When stocks and derivatives dump, people exit to T-bills or other Fed bonds
The reason? A risk-free interest bearing asset is understood to be uncorrelated with the rest of the market
What currently happens when crypto crashes? people exit for Tether (cash) for lack of a better choice as there exists no risk-free interest bearing asset in crypto!
Imagine if UST has a risk-free rate built into it. Not only will adverse market conditions see a rise in demand for UST (buffering Luna’s price), but will also pave the way for UST to surplant its centralised competitors.
Q: Isn’t Anchor already providing a savings product on UST?
A: The role of a risk-free asset is not for the size of its rate. It is there to be an asset which is uncorrelated with the rest of the market. In short, we are aiming to replicate something like the Fed’s T-bills in crypto.
The goal of this proposal is to make UST by far the most attractive stablecoin to buy during market downturns.
Q: Isn’t Anchor with its automated liquidation and deposit insurance sufficiently low risk?
A: There is plenty of risk management around mortgage-backed securities as well. The important distinction here is who is the counter-party if everything goes to s**t.
In the real world, institutions like T-bills because the Fed is the most credible counter-party. In the crypto space, we argue that only the protocol (and by extension the entire on-chain economy) can play the same role.
Q: Isn’t there still risk of de-pegging?
A: Yes, but we assume that should be neglibile (or else the whole of Terra will collaspe overnight). De-pegging is equivalent to the US dollar experiencing hyperinflation in the real world. On the otherhand, its fine for cascading liquidations, mortgage bubbles popping, etc to take place without breaking the entire system.
Q: How do you ensure validators still stake Luna?
A: “multi-staking” is designed such that validators are incentivised to have an equal percentage of delegated Luna and UST (e.g. 5% of each). If validators have an imbalance, they are penalised by receiving less block rewards.
Q: If this is built, will it displace Anchor?
A: In short no. The risk-free rate should always be the lowest rate in an economy. It exists to provide stability, and is complementary with all other assets / DeFi, etc. (The risk-free asset is actually foundational to hedged portfolios…)
Q: How is the rate determined?
A: Its market determined just like the APY on staked Luna. Block rewards are partly converted to UST (the exact proportion can be governance controlled), and is divided amongst all “staked” UST.
To smooth out the rate, the block rewards can be pooled over a period (e.g. 3 months). In this way, before the bubble pops, the pool will be nice and big, resulting in a high rate to attract people to buy UST when the bubble pops and everyone is dumping their crypto.
@fletcher_and_chan I’m going to take the opposing view mainly as a way to scrutinize the idea, not to slam the idea down.
TL:DR: You want to pay UST holders not to burn UST. This will only be beneficial if:
Staking reward lost due to the liability of $X UST staking < Spread fee earned from $X UST being burned – Luna price drop due to sell pressure from minted Luna.
Keeping UST deployed in large amounts on other chains offers few benefits.
I don’t know about #1 and I disagree with #2.
Instead of giving UST staker 2% of the staking reward ($311,397,395 USD of value) this money can be used towards LP pool incentives (like we are doing already). This is better because it keeps UST deployed actively on other chains ready to be used, paired with other assets, accessible to more people (not just Terra users). This is essentially what we are already doing see Liquidity Mining governance polls.
You are right that we will be in trouble if competing with USDC (ignore USDT) and they decide to take the cash collateral and put it into government bonds. They could even offer USDC holders some risk-free rate by passing through some of the bond yields. However, the difference is that Circle benefits from AUM, but Luna stakers benefit from expansion/contraction of UST demand. If $100b UST are minted today and nothing is ever minted/burned ever again, Luna staking will eventually not yield anything. Buying Luna is essentially a gamble that the demand for UST in the economy will continue to grow, the reverse of the gamble is if UST demand drops Luna will drop. So, will this increase the demand for UST? Or simply keep it from contracting? What benefits will this bring to Luna stakers? =>
When UST is burned stakers earn the spread fee for themselves and incur the cost of minted Luna adding to sell pressure. For this to work:
Staking reward lost due to $X UST liability < Spread fee of $X UST being burned – Luna price loss due to sell pressure from Luna mint.
Choosing the right risk-free rate:
For starters, it has to be higher than each given stablecoin’s country’s bond rate for it to be desirable. UST is more-risky than US bonds after all.
What will increasing/decreasing our risk-free rate do for Luna stakers? I can think of some pros:
The fed controls the interest rate of government debt (safe money) to pursue 1) stable prices, aka controlling inflation, and 2) high employment. AKA keeps ensuring the future value of dollars and keeps the dollar’s main economy (the USA) strong.
Increase rate: holders don’t burn UST, preventing Luna sell pressure.
Increase rate: Since user never gives away their UST, the barrier for this user to use UST in the future is lowered => increasing UST usage.
Decrease rate: this is what we have today, a rate of 0%.