Summary:
Increase ANC Emissions by 25% for 6 weeks to improve cash flows and buy time for upcoming protocol improvements.
Background:
Since the crashening, Anchor’s utilization ratio has been stuck in the low 30s vs the 66.7% target ratio. Borrower’s interest and collateral yield are therefore not enough to cover depositor interest. The yield reserve pays for the difference. But, reserves are down to 3 million UST and declining ~100k/day with the price of LUNA bobbing around 5.
Anchor has planned improvements on the way to address the lack of borrower demand. But, these require time that the current reserves do not afford. The community discussed and declined a variety of options to address this issue, including using ANC from the community pool, and using LUNA from the Terra community pool to top-up reserves.
Abstract: Modify ANC Distribution to increase the Borrower Emission Cap by 25% for 6 weeks. The Borrower Emission Cap would go from 20381363.85157231012364762 to 25476704.814465385 for 6 weeks. After 6 weeks, the Cap will go back down to 20381363.85157231012364762. The community will observe the data over the 6 weeks and re-assess other options when the time comes.
Motivation:
ANC emissions are the main lever to bootstrap borrowing demand. Utilization is at half the desired levels with emissions already at the Borrower Emission Cap. Concordantly, the demand for deposits may only grow as DeFi yields come down and more protocols utilize Anchor’s yield. Temporarily increasing the Borrower Emission Cap is a built-in lever to improve cash flows by attracting more borrowers. This lever is also temporary and easily reversible.
The main consideration is that accelerated share issuance may introduce some uncertainty around ANC’s supply schedule. However, if increased ANC emissions increase utilization, the probability of ANC’s success–and thus the equity value–increases dramatically.
I think this could be a good first step, but we might even consider a more aggressive temporary measure.
Since the increased ANC emissions would be a clear benefit for borrowers, we could also consider a borrow rate increase at the same time. Perhaps at a increase of 1% for every 10% increase in ANC emissions. At least this way we can be fairly confident of some economic return from the increased token distributions.
Something like temporarily increasing borrow rate by 5% and increasing ANC emissions by 50% would significantly close the gap in the system deficit and buy time for the Anchor upgrades to be implemented.
Thanks both - I’ve been following the conversation for a few weeks on the other threads but feel compelled to chime in now.
How sure are we that the distribution incentives are the issue? I understand the premise of “make it more attractive to attract borrow demand” but I’d argue that ~200% is already very attractive and doesn’t appear to be having the desired effect. A bump to 250% doesn’t seem like it should make that much difference on paper but I’m happy to be proven wrong.
I’d strongly support ZenDog’s notion to increase the borrow rate as an offset to the emissions rise. Seems to make a lot of sense to reach the objectives this proposal sets out to achieve.
I mentioned this in the other thread, but the current APR of 170% is not actually obviously attractive.
With the avg LTV of ~30%, it’s basically a borrowing APR of about 50%. This should be better than plain Luna staking, but it’s not obviously so because of possible genesis token distribution snapshots (Pylon, Orion, Nebula, etc…). When the genesis airdrops occur, in the past we have seen luna staking APY pump to over 100% APR. It’s very likely this is affecting the normal borrow vs. stake decision making throughout the community.
IMO, I don’t think borrow incentive is the issue. The main reason I ain’t borrowing is because Luna is too volatile and that’s really it. If collateral value is more stable, I would do it. Even if you increased ANC emissions, I still wouldn’t borrow. But that’s just me.
Increasing the ANC emissions temporarily, would decrease the price of ANC, thus the incentive would decrease as well since return is based on price of ANC and other variables.
Edit: I guess we don’t know for sure whose opinion of why people aren’t borrowing represents the masses.
Brilliant! I like your proposal of a 5% increase in to borrow rate and a 50% increase in emissions.
@planktonfarmer there is no way to be sure increased emissions will increase utilization. I agree that increasing the borrowing rate improves the probability that the proposal achieves its goal (reduce system deficit).
If there is any price elasticity of demand, an increase in emissions should help. Also, note that the APR on the bLuna/LUNA pool on Terraswap is 197%. As a LUNA holder, that may offer more attractive risk-adjusted returns vs the net borrow rate on Anchor of +173%—and I am not even including the impact of LTV.
You guys are making a lot of sense. Thanks for elaborating further on how the numbers stack up.
I am broadly in favour of this.
@Arcadia24 Auto loan repay is coming at some point, which should alleviate a lot of liquidation fear. This proposal simply buys us headroom until that time.
I don’t want to “preach” Do’s words too much, since this is DeFi after all…
But he did tell us multiple times to “not worry” about it and even stated that more bAssets are coming this week, which will further increase the borrow adoption.
IMHO, sit on this for just a week, see how things evolve, and if they’re the same in a week or two, then maybe go ahead with the proposal.
I view this measure as an insurance policy in case bAssets are late or adoption takes longer than expected. What do you consider the downside of temporarily increasing the emissions cap and borrower rates? ANC emissions would still be a function of the utilization ratio. If bAssets resolve the system deficit, emissions would still go down.
And note, we would need to double borrowing to be at the target utilization ratio. We may need bAssets and this proposal to restore the system to equilibrium / surplus.
I don’t think there is a big rush to launch a poll, but I think it’s important we discuss now. Let’s say we wait a week. Then we discuss for 5 days and then vote to implement this change. It will take 10 days from the the time of the poll launch to implement. So we’ll eat up 22 days of cash and we have about 29 days left if we continue burning through ~100k per day.
That’s a bit tight IMO. Might be better to decide on a plan now and be ready to vote next week if necessary.
I also agree the urgency is needed. I think an increase of ANC Emissions along with increasing the borrowing rate makes the most sense. We going through the ANC reserves very quickly so we should vote sooner rather than later.
Fair point.
My only “drawback” is the further dilution/sell pressure of the ANC tokens.
But I agree that keeping the Earn APY is more important than the ANC token value… and this is only a temporary solution until things tip the balance to the other side anyway.
The increased incentive on Borrow will drop off quickly due to ANC price dropping, just as we see with ANC-UST LP Yield. Unfortunately, I put a decent amount in ANC-UST LP, I’m not gonna have a good time…since I went in this pool when ANC was above $5…
The price of ANC is already dropping rapidly though…with this proposal I wouldn’t be surprised if ANC token dropped close to zero. At that point, borrowers are receiving more ANC, but they are all worthless tokens.
But it is not 200% is it. It is 200% of roughly 30% of the collateral which is far less in real terms. Nobody wants to get liquidated so you don’t borrow 49%. Maybe another way would be to increase the borrow LTV to 75% which I believe Do said in an interview was possible. It would certainly make things more attractive to a borrower like myself.
This is why it’s so important to implement alternate forms of collateral like bEth and mAssets. I’d be much more comfortable borrowing 50% on mGoogle, at least in these market conditions.
I think it should be done the other way around, by limiting the earn APY proportional to the amount of ANC tokens at governance.
There are currently not enough use cases for the ANC token and limiting the earn APY proportional to the number of ANC tokens owns could be one. In the meantime, this would lower the impact on the yield reserve in times like this.
Increasing borrowing incentives would lower the price of ANC token because users will just dump them. This would impact the overall value and trust in Anchor Protocol and on the long run borrowers wouldn’t be incentivized to use the protocol because of the low value of the token.
Because the only way to have adoption is through good use cases I propose limiting the earn APY proportional to the number of tokens one has at governance.
Example:
<1000 ANC staked at governance max interest APY= 50% target (currently 9.7X%)
>1001 <3000 ANC staked at governance max interest APY=75% target (currently 14.5X%)
>3000 ANC staked at governance max interest APY=target APY (currently 19.45%)
Values might vary but this is an open discussion linked to the initial proposal
The arguments against tiered yield was that it increased complexity…but the benefits far outweigh the cons! And the reality it isn’t that hard to understand.
