This protocol needs to come to terms with reality

General
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As the title says, anchor needs to come to terms with reality and own opt to the fact that it’s current system is 100% unsustainable.

It is not MIM degebox fault, nor is it the lack of borrowing. It’s reality, its market efficiency and its also a consequence of risk to reward ratio.

Anchor is being parasitized because it lends itself to that situation. For example:

  • Nexus protocol exploits the inconsistencies in the borrow/lend ratio (borrow being drastically lower than deposit). Which in turn leads to a depletion of the yield reserve. This does not happen anywhere in crypto but here…

  • People don’t generally want to expose themselves to risks and the bast mayority will always be more inclined to become a depositor than a borrower. This is the very reason why the deposit APRS in protocols like AAVE and COMPOUND end up dropping so much (and could even drop a LOT more with massive adoption).

  • MIM leveraging UST is a consequence of the markets doing what they do best. Find equilibrium, and there is no way get around it. If it is cheaper to borrow and a deposit APY is higher that borrowing people are going to leverage the power of DeFi to get the best yield out of their money. Why wouldn’t they?

  • With greater adoption it becomes increasingly difficult to subsidize borrowing APRs with ANC. As more people borrow (which probably wont happen given the unfortunate low LTV of the protocol) incentives become less and less impactful and thus the market will end up choosing which is the best borrow APR.

  • The same applies to the earn side, why would people take on additional risk when the can confortably get a 20% yield on their stablecoins? Thats 3x higher than the historical stock market average. The protocol should expect massive amounts of cash being inyected into the system as it is currently happening. Look at the current traditional financial system and there is a massive amount of money sitting in bank accounts doing nothing, thats what people do, they look the best paying place to deposit their savings and they just keep it there without taking risks they dont care to take.

Having said this people here should own up to the fact that a 19.5% APY wont be sustainable for too long. Nor will it be a 18, 17 or 15%, thats how it is. The current sustainable APY is 14% and thats WITH anchor incentives on the borrow side which with greater adoption will start to become less and less useful…

The yield reserve shouldn’t be used to subsidize unsustainable APYs waiting for a miracle to happen. Anchor has grown, thats a great thing, but it also means that from now on APYs will get nothing but lower and lower. A much better way to use the reserve should be to pay back people who got screwed with the oracle fund. And to make absolutely fucking sure that it doesnt constantly bleed reserves. APYs should be lowered immediately until reserves start to grow back up.

In the future such reserve should be used in adjunction to a complex liquidation algorithm to not only insure people’s loans in case of an unfortunate event but also give a time buffer for people to add collateral back (just like margin loans work).

If you people want to see APYs increase on EARN the protocol needs to make sure to treat borrowers as best as it can. Increasing LTV, providing liquidation bumpers, as well as having borrowing interests that are on par with the rest of the market (this last one isn’t a current issue as anc subsidizes borrowers at the time being)

I love anchor, I love the mission it stands for and I understand the willingness of people to want to keep it the best protocol out there but the current proposals that have been appearing are simply useless and absurdly complicated and evenetually doomed to failure.

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Agreed,

I think a proposal should be immediately voted for 80% LTV on anchor ASAP.

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These are valid points, but don’t forget the base yield was tracking well over 20% for months, at some points between 25% and 30%.

The depositor / borrow ratio is always going to ebb and flow, specifically in bull and bear markets swings.

The key is to make borrowing as attractive as possible, while at the same time aim to make productive use of idle UST. Anchor doesn’t need to be just a sponge for deposit inflow. A combination of a great multi asset, multi chain borrowing experience plus yield diversification could seriously get Anchor back on track.

We do need to act quickly as the current base rate is tracking around 12% and that’s a real issue for the entire ecosystem if rates drop that quickly.

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IT was tracking that yes, at the beggining of the protocol. In its infancy when borrowers were payed 300% for borrowing and the borrow/deposit ratio was really low, adopition changes those things and a LOT.

Plus as long as it is cheaper to borrow money somewhere else people will continue to leverage stablecoins for anchor yield. It is the way it is…

There isn’t much to be done on the borrow side currently… At least not with the current historical data, maybe the devs come up with a better, more advanced algorithm that allows for a LTV increase. Or maybe as you said adding more collateral assets (which is currently being worked on).

ITs not an issue for the ecosystem its the market finding equilibrium. Users out of whim, and the ilusion that anchor will be able to keep those 19.5% APYs, still demand to keep it that way without doing simple math and understanding it is NOT possible. And with greater adoption it will me much more difficult to keep those deposit rates high.

It’s simple math and adoption. Do your math first.

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I don’t think this proposal is going to have the support of some of the major stakeholders. Right now the major focus is launching Anchor cross-chain as quickly as possible. Borrowing needs to be easier and we can easily bring on cross-chain collateral to buffer the current shortfall. If cross-chain anchor falls short we then start looking at these ideas.

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Nothing in this post is a proposal. It is an invitation to come to terms with reality and start working in the things that need to be worked on.

I love the cross chain plans but good luck keeping earn apys at 19.5% when people start leveraging the fuck out of aUST with MIM. The apys are unsustainable, period. One way or another it will get exploited its the nature of DeFi.

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Sorry I meant to respond to @atebites post above, not your post.

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I’m sure there’s tons of big stakeholders who don’t care much or are against it but free markets don’t care for them.

I’m just looking at it as someone who wishes to use anchor for 5 years - 10 years down the line, and as someone who brings real economic value to the protocol. (From Fiat lending industry)

whatever anyone borrows compounded over that time period is a ton of money regardless of the interest rate or principal, that’s the point of of the focus on borrowing.

as someone who uses multiple fintech lending platforms, both on the supply and borrow side. And I am a long term holder of anchor tokens, I never bought any but I hold this as well as tokens from several of crypto lending platforms.

There is too much competition in this space, everybody wants their money to work for them and there is just too much liquidity in markets that it can’t. if fed funds rate went up 175-300 points though id bet UST and stablecoins demand skyrocket as real fiat drys up.

Other protocols I earn yield from a huge variety of assets and can borrow for well into -30% to -50% apy. They can do all of this without putting the protocol token into debt (paid out my asset yield in respective asset, auto compounded, etc).

What I have noticed is Terra based lending has been much slower to take off over chains, likewise solana has been much more rapid. I’m not sure if this is a result of the difference in blockchain grant size (solana was like 2bn vs terra 300m) or the architecture of the blockchains themselves (I notice way too many issues on cosmos based chains and I don’t think solana is cosmos). I guess when your this early in the game it’s something you need to factor in the design process.

Mid-term (5yrs) the majority of customers will be people like me who are utilizing it to supplement real financial operations (I.e small time payday loan operators, small retail stores that deal in used goods, self storage auctions, etc). Your not going to be getting enterprise customers for some time if ever to borrow on this platform so terms and conditions should cater for those small time players who simply don’t give an ass to auto manage or manage their LTV and just want to pull 25-50% interim to finance their operations. Those people cannot do it at 60% LTV max and like I said competition is brutal in this market. Those people will also leave the protocol like a dead horse if it doesn’t offer them what they want and someone else does.

utilization rate is the only thing that matters for the protocol and it’s falling like a rock. bringing in more collaterals won’t increase it without increasing LTV. Unless your telling me you got $20 Billion in bassets somewhere to put it in on day 1. Given that Beth is <500m and Luna itself is 5Bn I don’t think that’s the case without a major partnership (ie with Solana itself). If that is in the works I think it should be brought to our attention.

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Anchor has $5.5 Billion worth of UST on deposit and a vast amount is sat idle doing absolutely nothing. That stationary UST can be put to use in various yield generating activities.

Alongside new cross chain borrowing incentives plus additional new bAssets we can definitely see a significant improvement to the current situation.

There is so much more this protocol can do to sustain yields than tinkering with LTV’s. They haven’t even scratched the surface.

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The focus is always on borrowing, if implementation speed in doing this is fast then we should do it. This also means Terra/Anchor can’t stand on its own. Reliant on other chains.

Cross-chain borrowing is only a temporary solution. I feel as if it is a bad idea to rely only on borrowing and once that fails then think of another solution?

We should be thinking of a back up plan NOW. Not scrambling after cross chain borrow doesn’t work. As we all saw with bETH, that only bought some time and now we are in the same scenario.

It’s a reality that nobody seems to want to admit, Deposits will always exceed borrowing due to depositing being lower risk. It’s a fundamental truth that we must accept to make the right decision.

I have already stated it in the past in other threads. Gatekeep the yield with ANC holding/staking requirement. This too will only slow down the bleeding. Not sure if in some way ANC stakers/holders give back to the yield.

I am a little frustrated with the solution being so narrow minded in “just focus on borrowing” we have seen what happened with bETH. It’s a nice to have temporary solution. But must be combined with another solution.

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Yeah I agree, probably cross-chain will help a bit but it will probably not be enough.

Another big problem I see in terms of borrowing are ANC incentives (subsidies). They just don’t cut it as an incentive in fact they disincentivize borrowing. These incentives force people to pay an absurdly high borrowing rate (there is not a single protocol that charges 15% for borrowing) and anchor “promises” them it will pay most of those fees with its incentives. Then the borrowers are forced to hold on to a volatile token that could drastically drop in price and in consequence force them to pay a high borrowing APR.
and lets not forget that borrowers are the ones giving away their bLUNA staking rewards! So not only are we exposing them to an unnecessary volatility risk, but we are also taking their profits away from them! that’s absurd and an insult to borrowers!

Borrow APRs should drop to 4-6% and ANC incentives should aim to cover a 1% of that borrow rate.

There is so much focus on setting a stable APY for depositers but then we go and screw borrowers with a LOT of uncertanty and have them pay an unnecessarily high borrow APR and exposing them to high volatiliry and liquidation risks…

How the heck are people here expecting to actually incentivize borrowers?! with THIS?! And now you want to go cross chain which will further dilute borrowing incentives (subsidies) making borrowing drastically more expensive and still making borrowers resign to their staking fees…

MARS will leave anchor eating dust if this doesnt get solved ASAP

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Borrowing not so attractive when oracle aberrations risk liquidation, just sayin

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This is embarrassing. You should all have recieved a refund from the reserve.

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Alternatively, of course, we just take what we learned from the experience and channel it into due diligence on (hopefully, copefully) safer protocols.

Is there any point discussing changes to LTV ratios if they can’t be trusted anyway?

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What reserve would this be?

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No, of course not. I’m not proposing and increase in LTV, the protocol is not ready yet for such a thing.

I’m just pointing out that this protocol needs to lower deposit APYs to a sustainable 11% and decrease borrow APRs from 14% to a healthy 6% and subsidize that with ANC. That should help the protocol continue to grow safely while incentivizing borrowing.

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the yield reserve. It should be used for more than just keeping a deposit APY stable…

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Can you list out exactly what else it should be for, in what situations, how much, who funds it etc?

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If they keep going borrowing route, then they need a stable yield bearing asset. Current collateral is just too volatile like others stated.

Anchor loses its USP, if we drop the deposit rate. And no sense in dropping borrow rate when incentives last 3 more years. Once borrow incentives go away then yeah I suspect everything will drop to stay competitive.

Gated yield is the way, we should not be freely giving away this juicy 20%. Make people stake/hold ANC. Make those secondary protocols pay up.

In most businesses, more users more revenue. Anchor has this backwards. More users less revenue.

This barrier works because (no offense) most people seem to not be able to even afford the ANC governance proposal cost. Which is honestly nothing in my opinion.

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To pay back borrowers who were fucked by the oracle bug…

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