

As such, we propose a two-pronged approach to fortifying the market:

BORROW

1: Improving the borrow incentives

Since up to 20% yield is attractive to just about anyone, there are fewer incentives needed to improve the deposit side of the equation besides bridges and more partnerships to diversify the source of the capital.

However, the borrowing side of the market is where all yield is generated. To incentivize even more borrowing and improve the utilization ratio, we suggest introducing tiered APR and ANC rewards to improve staking balances among new bonded assets. This change is intended to have the desired effect of limiting Anchor’s reliance on LUNA alone, improving utilization, and reducing ANC’s downward pressure. We suggest a time-lock bonus should borrowers decide they want to improve their rewards and lock up their collateral for an extended period of time.

Further, we believe new collateral assets should be prioritized by liquidity and rewards incentives to maximize reserve accumulating to Anchor.

EARN

2: Tiered earning based on UST timelock

As the market grows, we feel it would be best to implement a predictable time-lock model such that depositors can choose to lock up UST in the earning pool and earn enhanced rewards. An optional time-lock with the following incentives should result in more predictable deposit collateral while still allowing flexibility for those with less risk appetite.

Some starting suggestions:

More detailed model for review:

HERE

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We feel these changes would provide the protocol with more stability in its next phase of growth and provide substantial improvements in confidence for new borrowers and depositors who are looking at working with a much larger size than Anchor has experienced to date. We would like to foster discussion around this proposal concept and get additional input, especially as it pertains to the upward pressures on ANC (re-buying), which is not covered in the model.

3 Likes

Worth building as a new dApp on top?

I believe there are 2 key phases for Anchor:

    1. the marketing and establishment phase
    1. the long-term capital optimisation phase

I believe we are firmly in 1) the marketing and establishment phase and anything that increases the penetration of the product and the utilisation ratio is a good thing because marketing Anchor’s ~20% rate is critical as the product goes cross-chain and seeks adoption.

Your borrow incentives seem entirely reasonable - it should allow for more predictability in gaining and retaining staked & bonded assets.

However, in this first phase I am not sure that the changes to earning interest are a good idea: IMO the adoption of UST is going to be driven in a significant way by the presence of Anchor’s 20% yield opportunity. If we tinker with that remarkable headline number by adding complications and tiers it will lose some of the simple and dramatic impact that is so attractive (as nowhere else in DeFi offers anything as stable and compelling).

So, it’s not that I think your idea is bad but I think it’s too early and needs to be kept for phase 2. For now I would think that we need to be simple and punchy as we drive our story across IBC and through other services like Orion to achieve maximum adoption.

Furthermore, when people are new to a protocol they want instant capital access - we want people to know Anchor is here to give you 20% whether your capital is in for 1 month, 1 day or even 1 hour. The more capital that flows into the protocol the better for all of us in phase 1.

Once we have a pre-eminent position amongst yield-generating protocols on all major chains then I would suggest that would be the time to lock in that position with timelock tiers like yours and phase 2 can be about making that capital maximally efficient for all parties.

5 Likes

Hi Will,

Thank you for the response. I think the point regarding a strong marketing message is well taken. Yet, continuing under current design, we risk depletion of reserve and collapse of earn rate under massive volatility. Protocols on top of Anchor can build in buffers but we suspect acceleration in UST availability and on-ramping into Anchor will skew the utilisation ratio, stressing the system to lower rates as it grows. It is not sustainable to be reactionary during these times. The starting point on incentivizing greater borrow rates from high chain-staking rewards is something we can both agree on. However, if we don’t build in robustness to both borrow and earn, Anchor could be hamstrung by larger-sized deposits, volatility moves to the downside, and lack of collateral diversity. In regards to marketing, I would suggest a simple tweak, “UP TO 19.5%” - not sure of any application that can consistently offer >10% APY transparently and sustainably with instant liquidity.

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What about adding a few percentage points on top of the 19.5% for depositors willing to commit to a longer lockup period? Anchor could then treat these funds similar to the borrow funds and use these staked rewards to support the deposit rate? I guess it would be important to keep the increased rate below the value of the rewards from staking so that these funds are a net positive to the main rate.

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Well, we don;t want to introduce more recursiveness. I think there are a few ways to support what we all want:

  1. Tier earn yield - Anchor then could reward folks who will lockup UST with “bonus” interest over 19.5% if they agree to a longer period
  2. Limit Anchor’s earn participation or rate to keep it in lockstep with milestones with Luna/ANC growth so it is not gamed by MIM and others. You could create a ratio that pauses new deposits until the basset health improves
  3. Explore linking ANC ownership with bonus interest

Deposits are outpacing collateral growth, TVL is misleading and that collateral value could drop if Luna price falls, putting the overall health of the system at risk. For instance, in our model ( not posted here) we are seeing ~$320k a day drain from the reserve with today’s numbers. If Luna falls by say 60% and deposits stay the same, we could see up to 1mm drain from the reserve daily. Something has to change to prevent activist protocols like MIM from threatening Anchor stability/longevity.

5 Likes

That’s right,

Money markets are not degen markets and they shouldn’t be incentivized to drain the protocol if stability is the goal.

So many people are saying we need to raise borrow demand while ignoring the earn demand or not addressing that it also needs to cool down. They won’t even acknowledge the interest rate needs tapering.

I think the focus should be diverse collateral, 0% borrowing rates, and a good enough yield on UST deposits to keep the borrow market liquid. I also think LTV can be adjusted upwards to help stimulate borrow demand in the interim and aust needs a fee structure in place to prevent leverage abuse like from what MIM is doing. Maybe a fee on withdrawals like traditional savings accounts etc.

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I think it’s feasible to revisit some of the ideas the community put forth on this issue. The one that seems to have gained the most support would be finding a mechanism in which users don’t get the full 20% right away…

Unfortunately it seems we are now forced into fudged workarounds for all users, purely to cater for the degen box.

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No, I think as a community we can come up with a solid plan that doesn’t allow anyone to benefit from short-term gains at the expense of long-term sustainability. An early withdrawal tax or even a full-fledge yield curve at some point would solve this

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Would a simple withdrawal delay prevent recursive leverage like what MIM is doing? For example, a one hour or even one minute delay on all redemptions. I’m not familiar with the details on how MIM implements its looping mechanism, but it seems like one of the assumptions is that they can immediately liquidate collateral if the price moves.

Of course, this change might well affect other protocols’ use of Anchor too (Nexus, Kujira, Whitewhale), but maybe that’s ok too if overall it is in Anchor’s best interest.

Users should have SOME limitations on earn if they aren’t willing to lockup their funds. Right now there is NO disincentive to over-leverage deposits. Once others see the success of MIM, I think they will try for similar-style attacks on Anchor.

Even if we did a lockup scheme something like 15% with small-time delay as suggested above, Two weeks for 19.5%, 1 month for 22%, and institute a small withdrawal fee % to pad the reserve as @atebites suggested, I think the earn side would have better defense

Medium-term, we really need to keep the ratio of Luna collateral (amount of bLuna, not just collateral value) in healthy balance with earn deposits.

Toggling net apr on borrow will help to remove free money gamesmanship that was happening, taking positive net APR on borrow and injecting that back into anchor earn. However, I’d have to look into @atebites suggestion re adjusting LTV - it’s possible that could be a good lever to use to modulate borrow. Right now though, the total Luna collateral in bLuna is 58m and change, which is lower than it has been.

2 Likes

Yeah I guess I actually like the timelock proposal for instant access, 1 week and 1 month rates that was proposed in the first post.

The suggested rates are pretty much spot on. If it helps retain the 19.5% rate for longer, that would satisfy a lot of concerns.

As for the degen box… That’s something we need to figure out.

If Degenbox is willing to threaten anchor over 110% in short term, we should start looking at ways to remove the games. The ratio is one way to do it - if Luna collateral growth (actual bLuna amount, not collateral value in USD) has not caught up, we can throttle the new deposits, putting the brakes on the attacks. However, that really puts a fence up and I want to see if there is anything else we can think of to stop the attack besides that + lockups - a withdrawal fee on earn helps remove some incentive but not enough.

Our biggest systemic risk is huge 500m-1bn gains in earn deposits (which just happened) and then luna value drops a lot, which would immediately shock the system and force lower earn rate. It’s best to be proactive instead of reactive. Anchor getting larger will necessitate a more mature approach to economic security.

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I’m in support of this plan. Even if it only slows down the bleed I think it’s something we should work out immediatly. Will be listening into the December AMA around this degenbox issue. Also like you said but yes borrowers like me do sell off our bluna collateral and deposit to earn which negatively effects the collateral amounts. We do this because it’s delta neutral and helps hedge against liquidation risk since it gives us free cash to pay off the loan we have against.

I think pre-degenbox that was the majority of the chasm and it was controllable but post degen we are playing a different game so I would support locking up collateral at this point as a different forum post mentioned. slowing deposits and securing collateral while keeping borrowing attractive should be the name of the game. I don’t think anyone thought there would be this much liquid USD for people to deposit into Anchor. Maybe we shouldnt blame MIM as much as the FED since they’re both just playing the same game de-valuing the little guys (us) in the process.

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I really don’t understand the hate towards the MIM strat, yes it’s an issue but it’s not the villain of the story, we need to make borrowing more attractive in a way that attracts more collateral on the platform… see Nexus, right now most bLuna providers won’t leave the bLuna on Anchor when the price goes up if they can deposit it on Nexus and get something extra. How do we change that?

Idle collateral on Anchor is what we need, collateral that’s providing yield to maintain the reserves, and the one way I’ve been trying to get across is to reward lower LTVs more than higher LTVs, it’s better for the protocol, it’s better for the end-user in terms of liquidation safety and this will incentivize users to leave the collateral hanging around on Anchor rather than pulling it out because it adds no benefit.

We should probably also look into monetizing part of the UST deposits in a risk free manner, using it to provide liquidity in stable pairs (insured when possible), allowing for flash loans and earning a fee (this is a risky one, but should be doable), and there’s probably many other ways… even Vertex Protocol could open up some avenues for this.

I think the concerns are that it isn’t sustainable, introduces potential systemic risks, and lowers the interest rate for the “normal” intended users of Anchor.

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On the topic of time locking, we could simply split Anchor Earn into two parts to make it super easy for all to understand.

Checking - Instant Access - 10% APY
Savings - 30 day time lock - 19.5% APY

As for the degen box… We as a community have the right to protect the protocol, to make it fair and sustainable for everyone while making sure we avoid systemic risks.

I understand the concerns, but the intended users of the protocol afaik is anyone and anything that wishes to use it, there’s no barrier to entry aside from having a wallet, and being able to sign transactions. While I appreciate that there’s a sustainability concern for the protocol, it’s a slippery slope when we start defining who’s worthy of, or who should be able to use, the protocol.

MIM is but one case of a protocol using it, I know of others that intend to use it, will we make sure they can’t? Will every protocol become a source of concern? I for one don’t care who uses it, I care about finding ways to make the protocol sustainable, regardless of where deposits come from.

This is cool - maybe change the verbiage to avoid undue reg scrutiny as those are banking terms but I like that marketing angle.

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