In recent weeks, there has been a lot of concern on Anchor’s yield reserve and some fear of the Terra ecosystem crashing if the reserve is fully depleted. “No more 20% APYs and a death spiral from unwinding UST.”
This paper aims to give readers an understanding of Anchor’s sustainability as a borrowing and lending protocol — with and without a yield reserve top-up.
The initial segment shows historical figures and growth rates for Anchor’s deposits, borrows and collateral values. This forms the basis of future projection rates — which when combined with other variables like staking yields and LTV — identifies the remaining runway for Anchor’s yield reserve.
An indication of how much top-up is required for the yield reserve is illustrated in a base, bull and bear case. An alternative scenario is illustrated in the event there is no yield reserve top-up. This forecast is over a duration of 52 weeks.
Any views expressed here should not be construed as a recommendation or financial advice.
[Data accurate as of 16 Jan 2022]
Growth rates of Deposits, Collateral and Borrows
Anchor has seen 44 weeks of historical data, where deposits grew by a compound weekly growth rate (CWGR) of 11.4%, while borrows and collateral grew by 9.6% and 9.3% respectively. See below for raw data, with yellow-highlighted rows at the top indicating average growth rates.
Deposits
As Anchor grows in TVL, it is not expected that they grow at the same rate as before. To illustrate my point, if current deposits total were to grow by 10% weekly for the next 52 weeks, Anchor would have $818b in deposits, more than the current market cap of Bitcoin ($740b at the time of writing).
As such, the approach to forecasting deposits growth rate will not be based on historical growth rates. It will be a function of Anchor’s deposits as a % of total UST market cap.
At Anchor’s launch, Anchor had $53m in deposits and UST’s market cap was $1.2b — giving a ratio of 4.5%. Currently, Anchor has $5.8b in deposits against UST’s market cap of $10.7b — ratio of 54%. The grey line in the chart plots Anchor deposits as a % of UST’s market cap over the course of Anchor’s lifecycle. It is more realistic that as UST scales towards mass adoption, the proportion that flows into Anchor follows accordingly.
Since 18 March 21, UST grew at a CWGR of 5.2% and Anchor’s deposits were on average 37% of UST’s market cap. However, this was weighed down by lower percentages in earlier months due to lack of awareness. The average ratio was 52.5% in the last 6 months (Aug 21 onwards) and we believe the forecasted figure will resemble that range.
In the base model, UST is expected to grow at 3.5% weekly and Anchor consumes 55% of UST market cap at any point in time.
Collateral
Collateral value had a historical CWGR of 9.3%, but a large part of that growth could have been due to the surge in LUNA’s and ETH’s prices. The more accurate approach to projecting collateral growth rates is to strip out the impact of the collateral’s price. The charts below (blue line) shows how much actual bLUNA and bETH were provided to Anchor as collateral.
bLUNA grew by 5.3% weekly while bETH grew by 4.4% weekly (based on CWGR). However, the growth of bLUNA has remained stagnant in recent months while bETH has shown gradual increases. With the rise of Terra dapps giving more use cases and differing yields for LUNA, it is expected that fewer users would want to sacrifice their LUNA as collateral for Anchor over time. Seeing the actual growth rates of number of bLUNA and bETH used as collateral gives us a clearer picture of forecast growth rates.
The base model assumes a growth rate of 4.5% and 3.5% for bLUNA and bETH respectively.
Borrows
The interest collected from total borrowings is another key cashflow item for Anchor. It is a function of LTV, utilisation ratio and a default interest multiplier. Observing the LTV taken by users over time would be meaningful to projecting the future LTV. The red dotted line below shows that on average, LTV ratio was 34% over a period of 10 months; or 34.5% if we exclude the anomalies in the May 2021 crash (shaded grey area).
The base model assumes an LTV of 34% and reduced interest multiplier at 0.2x.
Model input assumptions
The base case follows historical rates closely and assumptions were explained above.
The bull case assumes:
- Deposits take up a smaller % of UST’s mcap as the Terra ecosystem expands, but is able to pay out more through a higher deposit yield
- Staking yield of bLUNA increases from 8% to 9%
- The demand to use new bAssets as collateral grows dramatically and take up a larger % of current collateral value
- LTV increases slightly from 34% to 35%
The bear case assumes:
- Deposits increase significantly as UST grows, even while deposit yield drops to a stabilised rate of 17%
- Growth in bLUNA and bETH stagnates and reduces to 4% and 3% respectively
- The introduction of bAssets turns out to be underwhelming and takes up a smaller 3% of current collateral value
- Borrowers are less incentive to take out loans and average LTV reduces to 30%
Model output
Base
In the base case, the yield reserve is only sustainable until Week 6 (that is, ~20 Feb at the time of writing). Thereafter, a top-up of c.$481m is required to keep Anchor functioning.
At the base case projected rates for deposits, collateral and borrows, Anchor continues to deplete the yield reserve until Week 51 where cash inflows finally grow more than outflows. Self-sustainability may then be achieved, assuming the terminal growth rates hold.
Bull
The bull case requires a c.$120m yield reserve top-up at a slightly later date in Week 8, since the gap between revenues and payouts are smaller in earlier weeks. It continues to deplete until Week 33, as that is when revenues turn positive over payouts and Anchor hits an inflection point.
In later weeks, the optimistic scenario indicates cash inflows outpacing outflows so Anchor is able to provide yield on a self-sustainable basis.
Bear
In the bear case, a large yield reserve top-up of c.$1.04b is required to keep Anchor sustainable for the 52-week forecast period. In fact, there is no indication that Anchor eventually achieves self-sustainability since the steepness at which the yield reserve is depleting increases over time.
Since payouts continue to outpace revenues, Anchor has a growing cash burn rate and continues to market negative net cashflows. This may result in another top-up required at the end of the forecast period.
Alternative bear (no yield reserve top-up)
What happens if there is another scenario where there is no top-up of the yield reserve? No, the protocol is not going to crash and fail — in fact, Anchor will just pay out as much as it receives, and the deposit yield will be reduced from 20%.
Based on the same base case growth rates in collateral, borrows and deposits, Anchor’s yield reserve is fully depleted by week 6. Thereafter, the protocol is expected to pay out to depositors on a pro-rated structure based on how much cash inflows it receives.
From the table below, Anchor’s yield reserve would be depleted by late Feb 2022, so it is only able to pay out to depositors as much as they receive, i.e. $68m in revenues = $68m in payouts from Mar 2022 onwards. Likewise, $86m in Apr 2022 and 133m in May 2022. This repeats until Anchor’s revenues outpace payouts and is able to finally sustain the 19.3% APY again — projected to be from Jan 2023 onwards.
The average annual yield still works out to be 15.5% even without a yield reserve top-up, which still positions Anchor as the highest-paying lending protocol across all blockchains.
Conclusion
There is about 30–35 days left before the yield reserve is fully depleted (as at the time of writing). The model projects cashflows on a weekly basis while in reality, cashflows are transacted on a block-by-block basis.
Based on the model’s base case, a yield reserve top-up of $481m is required before Anchor is able to achieve self-sustainability after 51 weeks (assuming growth rates hold).
Anchor is only 10 months old and has managed to record >$10b in TVL. This ranks them as the second largest lending protocol on the blockchain, behind Aave which has been around for >4 years (previously known as ETHLend).
Topping up the yield reserve should be viewed akin to marketing expenses in bootstrapping a start-up. In fact, it might be the most effective way to scale UST to the masses. Nothing wrong with acknowledging that fact.
Between the time TFL topped up Anchor’s yield reserve with $70m to now, UST’s market cap grew from $1.9b (7 Jul 21) to $10.6b — a staggering 5.5x increase, flipping DAI’s market cap to be the largest decentralised stablecoin on the market, and the 4th largest stablecoin in crypto. In that same timespan, Terra’s native token LUNA grew from a market cap of $2.7b to $21.4b (a 7.9x increase, though this may be attributed to multiple other factors).
If TFL measured their KPIs based on mass adoption, a 70m “investment” certainly delivered healthy “returns” in a span of ~6 months. TFL’s goal is to scale UST and make it the de-facto stablecoin in crypto, and Anchor is the best tool to achieve that — low-volatile yields on stablecoins might be the easiest and most attractive way to onboard the next 100 million users onto crypto.
While the yield reserve top-up should not be viewed in a negative light, recall again that even if there were no top-ups, yields would hover in the 15% APY range — far above current market rates.
In the long run (beyond 1 year), it is imperative for Anchor to improve its capability to be self-sustainable. Other proposals and solutions addressing ANC tokenomics and utility will be covered in another paper.
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Appendix — monthly cash flows
Base
Bull
Bear
