With V2 of @anchor_protocol just around the corner, I think it’s only fair I spoke about V1. This 🧵 will cover:
- The protocols V1 products
- How the V1 system works
- $ANC and its value capture
- How loan liquidations work
- The protocols V1 products
- How the V1 system works
- $ANC and its value capture
- How loan liquidations work
Anchor protocol provides two main services. The first is its savings product where users can deposit $UST onto its platform to earn a 19.5-20.5% stable yield.
Anchor’s second product is a borrowing service, allowing users to borrow against collateralised yield-bearing assets.
Anchor’s second product is a borrowing service, allowing users to borrow against collateralised yield-bearing assets.
At this point, you’re probably thinking this is a Ponzi, but it’s not.
Let’s take a look at how it all works, starting with the borrow side. To borrow from Anchor, users must provide bonded assets (bAssets), these are essentially just staked proof-of-stake (PoS) assets.
Let’s take a look at how it all works, starting with the borrow side. To borrow from Anchor, users must provide bonded assets (bAssets), these are essentially just staked proof-of-stake (PoS) assets.
For example, when a user bonds their $LUNA and creates $bLUNA, behind the scenes, their $LUNA has been staked and is now earning transaction fees occurring on the terra network on a pro rata basis.
When this bAsset is later provided as collateral within Anchor protocol, Anchor will receive the staking rewards produced by the asset. The yield produced by the bAsset will be split partially between the $UST depositors, the yield reserve and anchor governance.
During times of surplus yield (yield produced by collateral > target deposit yield), 90% of the excess yield will be used to grow the yield reserve, and the remaining 10% will be used to buy $ANC tokens off the open market, which is then distributed to governance.
When there is a yield deficit (yield produced by collateral < target deposit yield), Anchor protocol will draw funds out of the yield reserve to subsidise the deposit rate back to its target rate of 19.5-20.5%.
Right now, we are in a yield deficit.
I've seen a lot of people stressed about the current subsidisation of the anchor rate (20%) through the use of the yield reserve, but this is what it was created for in the first place. Anchor is running exactly as planned.
I've seen a lot of people stressed about the current subsidisation of the anchor rate (20%) through the use of the yield reserve, but this is what it was created for in the first place. Anchor is running exactly as planned.
So, how does the $ANC token capture value from this?
The answer is protocol fees and governance fees.
The answer is protocol fees and governance fees.
Protocol fees include a proportion of the base yield produced by deposited bAssets (PoS asset staking rewards), part of the excess yield during times of surplus yield and part of the fees imposed on liquidations.
Governance fees are generated when Anchor governance proposals fail to meet quorum, this results in the $ANC token deposits being redistributed to $ANC stakers.
Now onto liquidations.
When borrowing from Anchor Protocol, users must maintain a Loan-To-Value (LTV) ratio lower than 60%. If the LTV of a user’s loan is above 60%, the loans collateral can be liquidated to repay the loan.
When borrowing from Anchor Protocol, users must maintain a Loan-To-Value (LTV) ratio lower than 60%. If the LTV of a user’s loan is above 60%, the loans collateral can be liquidated to repay the loan.
There are two types of liquidations:
- Full liquidations (current collateral value < $2000)
- Partial liquidations (current collateral value > $2000)
During a full liquidation, part of the loan collateral will be liquidated to pay off the entire borrowed amount.
- Full liquidations (current collateral value < $2000)
- Partial liquidations (current collateral value > $2000)
During a full liquidation, part of the loan collateral will be liquidated to pay off the entire borrowed amount.
During a partial liquidation on the other hand, part of the collateral deposited is liquidated to pay back 20% of the borrowed amount, bringing the LTV down to 48% (based on current parameters).
Loans are liquidated through the use of a liquidation queue. In a liquidation queue, liquidators can place bids at liquidation premiums ranging from 1% to 30%. Bids with the lowest liquidation premiums are exercised first.
This can be compared to the first come first served (FCFS) method used in most borrowing/lending protocols where in most cases, bots will liquidate all loans with LTV’s above 60%, resulting in a majority of liquidation profits going to users with capital and technical knowledge.
Hope this 🧵 was a helpful one :)
I'll have a 🧵 on @anchor_protocol V2 out soon!
I'll have a 🧵 on @anchor_protocol V2 out soon!
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