About ~3 weeks back, the Terralytics team recorded a discussion session with the Anchor team focused on the sustainability and the future of Anchor. As stated in the Terralytics youtube video, we have been planning on releasing a Proposal that our team believes will address the main issue of … Increaseing Borrow Demand.
Please review the proposal in it’s entirety via this Google Drive link or check out the abstract below.
We will be recording a video as well and discussing the contents of the proposal in-depth in the coming week. Once the recording is finished, it will be added to this post.
A quick abstract …
Authors: Terralytics Team (@gnawkz, @kash_sam_, @kashron)
ANC Tokenomics - Increase Borrow Demand via ANC Value Capture from Deposit Growth
Primary Objective: Modify key utility aspects of the ANC token to drive up borrow demand via the following:
- Improve capital efficiency of borrowers by increasing and maintaining the value of the ANC token
- Enable a better ability to prevent liquidation of assets by increasing and maintaining the value of the ANC token
Secondary Objective: By addressing borrow demand, we believe Anchor Protocol can organically sustain the 19.5% earn rate for however long ANC distributions continue with minimal / no intervention from TFL / LFG. A stable ANC rate that users can trust is the fundamental foundation of Anchor and UST demand.
Our Proposal: We believe the best way to accomplish our objective is by implementing the following 2 items. Some of these concepts are similar to ideas shared by other users, and some of these are original ideas that were discussed in our Terralytics videos.
- “Earn Yield” paid out to Depositors will be split 75% UST / 25% ANC, until the ANC threshold per wallet is reached. Once the ANC threshold is reached, “Earn Yield” will revert back to 100% UST / 0% ANC.
- ANC threshold is set at 5% of the total deposited amount in each wallet
Driving True Economic/Utility Value to the ANC Token:
Currently, ANC tokens provide limited value to borrowers. Primarily, it operates as an incentive mechanism to drive borrow demand. Secondarily, it provides the ability to participate in governance. Given the limited utility of ANC tokens, a majority of borrowers redeem rewards and sell those rewards for UST, creating a lot of sell pressure. Theoretically, the price of the ANC token was meant to be supported via buybacks by the extra yield generated where BorrowRate% + StakingRewards% > EarnRate%.
Unfortunately, as has been proven time and time again, deposit demand has grown and continues to grow at a much more accelerated pace vs borrow demand. This is not difficult to see given all of the great benefits that depositors receive through Anchor.
A large part of the reason why there is such low economic value of ANC is because the token is only directly impacted by, and integrated in, the process that is only used by a portion of the users. The deposit is completely ignored.
Our hypothesis is that by introducing ANC Tokens into the left side of the equation, the token will now be tied to all users of the protocol and thus, increase in value to appropriately reflect the exponential growth in deposits. Specifically, we propose to introduce a 2-tier yield generation system that can be somewhat modeled after existing “Reward Tiers” found in other industries like Airlines, Hotels, Retailers, etc.
Tier 0: Earn rate is split 75% UST / 25% ANC
Tier 1: Earn rate is 100% UST
To qualify for Tier 1, depositors must hold 5% of their aUST value in ANC. Once this 5% threshold is achieved, depositors will automatically move into Tier 1. For more perspective, assuming ANC token pricing stays flat, it will take ~15 months for a depositor to acquire enough ANC tokens to meet the 5% threshold.
Expected Borrow Demand Response to this Proposal:
The demand for borrow is currently limited because the opportunity cost of using Anchor is just too great. Borrowers typically have to incur a 12% to 23% borrow rate and the loss of staking rewards from their respective collateral.
Recently, additional capital efficiency was added into the ecosystem through an increase in the liquidation LTV threshold for bLUNA, from 60% to 80%. But this is still not enough.
Our hypothesis: Improving ANC tokenomics will drive a new wave of borrow demand. Especially, as the acquisition of ANC tokens will become the primary reason for borrowing UST vs all other reasons of borrow demand.
Our proposal will connect depositors with ANC token value and drive new demand for ANC tokens. We expect the market to quickly realize that ANC token prices are supported by depositors. Thus, as deposit size grows, so does the value of the ANC tokens. This will set an ever increasing price floor on the ANC tokens (given the max supply of ANC), making it an attractive investment for a wider range of users.
We believe that this change in tokenonomics will help users realize that the borrow interest rate % and the lost opportunity cost from staking will be minimal compared to the acquisition of the ANC token.
Given that ANC tokens are distributed to borrowers based on a quantity capped emission rate %, not a price capped emission rate %, users will recognize that this is the cheapest and most capital efficient method of acquiring ANC tokens. Buying or trading for it on the open market does not compare!
In the shared PDF via our Google Drive, we go additional detailed considerations to cover important aspects. This list includes the following:
- Why is our proposal focusing on ANC tokenomics vs adding more cross channel capabilities like bSOL, bATOM, etc?
- What about veANC tokens?
- Why are people taking outsized risks borrowing then? They should be more responsible with their assets?
- How about the potential liquidity issues that will arise on decentralized exchanges (Astroport / Terraswap) if “Earn Interest” is used to purchase ANC tokens on the open market?
- During a downturn, why would users continue to hold UST deposits and not just withdraw so that they do not need to buy more ANC Tokens?
- There are a number of implementation challenges here due to the current simplicity of a UST / aUST conversion ratio. How would these proposals be implemented in the current system?