Bolstering Anchor's Sustainability

Anchor’s Yield Reserve


TFL will be capitalizing Anchor’s yield reserve with 50 million SDT (~70 million UST) from its Stability Reserve Fund.

As a lynchpin of the Terra ecosystem, capturing ~22% of UST’s outstanding supply, this enables sufficient time for the introduction of more collateral types and self-sustainable protocols improvements coming in the next couple of weeks and in V2. Extending support to Anchor and the Terra community is the prerogative of TFL and is in the long-term interest of the overall Terra ecosystem.

Assuming a 35% utilization (current) with a 35% average loan LTV, the reserve boost will enable Anchor to support a 20% APY of $500 million worth of deposits for an additional period of around 1.5 years.

The deployment is a one-off solution that will prevent the need for future intervention, allocating a significant runway for the protocol to introduce self-sustainable mechanics even during periods of low borrowing demand. Note that this replenishment is funded by TFL and causes no burden on the LUNA community fund. UST will be acquired via on-chain swaps, thus incurring no downward pressure on LUNA.

Replenishment of the yield reserve will occur in ~1 week.

Planned Upgrades to Anchor

1. Introduction of bETH as collateral

bETH is currently on the testnet, and is almost ready for deployment, unlocking a significant chunk of cross-chain borrowing demand on Anchor via ETH 2.0’s staking derivative from Lido Finance.

bETH will be deployed on the Anchor mainnet later this month.

2. Yield farming bAsset vaults

Smart contracts that pool bAssets and generate UST borrows (with auto-repay) will be created, augmenting borrower confidence and increasing borrowing demand.

3. New liquidation mechanism (liquidation queue)

A novel bid-queue-based liquidation mechanism that incentivizes liquidators to bid for liquidations at competitive premiums. This should drastically lower liquidation premiums, reducing the damage to borrowers in events of liquidations.

4. Increase bLUNA max LTV to 60%

Increasing the max LTV parameter to 60% will allow users to further decrease the likelihood of liquidations while stimulating additional borrowing demand.

5. Other new collaterals

Following bETH, other PoS staking derivatives including bATOM, bSOL, and bDOT will be added as collateral to Anchor. The combined market value of those chains sits at roughly $300B. Capturing ~5% of the value will allow Anchor to potentially support around $10B in deposits without relying on reserves.

Other yield-bearing assets as collateral are also being explored.

6. Algorithmic adjustment of long-term Anchor rates

The current Anchor rate is a governance-set parameter, unable to properly reflect current market/protocol conditions. An algorithmically set rate will improve this, where yield is determined via on-chain economic values (e.g. total deposits, yield reserve size, collected bAsset rewards, and borrow interest).

The Anchor rate will be a fixed APY, updating every long-term period (e.g., 6-months), similar to what existing commercial banks offer, ossifying the protocol’s sustainability without explicitly relying on governance proposals to change the Anchor rate amid dynamic market phases.

7. Diversification of yield sources

A large portion of UST in Anchor remains underutilized. At 35% utilization, 65% of capital remains idle and not used in yield generation.

Instead, Anchor will deploy underutilized capital to yield-generating capital markets such as money markets (Mars Protocol), derivative markets, low IL pools, delta-neutral strategies on Mirror, and various other avenues for additional yield collection.



Look out for the official launch of bETH later this month and more details about the upgrades to Anchor above to follow.

Onwards.

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Is there any particular time frame that you think it is appropriate for the the liquidation queue? Because too long time slot will increase the risk of the loan being defaulted (as the collateral’s price may drop even further than the LTV limited during the time) and too short time will decrease the efficiency of the bidding process; thus I thought selecting the appropriate time would be the most difficult decision process to introduce competitive bidding for liquidation

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Although it is an unfortunately needed solution, I disagree with the implementation. Yes, TFL takes all the risk, but the funds should be deposited in tranches based on milestones rather than all at once. Ideally, TFL should not be the peg holding the entire Terra chain together every time there’s risk involved, throwing money at users isn’t sustainable.

With the current wider crypto market, guaranteeing 20% yield with such a large reserve is an open invitation for too much USD to be deposited into Anchor. Meanwhile, the issue that the yield is unsustainable is not yet resolved.

It’s good that we’re getting a timeline of upgrades to Anchor and (finally) a timespan for bETH support. Each of those may or may not help achieve a sustainable peg again, but the key issue is that there’s no timeline, even just a rough gauge, of when those might be implemented. I’m probably not alone in thinking from launch that there would be support for 3 or more collateral types by now, and that development would be a lot quicker.

Promising such a large sum upfront is like Ethereum developers constantly pushing back the difficulty bomb - there’s no sense of urgency to solve the issue.

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The mechanism is quite different. Bids are piled up first, and then liquidations occur afterwards. So basically the auction goes on 24/7

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I appreciate the hard work TFL has put in. The Anchor team’s plans to increase the borrow rate are excellent! (2-4) are truly innovative ideas. And 7) will go above and beyond what I thought imaginable with Anchor!

But I think replenishing the yield reserve is a mistake. If the upcoming changes will truly make the 20% yield sustainable then it is better to wait and let the fixes speak for themselves. If you are worried about people removing funds before the changes take place, the most important change would be (6) change the rate algorithm. At the very least add fewer funds and implement (6) immediately:
Anchor should pay 20% when it is cashflow positive and then fall back to a lower rate when the yield reserve is being tapped. I know TFL wants Anchor to have stable APY, but I think “returns of X% if times are good and Y% otherwise” would not be too complicated for most people to understand. This will extend the yield reserves lifetime.

In a bull market Anchor will be delivering 20% APY to depositors. But on a Bear market when all other platform yields fall to 1% (AAVE, Compound, and CeFi) Anchor will be delivering, say, 10% APY until the next Bull market. Now that is a customer driver if I have ever seen one.

I agree with @holdhorses that the Deposit Rate is the real culprit to Anchor running as a cashflow-positive company. Let’s implement (6) or at least something like my X else Y APY idea in order to: 1) extend yield reserve for extended times while 2) still being more attractive than competitors (12%?).

EDIT: I will also add another important idea to increase borrowing. Right now Anchor targets a 30% borrow rate at 66% utilization, and this does not include the staking rewards borrowers forgo to borrow. So the true borrow rate on Anchor is like 40%! Anyone with bETH is better off selling their staked bETH for normal ETH and borrowing on AAVE at 0.85%. Again this is another issue that can be solved by lowering the Deposit rate and adjusting the interestMultiplier. (for the record: borrowRate=utilizationRatio⋅interestMultiplier+baseRate). credit to: @e-gons , what do you think @e-gons?

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Hi Pedro,
You need to understand that Anchor has its own paradigm.
The whole reason Anchor even has its name, is due to the APY being anchored.
The yield reserve was created for this sole purpose.

The idea of Anchor is to be a building block for many other dapps like Kash, Alice, etc. and even for neo-banks like Revolut. This means Anchor will provide stable earnings to non-crypto users, and I’m pretty sure non-investor users as well.

The whole concept of Terra is to bring DeFi capabilities and advantages to the masses, aka the “common mortal” with minimal hassle or understanding needed.

You can’t convince people to “dump their savings” into something if it can’t provide a stable APR/APY.
Yes, 20% is orders of magnitude higher than what banks provide, and even other crypto services like Compound, Aave, etc., but Anchor is aligned to become the “savings standards” for the whole world. This is the vision.

If you want higher numbers, there’s opportunities for that as well (specially during bull markets), but most people don’t want to “play around” with their savings. It’s that simple.

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You can’t convince people to “dump their savings” into something if it can’t provide a stable APR/APY.

I disagree. Millions of people sign a 30-year mortgage with a variable APR, they will be fine singing up to a savings account that gives between 12% and 20% depending on market conditions. easy enough to sell/explain.

but most people don’t want to “play around” with their savings. It’s that simple.

And why would people “play around” with their savings by putting it into an app that is not sustainable and requires bailing out?

I think your main argument is you want the rate to be as stable as possible. In that case, you would support just lowering the rate(target)? That would solve the issue too. I prefer 20% when possible and I am OK with lower when not possible. but something like 15% year round might be more to your liking.

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I agree with Pedro. A range of rates between 10-20% depending on market conditions would be more than realistic and perfectly acceptable for the ‘masses’ while being stable.

There are various companies within the existing financial system providing fixed rates for a period while being reviewed on a regular basis for sustainability. The one in the link below is an example, having a separate ‘Provision Fund’ to smooth out as possible those returns, while not guaranteeing that the rate will be eternally fixed.

I wholeheartedly disagree with that bailout premise, and the rate should not be “bailed out” to try and make an arbitrary interest rate sustainable; if anything, it only makes the system more fragile.

Yes deposit rates would have to somewhat adjust with market conditions too – this is planned for implementation.

On a sidenote, this replenishment not only buys the protocol the time required for a v2, but also acts to significantly boost Terra’s adoption. Terra would get a huge amount of new users and capital from other chains/protocols just by continuing to offer a much higher yield than the rates offered there.

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If Anchor really fixed, why the 18% when few months was 20%? So that argument is gone…
The idea of Anchor being a building block for other dapps is great, but if it’s only dapps that deposit and don’t bring any borrowing, the deposits will grow much faster and the gap will widen even more.

The idea of having this rate and deposits for non crypto users is great in paper, but in the long run those users will outgrow the crypto borrowing side which will drain reserves again.

I don’t see the team doing any long term fix, Anchor will be gone in a year if this goes as planned.

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Anybody can explain what TFL means?

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Terraform Labs, I would guess.

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Pylon will use Anchor, Angel Protocol will use Anchor, Mars might use Anchor, Yotta uses Anchor…from this perspective bolstering Anchor for the time being allows more than just Anchor protocol to survive but also all the protocols that depend on it. So I agree with @Chinoman10 now with this perspective in mind, the 70M is not for Anchor but for the entire ecosystem that depends on it.

I like the idea of a more dynamic rate, I do not think this will deter non-crypto users from using Anchor at all. @Chinoman10 T When trying to get my family/friends on Anchor, the main thing that stops them is when I mention Anchor is not cashflow positive right now. they worry that they will go through all the trouble of onboarding money only to have to withdraw it if yields become too low after yields drop AND I see fear in their eyes even as I try to explain that their money is safe after the reserves run out. A lower yield when times are slow and a higher yield for cashflow positive is easy for them to understand and appreciate.

Since Anchor is so important it is imperative we make the yield self-sustaining and the borrowing rate cheaper for V2.

@ryanology045 out of curiosity, right now the target borrowRate for 66% utilization is at 30%. Have you played around with different borrowRate curves, maybe less aggressively growing ones? How small can we make interestMultiplier while still mantaining the 20% APY (this is a change we can do easily)? Can we change the borrowRate equation from linear to a convex that keeps borrowRate low until we reach very high utilization? (someting like this y=x^2*0.41979 .02 from x=0 to 1 - Wolfram|Alpha)

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:clap::clap::clap::clap: This is amazing! Thank you for the upload and sustainability efforts. So excited to share this with friends.

Can you explain Yield Farming bAsset Vaults a bit more.
“Smart Contracts that pool bAssets and generate UST borrows (with auto-repay)”

  • do you mean when you borrow against your bAssets e.g. bLuna, the borrowed amount will be automatically repaid over time? Sort of like Alchemix Protocol?

If so, where will the bAssets be deployed? is that linked to update #7?

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"Diversification of yield sources

A large portion of UST in Anchor remains underutilized. At 35% utilization, 65% of capital remains idle and not used in yield generation.

Instead, Anchor will deploy underutilized capital to yield-generating capital markets such as money markets (Mars Protocol), derivative markets, low IL pools, delta-neutral strategies on Mirror, and various other avenues for additional yield collection."

What does it mean exactly ?

This may greatly increase the risk of losses, hacks etc for Ust deposits, right?

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@ryanology045, congrats on the much-needed financing! A tremendous step forward for Anchor.

Regarding the turnaround plan, I am curious to know how you plan to fix the borrowing demand deficit. The reiteration of your previous announcements around expanded collateral and improved liquidation mechanisms will undoubtedly help the issue, but will it be enough? Even with current ANC emissions at the maximum rate, the borrowing rate is not very attractive.

Are you confident that these measures will restore the Anchor system to cash flow positive? For example, will the new rate model target cash flow neutral/positive, or will it optimize for a target level of reserves? Given that most yield farming is dominated by stables (as we know too well, volatile assets don’t make for great collateral), how much demand do you expect for the bAsset Vaults? How much permanent capital loss risk Anchor plan on taking with customer deposits? Will this all be done on Terra or will it require wormholes to other blockchains? What is the policy for smart contract audits for protocols where you invest depositor money? Will the protocol use leverage to earn a yield on customer deposits? How will this all work?

Lastly, could you also please clarify this comment you made in the Anchor forums. What do you mean by “research on protocol consolidation?”

+1 here. Research on protocol consolidation should take place.

As mentioned, ANC only accrues sufficient value during the “good times” where excess yield is plenty. Ideally, its value should proportionally increase with the total deposit size

While I am pleased to see Anchor more properly capitalized for its current balance sheet, there continues to be too much uncertainty around its core customer value proposition and the long-term economic model. Some guidance on these topics and generally how you plan to operate the system would be greatly appreciated.

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I did have similar thoughts of experimenting with different borrow rate curves. Definitely a topic worth more research. For Anchor’s borrow rate curve, a kinked curve equation like the ones used by Compound might be quite fitting - steady, linear increase until 66% utilization and increasing sharply afterwards.

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Not necessarily. Imo Anchor should be differentiating itself from other yield aggregator protocol by only deploying capital (deposits) to solid, fundamental financial primitives. Yield sources should be as fundamental as e.g. PoS staking rewards.

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Could you reply to e-gons post?
They are very valid questions…

They won’t. Because in the end all the whole concept of Anchor is based on the hope that “ultimately” the protocol has an extremely high number of bAssets … And that nobody knows in advance … So in good faith they give the protocol a chance by giving it a year of respite, hoping that by then there will be a significant flow of bAssets that will be included in the protocol … What I’m also afraid is that in order to leverage their aUST, they go through external platforms without clearly saying which and / or auditing its platforms …It does not prevent me from believing in the protocol but clearly there are dozens of UST deposit projects but very very few loans … We’ll see! I wish them success!

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