[Proposal] veANC: Evolving Anchor Tokenomics

I actually really like this. Would make me actually finally pick up some ANC lol.

This seems like something you’d see chains try to control since Anchor collateral is all PoS tokens. That being said, I’m not sure having collateral communities fight over rate control is a good idea, especially in terms of Anchor’s narrative. Anchor would get increased borrowers hypothetically from the highest voted gauge, but that leaves a potentially large group of assets with sub-par variable rates.

Its safe to say this will get Convex’d granted who made the proposal. I’m not sure if that’s a positive end state either. 1 entity getting majority control over the borrow rate of Anchor assets seems pretty risky.

I’m against the vote gauges, the lock to increase ANC emissions is fine.

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does it break if we collateralize it

Also, would this assumably decrease base distribution rate? If so the boost for locking should be in line with the distribution APR.

Telling any user w/ an open position they’d have to buy & lock extra ANC to keep their interest rate stable this suddenly isn’t a great idea for sentiment.

I think if the mechanism works well, your borrow rate becomes attractive enough for you to work leverage into your strategy long-term. Over time of course.

Just my two cents, but I don’t think this is the best direction for ANC tokenomics. There is a very good thread here that succinctly highlights the cons of veTokenomics.

Curve veTokenomics has played out very well due to three main reasons:

Factor #1: Lots of motivated players: Lots of different stablecoin projects fighting to incentivise their stablecoin pools on Curve (Frax, Mim, UST to name a few)

Factor #2: Deep liquidity for stablecoin pairs is very fundamental to the utility of stablecoins

Factor #3: Curve emissions are constantly decreasing, and will be emitted for the next 300 years.

Reasons why veTokenomics might not work well for Anchor Protocol

Factor #1 is not directly applicable to Anchor. Currently only Layer 1 tokens are used to borrow UST. Will Layer foundations such as Solana or Atom participate in Anchor wars? Unlikely. Will Application layer projects fight to incentivise Layer 1 tokens? I think quite unlikely.

Factor #2: While creating a leverage/lending utility for the L1 token is valuable, it does not have the fundamental importance of a stable coin having deep liquidity on a Dex. Right now, users are able to deposit their eth into Aave and borrow USDC at 3% variable borrow rate/ 11% fixed rate (and a host of other coins) vs the 12% variable borrow on Anchor (before netting off 11% anc distribution). So at the moment (market is in a risk-off mode), the cost of funds to a borrow (even factoring net anc incentives) is quite similar on both protocols. With other money markets as alternatives, will Layer 1s think it worth getting involved in a war? I think unlikely.

Factor #3: Currently Anchor’s emissions for borrow incentives is slated to end in Year 4 (iirc, we have <3 years of borrow incentives left), making a fight over this 3 years of emissions even less palatable for protocols/layer 1s. It’s possible this can be adjusted by governance votes etc so extend the emissions - so don’t think its an insurmountable hurdle here. Although by doing so, the Anc % distributions will drop even more.

I believe these are some reasons why Mars Protocol is going with an xToken model rather than a veToken model.

Really happy to see the community coming out with proposals to improve the Anchor tokenomics! I hope some of my thoughts above will help to drive the discourse forward.

You can reach out to me on:
Twitter: https://twitter.com/davidkohcw
Telegram: @davidkohcw
Running a Terra validator at SeltonStake

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Ok, first question. What problem are you trying to solve?

Second question. What is the desired outcome you are looking for when addressing this problem?

It seems you’ve come straight in with a detailed proposal on ve locking mechanics, but how about starting from point A before we get to X, Y or Z?

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I agree with the overall concept of favoring long-term supporters for governance decisions, but a 4-year lockup is a long time.

Why don’t we consider a model similar to Platypus Finance, where governance-staked ANC earns non-tradable veANC over time up to a specific cap, and withdrawal of any of the gov staked ANC zeroes out the veANC total? This keeps people interested in governance prioritized, but someone barging in at the last minute has limited voting power? This way also if people want to leave governance or need liquidity they can exit as desired and the remaining voting power and quorum are not diluted by people who have just written off their ANC holdings because they won’t see them for 4 years?

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What if the veANC applies the same concept Prism will use with AMPS or Platypus is using with vePTP, veANC could be farmed on incremantal volumes by time while staking ANC, BUT it’s lost if you unstake any quantity?
Also yield could be boosted depending on the ratio of veANC versus aUST. Fixed yield could be lower than current values is no veANC is held by the wallet, but could go higher depending on the veANC/aUST ratio. This would generate a virtous circle and would generate better incentives for protocol retail supporters versus external protocols that can empty the reserves using loops (Like Wonderland loops, Edge and others to arrive)

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I think you meant borrowers? Adding more utility to the depositor side will only make things more lopsided than they already are, so benefits should be directed primarily to borrowers…

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I meant depositors… One thing that Platypus Finance is doing is that they scale back the base deposit rate (to something like 5%) and then require locked and staked PTP which boosts yield earned on deposits. We don’t necessarily need to do that, but I do think we should be looking on both sides of the equation for opportunities.

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I agree with most of @davidkohcw 's take on the veToken model and having it applied here on Anchor, but I believe this proposal may have tackled the wrong issue. Borrowers are what’s feeding the platform, attracting and maintain borrowers is an issue, but adding an extra step and year-long commitment isn’t likely to fix that issue. Curve’s war is fought between those that need the platform, not those that make it work.

On Anchor those that need the platform would be depositors, I’d love to explore the ve model applied to the depositor side, the full rate could be assured to a certain deposit threshold and after that using the veToken model to unlock the full rate for higher amounts, maybe even having different thresholds between wallets and smart contracts. And yes, I know and understand that this would be downright impossible with the current model, so perhaps an hard cap would be one solution, not one I’m happy with to be honest. I do realize this would be bypassed by bots and multiple wallets, so I’m not proposing this as a solution to adopt, but rather as a challenge to explore on how to engage depositors in holding and locking ANC, rather than making it harder on borrowers.

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I like the ANC subsidies on lockup, but I question how much more they will encourage deposits since if there is a 1 year minimum commitment and the upside seems limited.

I’m also not sure how much value gauges on collateral types will have. As David pointed out, subsidies on collateral isn’t nearly as important to other chains/assets as liquidity is, which is the the veToken model is traditionally used for. Seems like we would just stack rewards on LUNA and maybe the second most deposited asset. Which I guess would be nice for those depositers but can’t see it increasing ANC demand much.

I also like the Platypus model where veTokens accrue over time. Seems to be working well and I think most would prefer that over 1-4yr lock ups.

I also don’t think there is anything wrong with having variable rates for Earn depositors based on staked ANC. A combination of variable earn rates with borrow subsidies could be nice. Adding additional fees somewhere for more rev could be considered, even if not ideal. Removing collateral, opening a loan, withdrawing from Earn, etc.

Significantly better than current tokenomics but I think there is room for improvement.

Nobody (in this entire thread) has actually defined what the problem we are trying to solve, or why it’s a problem.

Until we can at least get to that stage this proposal makes no sense.

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Great idea, locking anc for veANC and veANC for boost.
I’m all for it.

Few things i think worth mentioning

  1. veANC locking for 4 years, so that borrower can earn up to 1.5x boost of distribution.
    ANC distribution will end at year 4. And we are currently close to the end of year 1. Are we planning to extend it? If so, how?

  2. Borrowers are the only source of revenue and they are the risk taker.
    ANC yearly distribution for borrower incentive stays the same 100m/year. In my opinion, this could backfire and have the unintended consequences, like the loss of revenue from borrowers that do not wish to lock for 4years for obvious reason. “ANC borrower incentive distribution only last for another 3 year from now, why lock for 4 years?”

I agree with veANC lock and incentive for borrower. But is it possibe that we make it a little easier for them? Perhaps introducing less requirement.

  1. We have tons of easy depositor. Earning nice 20%.

For profit company doing easy business. Making fat margin. Offer 10% to user, while earning 20% from anchor. We have few example of it.
Can we actually introduce veANC boost for depositor?
I can guess, tampering with target rate is off limit.
But we can actually add boost on top of the target rate.
That boost is going to be paid for with UST and in my opinion, is in fixed percentage terms.
For example : add 2.5% If wallet have veANC worth at least 10% of the deposit amount. If target rate is 20%, for a wallet with 10K in deposit.
In one year, the wallet will earn $2000 (20%x10K) + $250 (2.5%x10K). Additional 12.5% (250/2000).

2.5% on top of 20% seems small.
However, i believe we can agree, that long term, target rate will be much lower.

If we have “fixed percentage” for boost. The lower the target rate goes, the bigger the impact will be.
In my previous example with 10K deposit, if we have target rate of 10%. The impact will be bigger.

1000 (target rate) + 250 (boost).
25% (250/1000) additional interest.

It will be even bigger impact for a for profit business fighting for profit margin.

When the times comes for lower target rate, it will most probably be in part of market cycle where mood is risk-off. Like we currently have now.
We could have for-profit companies actually fighting for veANC for bigger profit margin.

And this way, we can support ANC price and borrower incentive will stay relatively higher than if there is no buying support.

They are for profit business. Let them fight and compete against each other?

  1. Also worth mentioning. Borrower will only hold veANC because it makes them borrow cheaper, and even farming and earning more than the rate.
    However, saver/depositor are in for the long haul. They will make better target for veANC.

There are projects that build on top of Anchor borrow, farming it. (Nexus, Neptune)
There are also projects and companies that build on top of anchor earn. (Glow, Sayve, Kash, WhiteWhale UST vaule, outlet, alice, just to name a few)

If the goal is Anchor wars. Saver/Depositor and borrower have different priorities.
Why not have those two group battle each other?

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Second this.

Also a gentle reminder 50% of borrowing is done by only 4 whale wallets. I doubt veANC will make that big of an impact, but I could be wrong.
Boosting Anc rewards will also dry up the reward pool more quickly, which might actually be counter-productive.
Increasing reasons to hold on to ANC is a great idea, but I don’t see this proposal as a particularly good solution, atleast not in its entirety. Good brain-food though!

In general, this proposal seems to take a lot of assumptions on user behaviour without any data to back it up. Who borrows long-term? What are their incentives? Who sells ANC? Why do they do it?

I’m not an expert, just a humble observer, but here some comments to consider.

Benefits

  • Incentivize Long Term Supporters: veANC holders will support the protocol over a longer term horizon rather than speculate on price fluctuations in the short term. Those with strong conviction are rewarded the most over time.
    It’s the borrowers who support the protocol, ANC holders only support it in secondary terms when not selling, increasing the rewards when denominated in UST.
  • Ecosystem Growth: veANC creates a flywheel effect where emissions drive higher TVL, in turn generates more fees, and leads to greater value accrual to the ANC token. This better aligns incentives between ANC holders and the core stakeholders for the Anchor protocol.
    How does a higher ANC TVL generate more fees? It’s the bAssets who generate value accruel through buy-backs. Suppose veANC increases bAsset TVL, this would be a secondary mechanism not a primary one.
  • Increase incentives for 3rd parties to accumulate ANC: Protocols will be incentivized to lock up ANC to vote and support the base borrow rate for their preferred collateral asset. Given the massive sway of Anchor in the Terra ecosystem, directing ANC emissions can often be a more efficient use of funds for 3rd parties than native incentive programs.
    The idea of locking ANC for veANC to direct emissions towards specific bAssets, and to reward long lockings with more voting power, that seems fine. I’m just not sure why we would want to increase ANC emissions drying up the ANC reserve faster.
  • Locking Anchor Supply: Longer lockups of ANC contribute to a lower ANC supply (less is available on the open market to sell). ANC will maintain a more stable price as a result of the new design. Quite the opposite. I’d reckon only the people who hold on to their ANC anyways at this point in time will make use of multi-year lock-ups. Short term borrowers paying off their loan with the emissions will remain in play. In addition, long term holders might favor veANC over the LP, reducing liquidity and increasing volatility.
  • Improved Security: In its current state, Anchor is susceptible to attacks via borrowing ANC, and voting with ANC to make adverse changes to the protocol.
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I agree wholeheartedly with @Jae999 that Depositors are EASY to come by but revenue-producing Borrowers are hard. There is a reason Anchor is running at such a deficit. TFL and the entire community wants to keep 20% Earn APY and we should. I would argue a 2.5% boost in APY for any Earners holding veANC is the best solution to ANC value.

Success Loop: In the future if Anchor cannot make 20% and we vote to drop Earn APY to 10%, that 2.5% boost beceoms a 25% APY boost! That makes veANC even more valuable to depositors, driving ANC price up, and driving borrower incentives up simultaneously! This will drive Anchor profitability up and we will be able to return to 20% APY faster.

The solution @Jae999 benefits ANC by increasing the value of ANC and making borrowing cheaper via incentives.

Finally: Earners are LONG term customers. They will hold veANC for years, and locking 4 years makes perfect sense for them. Borrowers are short term customers, coming and going with market sentiment. veANC in their hands would not make sense as they will take on long-term investment for short-term debt benefits. veANC and earner time periods align, and makes more sense.

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Currently we have a 3.68% Net APR on the Anchor Borrow tab. I love being “paid to borrow” but would be encouraged to see that extra capital utilized to replenish the Yield reserve or to fund Anc buybacks. This could meaning capping the NET APR at 0% which would be pretty fantastic. Anything above and beyond goes back into Anchor to support its health and growth. Thanks

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danku_r made a nice video on contract-2-contract lending of Mars which enables a virtual credit line

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Can wee add the external incentive function for preferred collateral. The more intense war above preferred collateral can lead to more borrow amount which mean more revenue for us.

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