Anchor Targets veTokenomics as Luna Foundation Adds $450M to DeFi Protocol’s Reserves

Anchor Targets veTokenomics as Luna Foundation Adds $450M to DeFi Protocol's Reserves


The Luna Foundation Guard (LFG) has topped up the Anchor yield reserve with $450 million, according to Do Kwon, CEO and founder of Terraform Labs, the South Korean entity behind the DeFi lending and borrowing protocol.

Following the announcement, a new proposal was made on Feb. 18 to change the economic model of Anchor to include vote escrowed (ve) tokenomics, ostensibly as part of a suite of interventions to tackle the problem of depleting reserves.

Do Kwon said LFG – founded in January to help stabilize Terra’s UST stablecoin – approved a plan to recapitalize the Anchor yield reserve earlier this month using part of the $2.8 billion it got from Terraform Labs as a donation.

The cash injection means that the protocol could maintain its high deposit rates of between 19%-20% for the next year. Around $503 million now sits in the Anchor yield reserve following the top-up.

Anchor Protocol’s ANC token soared more than 15% to $2.58 after the cash boost, with a 24-hour volume of $84.09 million at the time of writing, according to CoinGecko data. Over the past 52 weeks, ANC touched a high of $7.11 and a low of $1.33.

Anchor’s reserves decline

Anchor is at the heart of the Terra (LUNA) economy, with $10.07 billion in total value locked. However, the protocol’s yield reserve, a form of a savings account, has dropped sharply since December due to a lack of borrowing appetite, threatening to shutter the Terra ecosystem.

The DeFi lender pays about 20% interest on deposits of UST, the U.S. dollar-pegged stablecoin native to Terra. Known as “anchor rate”, the rate is fixed, and significantly higher compared to rates of between 0% to 8.5% currently offered by industry competitors.

Anchor is able to pay this high rate from interest charged on loans, liquidation fees, and yield earned from borrowers’ collateral. But with the crypto market downturn, borrowers have been in short supply, forcing the protocol to dip into its reserves in order to sustain its “anchor rate,” built to become an industry benchmark.

Vote escrowed tokenomics come to Anchor

The Luna Foundation Guard’s cash injection was never meant as a long-term solution to the issue of declining reserves at Anchor, just a temporary fix until a more sustainable economic model is developed.

So far, the plan revolves around the introduction of a model that incentivizes borrowing while diversifying collateral to include new staking assets. Anchor will be adding more assets from other blockchains such as Avalanche, Solana and Atom.

These changes are expected to boost income and staking rewards, as well as dilute LUNA’s dominance in Anchor collateral to below 40%, allowing the protocol to become “sustainable.” It is a process that takes time, officials say. The long-term “goal is to ensure Anchor achieves mass adoption” while remaining “decentralized and self-sustainable.”

Now Retrograde Money, a Terra community participant, proposed last Friday to pay higher rewards and grant more voting power to borrowers who, instead of staking, lock their tokens in Anchor for the long-term, up to four years. The plan leverages a concept in decentralized finance (DeFi) known as vote escrow (ve), pioneered by Curve Finance.

By incentivizing borrowers, Retrograde hopes to maintain the balance between deposits and loans, and prevent a situation that compels Anchor to dip into its yield reserve to the extent that it risks depletion. Under Retrograde’s proposal, the ve tokens cannot be transferred, though this may happen at a later stage, when they can be converted into a non-fungible token (NFT).

The proposal states:

“veANC holders will support the protocol over a longer term horizon rather than speculate on price fluctuations in the short term. Those with strong conviction are rewarded the most over time. Vote escrowed ANC creates a flywheel effect where emissions drive higher TVL, in turn generates more fees, and leads to greater value accrual to the ANC token. This better aligns incentives between ANC holders and the core stakeholders for the Anchor protocol.”

The plan has so far drawn mixed reactions from the Terra community, with DeFi investor David Koh suggesting the vote escrow token model might not work for Anchor because “it is not directly applicable” to the protocol. The proposal will be put to a vote.

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