The idea behind this suggestion is to promote a better utility method to ANC, one that would allow it’s main holders and benefactors to reap the benefits of protocol growth while also promoting utility for the token.
What I’m about to purpose is probably flawed in some ways, my main goal is to spark a discussion towards an alternative to the current model and other proposals already being discussed, the larger the pool of ideas the more likely we find one that’s truly great, criticism is welcome but please try and keep it constructive. I’m sure most of you are probably smarter than me and I can’t wait to learn from the discussion that follows.
As is, the ANC token is mainly used for two purposes: Governance and Borrow Incentives. Governance is mostly a standard amongst crypto projects but has yet to become a truly enticing reason to hold a token, stakers get benefits from buybacks that happen on a regular schedule. The buybacks are fueled by protocol revenue, that same revenue is also used to fill the yield reserve. As for borrow incentives, they are a necessary evil, attracting collateral is the life line of Anchor, but most of these incentives get sold on the market on a regular basis while the incentive to buy doesn’t go beyond price speculation (or governance of course).
There are two main actors on Anchor, borrowers and depositors, borrowers are what feed yield into the protocol and depositors are those that benefit from that yield. Currently depositors far exceed borrowers, because depositing is both easy and risk free, which causing the depletion of the yield reserve (the very same that had an emergency refil, twice now). To me, it has become clear that Anchor needs to improve on capturing borrowing demand or collateral deposited on the platform, while also providing a way to control inflows on the deposit side, not to limit usage by anyone in particular but to make sure that the protocol remains solvent without the need for emergency refils. Emissions of borrowing incentives are based on a formula and fixed amount of tokens to distribute, making each token worth more is one of the best ways to make those incentives be more attractive.
Minting aUST right now provides access to the full 19.5% yield, that extra yield is currently being provided by the yield reserve. The core idea would be to make aUST track the true yield rate of the platform, so the rate being provided by borrowing/colateral before adding the yield reserve top up, we would then allow people to mint baUST, in order to mint baUST you’d need aUST and ANC (on a ratio tbd), this baUST would have it’s own oracle that would be the current one tracking the 19.5%. Individuals would be able to freely access what I believe would still a competitive rate and could further exceed that by boosting with ANC (making it xANC).
The process of locking would result in two tokens, the user provides ANC and aUST and receives xANC and baUST (the protocol could automate going from UST to baUST, to avoid multiple steps). Both tokens can be fully traded by the owner without being paired, this is because for the protocol it matters not if the user keeps the xANC or not, should the user require to unlock the baUST he would need the xANC back, this would most certainly open secondary markets to trade baUST for aUST, and avoid that step of aquiring the xANC again.
This complicates the process of deposit slightly, for the full rate, and complicates the fungibility of aUST/baUST by having two tokens, but it wouldn’t outright destroy that property. Other protocols that want to give their users the full rate could acquire the ANC for them and lock it up on their behalf, giving that protocol power to vote in Governance should they wish to do so.
Governance should also have the power to vote on the ratio formula parameters, required to mint baUST, but having this formula change proposes a challenge, baUST that’s already minted didn’t use the same ratio and now unlocking all of baUST would leave some xANC still in circulation, to solve this issue I propose that xANC can be unlocked without baUST, on an unlock schedule to avoid abuse, the same way that it can be freely locked for those that seek governance power alone.
The main goal is to increase demand for ANC, because an increased demand of ANC will lead to higher prices, which in turn lead to better incentives and therefore more borrowing. What I’ve tried to accomplish is a solution that creates this demand in expansionary cycles, not making the deposit process much more complex, and also allows for alternate markets to be traded for those looking for an easier way in. Because depositors have had the easiest job so far, I’ve attempted to make depositors contribute to a positive cycle of rewarding borrowers which in turn guarantees the yield necessary to ensure the earn rate. What is not the goal is to force everyone into being an ANC holder, as I believe that’s the easiest way to lose users.
aUST rate will change to be the true rate of Anchor, and what the true rate is can change depending on what the version of Anchor is, right now te true rate is given by the deposited collateral yield, if Anchor v2 is implemented then it will change to the borrow rate.
The b stands for boosted, this is the boosted version of aUST, boosted by what? The yield reserve, baUST is what aUST is right now, targeting 19.5% or whatever rate is decided by governance.
The process to get baUST, in it’s most raw form, would be deposit UST into EARN to get aUST, then boost that aUST with ANC, the result of this process would be baUST and xANC. To go from baUST one would need to also have xANC, this is a way to incentivize holding the xANC but could be waived.
I’m not mathmagician, hence why I’m not focusing heavily on the math like other proposals but rather on the pieces and how they would fit together. The formula should reflect the properties that benefit the protocol the most while making it as easy as possible for earners to unlock. I also believe that it’s important that the requirements for lower amounts of deposits is slightly lower, but not low enough that it’s worth to be gamed.
Something like the table and graph below, the initial cost is not prohibitive but there’s an economy of scale.
I’ve tried to come up with a formula that would mimick this, but failed to do so and don’t want to spend another week or two trying to figure that out before presenting.
The parameters I believe should be taken into account:
ANC price (could be on a daily basis, doesn’t need to be live)
Minimum and Maximum deposit to ANC cost ratio (0.4% to 1% in the images above)
Borrow to Deposit ratio, if borrow is in high demand make it cheaper to deposit, if not make it more expensive
ANC is the most basic form of the Anchor token, right now it can be used for governance, after this proposal it wouldn’t have any governance power without being locked into xANC. It will however be needed to boost aUST into baUST, and that’s a very useful utility, one would need unlocked ANC in order to increase it’s holdings of baUST.
Because of these changes I expect that the demand for ANC will increase, making the borrowing incentives far more enticing, borrowers will get these incentives and may choose to keep them as a means to boost their own savings, or sell it as a means to maintain the LTV.
xANC is the locked form of the ANC token, usable as a Governance token and can be locked just for that, or it’s created during the boosting process of aUST. xANC may be unlocked at any time, on a vesting schedule (2-4 weeks would probably by ideal), but if a baUST holder wants to unwind their position, they would then need to acquire xANC in order to do so.
Depositors that only need a place to park their UST for a bit will do it in aUST, it’s the easiest way to park UST while still getting some yield on top of it, then there’s the users looking for a long term solution, those will want baUST. In the near future (2-5 years), I expect that most of these won’t be using Anchor directly but rather an app/service built on top of it. The service provider will handle the boosting of their users savings, and may choose to keep the xANC as a means to unwind the position but also as a means of governance. I don’t expect these services to boost all of the aUST, they’ll probably boost most of it but keep some of it as an easily accessible exit liquidity.
Borrowers will continue to get ANC incentives, with the increased demand I expect that these incentives will grow in value and atract even more borrowers, because borrowers provide the yield necessary to feed the whole system their not the target of these proposal, but I expect them to benefit indirectly from price increases in the ANC token and how that will affect the benefits.
There will be room for liquidity pools being created to easily swap between aUST and baUST, while these won’t be the best option in terms of price for the user, that may be used as an easy way to get out of a baUST position for smaller holders.
The protocol should have a safety mechanism, if the yield reserve is being depleted at an increased rate (to be decided what this would be), we could disable the minting of baUST, only allowing for the aUST to be minted, this would limit the depletion of the yield reserve but could also make baUST trade at a premium on secondary markets.
Assumption here is that people would be willing to lock ANC in order to get the full rate, but if the cost to do that become to high, or if the volatility of ANC price is high, most may choose not to do it and resort to other protocols.
I don’t have an easy way to confirm this but I believe a good source of borrowing is self fulfilling, people that borrow and deposit into Earn (see Nexus strategy), this would cripple that strategy and may result in a flee of borrowing interest, still borrowers could use the ANC incentives to start boosting. It’s my opionion that this strategy doesn’t serve the protocol, so trying to protect it isn’t necessary, as those providing the borrowing take more than what they give. In full disclosure, I’m a user of this strategy, on my own and via Nexus.
Having so many new and different tokens can be confusing, right now it’s rather simple to understand Anchor but some users still struggle with it, adding this whole new token could add greatly to the confusion. Also having two yield-bearing UST tokens could split liquidity on existing pools, but that’s not a concern to Anchor itself. However, being more complex than the alternatives is a potential issue.
The lock ratio formula becomes increasingly important to the protocol, if it’s not balanced it may scare away partner protocols, as their offer becomes less attractive to their users and the incentive to lock ANC, on their behalf, may not be sufficient.
Because users can unlock xANC and sell it after boosting, the selling pressure may still outweight the buying pressure if users are more interested in depositing long-term and not holding onto the token. But forcing users to hold onto it would make Anchor far worse for depositors, and it’s not a viable solution in my opinion.
This idea doesn’t require depositors to hold onto ANC (or xANC) and face volatility, if you know you’re going to lock for years, and don’t want to own a part of the protocol, sell the xANC. Because the ratio formula should take into consideration the price of ANC, it’s unlikely (and should be a concern of Governance) that you’d need more UST than what you used to buy the ANC necessary to lock. Users can park the UST that resulted from selling xANC, as aUST, and use it as a store of value so that they may buy back the ANC/xANC later and unlock.
This also aims to promote Anchor on a B2B (or should I say P2P, protocol-to-protocol) model, not focusing only on single users but on being a base layer for others protocols, with an economy of scale on the locking model, Fintech-like offers can lock their users funds for cheaper when in bulk, most of them already offer a lower yield than the full Anchor yield, so it can accomodate a few days of accumulation before locking.
Hope I’ve been able to express myself in a clear way, but if there’s anything I failed to explain properly, do let me know and I’ll improve the suggestion with your feedback.