Anchor faces the music

The sunset of Anchor's 20% deposit rate

(Disclosure: I hold long positions in LUNA, ANC, and ASTRO)

The Terra / LUNA ecosystem has been crackling with energy lately. LUNA has outperformed ETH by a mind-boggling amount, and for once, its native tokens have gotten a taste of LUNA’s success. The most noteworthy to me, of a rapidly growing list, are:

• ASTRO: The Astroport launch took place at the end of 2021. Although the ASTRO token had a godawful debut, ASTRO has become the 4th-6th largest dex in the world by official rankings (they claimed that on at least some days, they’re the 2nd largest in the world) with healthy metric growth.

  • ASTRO also enjoys hegemonic market share on Terra, like CAKE on Binance Smart Chain; I own some ASTRO and think it should trade at at least double its current market cap/TVL multiple. (Its current market cap is $165m — $1.65bn fully diluted — but they haven’t yet implemented voting-escrowed rights or given anyone any reason to own the token.)

• PRISM: Prism launched recently (haven’t used, but I see “gm refractooors!” so many times on Twitter that I guess it must be doing well.)

• MARS: The Mars Protocol, which bills itself as the first decentralized credit protocol on Terra (altho I have no idea what that actually means until I use it) launches tomorrow. I want to play with it asap and see what leverage I can actually get.

• MIR: Mirror seems to have a golden chance to start trading stranded Russian assets (yes, I know, they normally need an oracle with data feed to price of underlier, but this is an interesting opp for category expansion, unless Terraform Labs doesn’t want the headline heat).

• Kado Money, a fiat-to-mostly-UST onramp

• Many others that I’m sure I’m forgetting.

• Lido (LDO), a multichain protocol that’s heavily associated with Terra, which has done well but could be a big loser over the coming months with some of the proposed Anchor changes (separate post / will not address here)

But the most important protocol to Terra by far, and the reason 99% of people come to Terra in the first place, is Anchor. If you aren’t familiar with it, Anchor offers an unbeatable 20% return on unleveraged stablecoin deposits. As the world has woken up to the scalability of this protocol, hot money has poured in from the outside world much faster than Anchor can find borrower demand. As a result, ANC now has $9B of UST deposits and only $2.5B of borrowings.

Furthermore, the large majority of those borrowings are against a separate pool of $4.8B in bonded crypto-assets. ANC makes good money off its bonded assets because the average borrower borrows (I think) around 40% against those assets. ANC stakes the bAssets for a staking+airdrop yield of around 7-9%, so ANC makes (7-9%)/.4= 22.5% return on those staked assets. (I think a high percentage of that is flipped back into UST deposits, in which case ANC makes a minimum of 22.5% - (.4)(20%) = 14.5% - (ANC borrower-incentive emissions on the 40%).

For the sake of argument, assuming a) the user sells his ANC borrower the moment he gets it and b) the borrower incentive is 20% (definitely not always true), that still means that ANC is making a minimum 6.5% “GAAP net interest margin” on its bAssets, by my very quick and very possibly wrong math.

But if we look at the UST side alone, ANC has $1.8bn of annual interest payments to make on its UST deposits alone ($5.5M/day), plus issuing ANC-denominated borrower incentives. The $500M LFG bailout to Anchor recently only bought Anchor 4-5 months to solve its liquidity issues.

Which has created a problem, as shown in this anon’s dashboard:

With its 20% deposit rates, Anchor was actually profitable on a cash flow basis throughout 4Q21 (red line > green line). Then Sestagalli’s Degenbox showed up, doubtless followed by other big boys in the market, and Anchor has had excess deposits ever since.

This dilemma has resulted into 2 competing restructuring proposals, from Retrograde and Polychain/Arca, to restructure the future of the protocol. I will leave it to others to cover all their differences here.

I want to write about a much simpler proposal, from Anchor’s superb & hard-working TFL overseer, bitn8, which has worked its way into both the competing activist proposals.

bitn8 proposed to touch Anchor’s third rail: its too-good-to-be-sustainable deposit rate, and slowly crawl it down over the next 6 months or so to a dynamic level at which Anchor would be breakeven or better, at least on the UST cashflow side.

At currently abysmal borrow levels, another anon’s dashboard (endorsed by @somethingelse in the Anchor Discord)

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suggests that Anchor’s breakeven deposit rate, at current abysmal borrow levels, would be around 8%.

However, Anchor plans to increase borrow utilization quite a bit. That would mean a higher breakeven rate, to a theoretical peak of around 14%. Anchor has stated in the past that they require a 60% borrow utilization rate

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(current: 30% and dropping) to be ‘profitable’ (I assume that means on a UST cashflow basis, ie without including the borrower subsidy of ANC emissions which aren’t LT sustainable). If Anchor gathered more bAssets, they’d be able to push the breakeven rate higher still.

Anyway, what does this mean for LUNA?

First, let’s look at UST demand (the main driver of LUNA’s price) over the last 3 months. I divided it into 4 phases.

Phase 1: Degenbox ramp-up; Astroport launch; “the Great LUNA Pump”

Phase 2: Phase 2: Sifu-gate; Degenbox loses 45% of its original $1.2B capacity; risk-off across all cryptos. (LUNA was perceived as the highest-risk, highest-reflexivity cryptocoin, with high vulnerability to a Soros attack)

Phase 3: UST Supply artificially inflated by Luna Foundation Guard LUNA burn to recapitalize Anchor’s Yield Reserve ($500M).

Phase 4: Very widely expected $1B LFG fundraise announced, which (I think) had no effect on UST supply; massive (I think) organic growth, in light of geopolitical events and growing understanding of UST/LUNA’s core advantages as the first fully decentralized, non-USDC/USDT-interacting stablecoin.

An ANC deposit rate is basically a big rate cut by the LUNA-UST central bank. It will probably permanently reduce UST demand. As least one active Twitter member of the Terra ecosystem posted recently,

Legomakers 🌖 @tlagomi

@helmutchrome @OlympusDAO Yea Anchor 20% yield is basically a marketing strategy for $UST. The goal is to continue building out other sources of demand, which we’re seeing now with new protocols sprouting up. Still early days

The UST marketing strategy has become too successful, and has been decided to be cut back. Personally, I hope very large UST wallet holders are cut back further; ANC doesn’t need their deposits and there’s a massive amount of parasitic carry-trading going on at this point. I’m very happy to see Do Kwon and the LUNA crew stand up for ANC tokenholders instead of making ANC the Welcome Doormat of the Terra ecosystem. This rate cut is expected and should be applauded, especially by long-suffering (until recently) ANC tokenholders.

Update: Reader Ronan McGovern asks a good question:

BTW, where is the bAsset yield coming from? Surely worthy of consideration in thinking about stability long term of rates?

The yield comes from Anchor staking the asset. Anchor’s LUNA has an ~8% staking yield on the LUNA network.

The remainder (bETH) has extremely low direct staking yield post the London Fork. Instead of paying stakers via seignorage, the network pays stakers via reverse seigniorage (buybacks), which I don’t think accrete to Anchor. I’m not clear on how their bETH economics work but the Grafana dashboard indicates that ANC makes a negligible staking yield (.4%) off their bETH.

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