[Proposal] Use Anchor idle deposits for deposit insurance

Due to LUNAs rapid rise in value (partially due to UST demand), UST, and thus also aUST, are increasingly exposed to a death spiral scenario.
This may happen if the trust in LUNA is broken and/or a bank run on UST occurs that cannot be met by LUNAs mint-burn mechanism.
The creation of the LFG Bitcoin reserve is only a temporary fix to this problem, since LFG is deploying their own LUNA reserves which are ultimately finite.
With an increase in UST market cap, the created reserves will be less effective in relational terms and eventually completely fail in their purpose.

I suggest a new mechanism that protects UST deposits in a bank run/death spiral scenario.
We will implement a decentralized way of shorting LUNA while paying the LUNA providers an interest that is both higher than the staking yield as well as covering the margin between the value during the time of shorting and its current value.
LUNA holders are therefore incentivized to lend out their LUNA, instead of simply staking it, to protect the UST peg.
In the case of a bank run and a consecutive death spiral, both UST will de-peg, as well as the trust in LUNA will be broken which leads to a decrease in LUNA price, or even a complete loss.
This decrease in LUNA price may then be used to refund the UST lenders and act as a lender insurance.

In summary, we will introduce an option to simply deposit UST for 19.5% APY yield, as is, or deposit UST into Anchor for 19.5% APY minus the LUNA borrowing fees which are accrued for borrowing and selling LUNA (shorting).
The latter will be less than 19.5% but acts as a full deposit insurance.

1 Like

UST peg arbitrageurs exist and are in plenty, the peg is fine. If your worried about your deposit peg you can buy peg insurance but it really isn’t necessary.

All of Anchor can collapse and the peg will still hold. Until we’ve seen concrete evidence that this isn’t the case or proof of concept there’s no reason to be working on these strategies.

With that being said I’m always for being able to lend out our collaterals, however, from what I’ve gathered this is no priority in the developer pipeline. We don’t need to open and shorts or anything ourselves just be able to enable lending of the collateral. This is much more feasible with xanchor, however, still poses technical challenges and requires developer resources.

If you can find developers interested in designing this for xanchor you can branch it on git and once you got a design ask for pull request. You’ll probably be required to pass a governance poll which you will find a lot of resistance on since the community have very little interest in this. Especially as edge protocol already exists for this functionality.

You can check out the 4pool on curve, this wouldn’t have become a thing if depeg risk was actually a concern from any part of the industry.

1 Like