Authors:
Polychain Capital: @josh_rosenthal
Arca: @Matt_Hepler
The respective ANC utility proposals from Retrograde and Arca, and subsequent debate by the Anchor community, have been a powerful example of the potential of on-chain governance. The attention, creativity, and focus dedicated by all parties give us great confidence in the future of Anchor Protocol as a foundational piece of Terra’s DeFi infrastructure and for the continued proliferation of UST throughout the broader crypto ecosystem.
As discussed in Thursday’s AMA, there are positives and negatives to each proposal. With Retrograde’s proposal, ANC’s long-term ownership incentives, outstanding supply reduction, and accumulation benefits stand out as valuable, though it risks unchecked governance power concentration and increased token illiquidity. Arca’s proposal encourages an ownership mentality for depositors and increases utility and demand for the ANC token, but implementation may be more complex.
By uniting these proposals, ANC stands to gain unheard-of utility that results in a vibrant, sustainable Anchor Protocol and immense value creation for ANC holders, all while maintaining the high yields depositors know and love.
The Polychain Capital-Arca ANC Utility Proposal is as follows:
1. Yields paid to Anchor Earn depositors are now paid-out 85% in UST and 15% in ANC. The ANC is not inflationary, rather it is market-bought on a DEX, such as Astroport, using UST from the reserve that would have otherwise been paid out in yield. For example, in Anchor’s current state, a depositor of 100k UST would earn ~20k UST per year. In this proposal, ~17k UST would go to the depositor, while the remaining ~3k UST would be used to purchase ANC on the open market for further delivery to the depositor (see point #2).
This aspect enforces an ownership mentality for all depositors regardless of size, eliminates the friction of depositors having to purchase ANC on their own, and relieves the burden of needing excess capital to attain ANC ownership. By market-buying ANC rewards rather than having them be emission-based, steady upward pricing pressure could be applied to ANC, benefiting holders without token inflation.
2. Absolute yield level is determined by how long depositors decide to vote-escrow the ANC portion of their yield. Upon depositing UST in Anchor Earn, users determine upfront how long to escrow their yield-derived ANC. Yield levels per given escrow duration will top out at 20% for 12mo “max” locks and asymptotically approach 12% as the lockup time approaches zero. Users choosing no lock will receive 12% yield. Note that these yields, regardless of amount, will be a blend of UST and ANC – 85% and 15%, respectively. All vote escrowing is done irrevocably, meaning veANC will not be released until the initially selected duration has expired. UST yield on the other hand will be harvestable upon accrual.
In addition to yield incentives, vote-escrowers are granted increased voting power. Those who max vote-escrow will receive a 2x multiplier on their otherwise 1:1 ANC voting rights, while those who do not vote-escrow maintain their 1:1 rights. The voting multiplier decreases linearly from maximum to minimum escrow durations. Vote-escrowing would be made available to those who purchased ANC on the open market as well, though the yield incentives would be limited to depositors. Vote escrowing will replace existing ANC staking.
This mechanism creates an economic incentive for depositors to hold their yield-generated ANC rather than simply dumping the token. It also encourages long-term token holding by giving long-term holders substantially higher power in governance relative to speculators. Through opening up vote-escrowing to all ANC holders, token accumulation by individuals and entities who wish to have outsized say in Anchor Protocol governance is expected. These effects will reduce supply, increase governance participation, and encourage long-term holding without the emission conflicts that may appear through the usage of gauges.
3. Borrowers can earn up to a 1.5x boost on ANC rebates, proportional to the borrower’s amount of veANC.
The first two points seemingly only affect depositors, but in reality they also induce increased borrowing through the theoretical upward price pressure on ANC. A higher ANC price increases the notional value of a borrower’s ANC rebate, thus reducing or eliminating interest expense. Low-to-no, and in some circumstances negative, interest expense can incentivize increased borrowing. Strong borrow demand is critical to the sustainability of Anchor Protocol. Adding boosted ANC rewards on top of the depositor-related improvements further ensures long-term, impactful borrowing demand.
Illustrative Visual
Conclusion
Rather than picking between two quality proposals, Anchor Protocol stakeholders deserve the best of both worlds. As detailed above, this proposal could result in increased utility and demand for ANC tokens, an ownership mentality from depositors, and increased long-term holding. These three benefits likely increase ANC price, not only rewarding holders, but also encouraging borrowing as ANC rebates to borrowers more effectively cover interest expense, especially when veANC-related boosts come into play. Clearly, the bespoke utility for ANC laid out in this proposal could result in an elegant flywheel that cements Anchor Protocol as a top borrow-lend protocol and uncorks its massive potential.
Disclosure: Each of Polychain Capital and Arca have respective positions in ANC tokens. This proposal was written by Polychain Capital and Arca, and the views expressed herein reflect their own opinions. Neither Polychain Capital nor Arca are receiving compensation from anyone for this proposal.
