- Core Contributors
- Terra Labs
- Flow Ventures
This proposal aims to deploy part (up to 10,000,000 $) of the idle stablecoin balance of the Merit Circle DAO treasury into Anchor Protocol, a Dapp on Terra blockchain. The treasury still has 53 Million USD sitting idle on the balance sheet. Anchor protocol offers an outlet to make USD stablecoins, in the form of UST, productive. Anchor Protocol currently offers a 19,5% yield fixed rate on deposits, while maintaining a lot of withdrawing and depositing flexibility. Deploying will diversify the stablecoin balance of the DAO and will increase the yield that the treasury assets will generate.
The Merit Circle DAO treasury still has 53 Million USD sitting idle on the balance sheet. It will take a while to deploy these funds into good projects. On the other hand, Decentralized Finance is offering good venues to make the cash productive in the meantime.
The Anchor Protocol on the Terra blockchain is a low risk savings product designed to offer attractive yields on UST deposits. Anchor provides a fixed 19.5% yield by redirecting yield of stake-able collateral assets (like bLuna and bETH) along with borrower interest rates from its money market to Anchor Earn depositors. Anchor is one of the 5 largest DeFi application by TVL at 12.55B, with just over 7.75B of that in deposits earning 19.5% yield and the other 4.8B used as collateral in the lending market.
Anchor utilizes a Yield Reserve to maintain its fixed yield rate. When yield from deposited collateral is greater than yield owed to depositors the Yield Reserve grows and vice versa, you see historical data of the yield reserve here: Mirror Tracker.
At the time of writing this article more than 53.7M bLuna ($4.2B) and 273k bETH ($767m) have been deposited as collateral in anchor. Anchor has plans to release additional collateral types such as bSOL shortly which will help remove idiosyncratic risk of any one particular collateral type affecting the protocol and allowing for new sources of yield for the protocol.
Additional information on Anchor can be found here: https://www.anchorprotocol.com/.
The proposal is for Merit Circle to deposit up to $10,000,000 of its treasury into Anchor. This will be done by swapping USDC into Wormhole UST on Curve.fi, bridging the UST to Terra through the decentralized Wormhole Bridge, and depositing the funds into Anchor.
When the yield changes (reward), the risk changes, the investment committee reserves the right to withdraw the position back into a native ERC-20 USDC position on the Merit Circle Treasury. The reward profile and the risk profile will be reviewed at least once every 30 days.
In addition, this proposal aims to increase the stablecoin farm limit from 20% to 35% of the total treasury value.
Without an increase of this threshold, putting 10M $ in Anchor would put the total amount of USD over the 20% limit of positions of stablecoins agreed on through MIP-2,. By increasing the stablecoin limit within mandate to 35% of the treasury value, there will be some room for additional stablecoin deployments. This is advantageous in a phase where the treasury still largely consists of stablecoins and still sits on a lot of idle cash. The desired threshold can always be overwritten with a new proposal, for example when the pipeline of partner project investments takes up a large relative share of treasury positions.
To summarize, putting $10,000,000 into Anchor Protocol will generate 19.5% yield on our deposit. This would generate 1,950,000$ additional revenue to the DAO on an annual basis.
The main purpose of utilizing a portion of stablecoins held by the Merit Circle’s treasury to provide liquidity on Maple Finance is to generate an additional yield on now-idle assets. By increasing the total portion of yielding stablecoins, the total DAO revenue will be further increased. This will enhance the profitablity and the capital efficiency of the treasury, the value of which will ultimately find its way back to the members of the DAO. By increasing the portion
Smart Contract Risk
DeFi protocol comes with an inherent risk of smart contract vulnerabilities and bugs. Anchor has had code Audits by Cryptonics and Solidified and additionally has a $1m bug bounty available through Immunefi. Audit reports and additional details: Security - Anchor Protocol
UST Depeg Risk
UST is the largest decentralized stablecoin at just over a $9B market capitalization. Recently, it has seen tremendous growth given that it’s market cap was under $3B less than 3 months ago. UST relies on creating natural arbitrage opportunities to allow the peg to be maintained via the minting and burning of LUNA, quite different from other stablecoins like USDC and USDT which are backed by centralized deposits. In addition Luna has recently set up a 1 billion dollar BTC fund, to safeguard against de-pegging risks in periods of extreme market conditions.
Although unlikely, the Anchor Yield Reserve could run dry if deposit demand greatly outpaces borrower demand in the future. If this were to happen deposits would cease to earn yield.
Smart Contract and UST depeg insurance can be purchased through Unslashed, Nexus Mutual, InsurAce, Bridge Mutual, and soon Risk Harbors Ozone protocol.
Shouldn’t we take out insurance against smart protocol risk and against depegging risk?
We’ve looked into insurance. The ceilings are very limited and the policy details are also quite restrictive. It usually has to be under a certain TWAP, often well under 0,90$, for a prolonged period of time. This would protect against complete collapse, but that scenario is not very likely. A scenario where it depegs for a while during a collapse of markets and with it a collapse of yields is quite likely, but in the long term, market incentives should drive it back to the peg. As long as there is a Terra ecosystem. Even if $LUNA trades sub 1$<, there will always be an arb incentive. UST is not backed by $LUNA, it is backed by incentives and Terra infrastructure. The costs of insurance are also material, taking out insurance will lower both the risk side as well as substantially lower the reward side of the equation. The trade-off is not necessarily worth it. We deem the risks of a prolonged off-peg situation very low. The arb mechanism is sound and has functioned well thoughts USTs relatively short, but rocky hisorty. The risk has been lowered further with the new insurance fund has been launched, which is effectively an insurance acquired by the protocol on behalf of UST users… Even if the trade-offs were worth it, there is simply not enough insurance on offer for a 10M position atm. An alternative is to insure part of the deposit.
In terms of smart protocol risk it definitely doesn’t seem worth the insurance. This is even more unlikely in our estimation and the price of insurance is even higher.
What if we need the dollars for new investments, how easily do we get it out of Anchor?
Anchor lets you deposit and withdraw freely at any time and without any penalty. There is no lock-up. Most of the risks are on the borrowing side, where liquidations will be triggered in the event that collateral rapidly loses value. Depositors are protected by these liquidations.
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