Over the course of the past two weeks, we have taken considerable amounts of time sifting through feedback offered by the Anchor community, ANC holders, and participants in the broader crypto ecosystem. What is clear is that there is significant consensus that Anchor Protocol is critical infrastructure for Terra and the future of decentralized, censorship-resistant stable money. What has also been understood deeply is that much of Anchor’s success has been driven by an ethos of elegant simplicity: lenders deposit assets and in exchange, earn a market-leading, predictable yield paid out in UST. This ethos was core to what has proven to be one of the most successful bootstrapping tools in history: in just about a year and a half, UST market cap has erupted to close to 13.5bn. While successful, Anchor’s bootstrapping method is not immune from the force of gravity that affects all bootstrapping mechanisms: it is unsustainable. This is evidenced by Terraform Lab’s centi-million UST injections into Anchor. Accordingly, given the escape velocity achieved by UST, we believe it is mission critical to address the sustainability of Anchor Protocol.
Our initial proposals centered around making depositors owners through ANC distribution in an effort to economically align incentives with the health and success of Anchor Protocol. While we believe this proposal was a thorough way to address many current issues with Anchor, we have opted to significantly restructure our proposal in a way that retains this core ethos of simplicity, continues to pay industry-leading, stable yields, and dramatically increases the sustainability of Anchor Protocol. This restructuring could not be made possible without the thoughtful feedback provided by the community - for that, we are eternally grateful and excited about the role of governance in Anchor Protocol.
This revised proposal has two core features:
Deposit amounts up to 10,000 UST will continue to earn the Anchor rate of ~20%. As described above, Anchor has done an incredible job in terms of spurring the adoption of UST. As Terra enters its next phase of growth, more focus should be placed on users added to the ecosystem rather than dollars added. More users result in broader demand, which results in more effective distribution of UST. By offering ~20% yields on deposit balances up to 10,000 UST, we believe that small- and medium-sized users will continue to flock to Anchor for unprecedented yields, thus increasing the number of users earning and using UST.
The rate earned on deposits in-excess of 10,000 UST will decrease linearly over the next 1.5 years from ~20% to 10%. By currently offering ~20% on all deposits, regardless of size, an environment with large depositors dominating the depositor base has emerged, resulting in a massive Free Riding problem that manifests itself in rapid bleeding of the yield reserve without the benefit of incremental users. To counter this, we lean on the Anchor’s whitepaper itself in proposing a reduction to the yield paid to depositors, though focusing it solely on deposits in excess of 10,000 UST. For example, for a depositor of 100,000 UST, the first 10,000 earns 20%, while the remaining 90,000 earns the new, reduced rate referred to as the terminal rate. We assume the terminal rate is 10%, which is comparable to existing staking rates of layer-1 assets that either are, or may be, eligible collateral on Anchor. This rate can be adjusted through governance, though we believe in principle that they should be close to the staking rate of the protocol’s collateral assets. This is a new reality for depositors, so we believe an incremental shift to the terminal rate over 1.5 years, with the new effective rate being struck every 30 days, is warranted. A sample yield schedule on this rate can be found at the bottom of our proposal.
The net of our proposal is the encouragement of new UST earners through paying 20% on deposits up to 10,000 UST and increased sustainability by steadily reducing the total yield earned by large depositors all while retaining Anchor’s flagship characteristics of simplicity, predictability, and sector-leading yields. We acknowledge that some users may create multiple wallets to avoid the 10,000 UST threshold, but we believe that the complexity of managing multiple wallets will deter this from becoming problematic and we are realistic in understanding that any proposed structure can be gamed. Even while factoring that behavior, our proposal will dramatically increase the likelihood of a self-sustaining protocol that spreads UST far-and-wide, free from drastic capital infusions. This is a step-function improvement when compared to the current state of affairs.
The attention and activity that is currently being paid towards Anchor governance is at an all-time high, which affords us all a unique opportunity to implement groundbreaking, critical adjustments to protocol operations. Through deep diligence, significant collaboration, and consensus-building, we have conviction that this proposal represents such an adjustment and believe a broad base of ANC holders agree. Notably, this proposal only addresses the depositor side of the Anchor equation, the borrowing-centric Retrograde proposal debate can continue unimpeded. We again want to take a moment to thank all that gave feedback and helped move our proposal to its current state. We believe that the future of Anchor Protocol is indeed very bright.
Illustrative Terminal Yield Table:
(note these yields are projections, and not guaranteed)