Call to Reduce Yield Payouts to Save Anchor Protocol Roils Terra Community

A new proposal to limit yield payouts has divided the Anchor community.

By: Samuel Haig Loading...

Call to Reduce Yield Payouts to Save Anchor Protocol Roils Terra Community

The Terra community is again divided on the future of the network’s leading protocol, Anchor. And the question of how it can maintain high yield payouts is at the heart of the matter.

Anchor is a decentralized yield protocol allowing users to earn a fixed annual percentage yield of about 20% on deposits in Terra’s native stablecoin, UST. The protocol ran into trouble in early February when a governance proposal called on the Luna Foundation Guard to inject $450M into the Anchor Yield Reserve in order to maintain the high yields.

All-time Highs

The proposal’s author warned that without the funds, Anchor’s reserve would only be able to support its high yields for roughly two weeks, but predicted that protocol revenues and its forthcoming v2 iteration will render the Anchor self-sufficient from November. The Luna Foundation Guard obliged, and Terra’s LUNA token resumed rallying toward new all-time highs.

But questions regarding the sustainability of Anchor continue to linger.

Venture firm Polychain Capital and asset manager Arca argue yields paid out exceeding 100,000 UST should be reduced in a new governance proposal.

If passed by the Anchor community, the proposal would see deposits of up to 100,000 UST receive 19.56%, while deposits worth between 100,000 and 500,000 UST would be paid 17.5%; deposits valued greater than 500,000 UST would get 10%.

The schedule would be applied across deposits that are worth more than 100,000 UST. For example, in the case of a 1M UST deposit, a yield of 19.56% would be applied to the first 100,000 or 10% of the deposit, while 40% of the deposit would receive 17.5%, and the remainder would generate 10%. The proposal also suggests reducing the rates for medium and large deposits linearly over 19 months at 30-day increments.

Rejected Proposal

“It’s time to focus on protocol sustainability by bringing down the overall yield earned by depositors and maintaining high yields for small-and-medium-sized users,” the authors wrote.

However, three-quarters of the votes cast have rejected the proposal so far.

Twitter user “Westie Capital” urged their 11,200 followers to vote ‘no’ on the proposal. They predict that large whales will just “split up deposits in different wallets,” harming the composability of Anchor’s aUST token in the process. “Simply lowering the yield al[t]ogether, or having a dynamic interest, is a much better solution,” they argued.

Anchor’s TVL Surges to All Time High of $11.7B After Luna Foundation Refills Reserves
Anchor’s TVL Surges to All Time High of $11.7B After Luna Foundation Refills Reserves

Anchor’s TVL Surges to All Time High of $11.7B After Luna Foundation Refills Reserves

Anchor's TVL surged to $11.7B after its reserves were topped up.

The Defiant The Defiant

“Matt Canieri” warned that increasing the complexity of Anchor’s code may open up new attack vectors. He added that the proposal would impact the fungibility of aUST and make cross-chain applications for the token “much more difficult.”

Not everyone is opposed to the proposal. “Meta4monky expressed doubt that “whales will bother with the time/effort of creating new wallets for 2%,” asserting that “anyone who says otherwise is probably a suspected whale.” They added that the proposal would likely benefit Anchor “to some degree.”

“0xkrane” chimed in, stating “it’s silly to assume all market participants have the time to sybil this and don’t just want a plac[e] to park their money for some non-trivial yield.”

‘Applaud the Effort’

Others praised the proposal for seeking to increase the sustainability of the protocol, despite disagreeing with the methods suggested. “Applaud the effort to put a prop[osal] together with long-term in mind, but there are serious cons,” said “0xCha0x”. “There are always alternative routes to achieve the same goal,” they added.

Many commenters suggested reducing the APY to 15% for all deposits. “OptimistLib” floated reducing yields to 15% overall, but introducing higher yields for users that lock their funds over specified durations.

Terra’s LUNA has been among the few tokens to rally in spite of the recent bearish pressure in the markets, and the continued uncertainty regarding the sustainability of Anchor’s yields. LUNA’s price has doubled in less than three weeks to tag a new all-time high above $100 on March 11.

Anchor currently represents 49.3% of Terra’s $25.9B total value locked.