Why not let aUST be utilized as collateral?

Listening into the Anchor AMA today, there were two concerns that were brought up multiple times by listeners:

  1. How to boost borrowing on Anchor?
  2. How to address the fear of liquidation and thereby enable normies to borrow without fear on Anchor?

A simple and possibly dumb question to the experts here to address the two concerns: Why not let aUST be utilized as collateral on Anchor? This should address the fear of liquidation while opening up borrowing to all depositors on Anchor.

So create a loop? Deposit UST, get aUST—>deposit aUST, borrow UST—>deposit UST, get aUST—>….see what happened there?

This is what some other degenbox strategies are essentially doing, just replacing aUST with their own version of a stablecoin and depleting yield reserve.

I’m not referring to looping shenanigans. I’m asking on behalf of normies with real-life needs such as being able to borrow to buy a car and payback the loan over time while not having to worry about liquidations. All this while your deposits continue to earn a healthy yield which protects you as a safety net.

I’m far more interested in addressing real-life needs rather than any degen strategies. However, I understand the risks of what you bring up - would it be addressed by preventing looping?

IT wouldnt work, anchor is a traditional money market. the borrow rate would grow to above 20% to compensate for the looped behavior.

The degen behavior we see is from debt backed stables backing themselves with UST. UST has a 20% cap rate which causes mass flood into Anchor market. UST doesnt generate 20% yield however which is why we see a discrepency between borrow / deposits. It will remain that way until equilibrium is established regardless of what anyone does. UST will not depeg because of this, it solely affects Anchor protocol’s profitability and therefore long term sustainability.

Market making on UST in the form of arbitrage for luna-ust (whitewhale). And liquidity in market maker protocols for rune-ust (thorchain). Are currently able to support 20%+ APY sustainably but that will drop over time as UST adoption continues to grow and there is more liquid dollars in defi markets.

We have excellent proposals in the work for capital controls and evolving tokenomics. just hold tight and get ready to vote. Everyone knows the 20% won’t last forever but community is working hard on keeping it attractive and improving its longevity.

to be honest with you guys I think reserve currencys like ohm and susd, even frax and other terra stables are the route to go. Holding onto a ticking timbomb holding any form of $USD.

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because rehypothecation can be very dangerous.

Don’t banks and brokers do rehypothecation? As long as it is done in a responsible manner, it should be possible, no?

IIRC someone was working on developing a dApp within the Terra ecosystem based on the concept of self repaying loans. I can’t remember who it was but what you are describing was being worked up, just not through the route that you are thinking.

Edit: it was kinetic money.