MIP-11: Deploy idle stablecoin balance into Anchor Protocol

Authors

  • Core Contributors
  • Terra Labs
  • Flow Ventures

Summary

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.

Abstract

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.

Anchor Protocol

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/.

Proposal

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.

Motivation

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

Risks

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.

Protocol Risks
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.

Rationale

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.

Copyright and related rights waived via Creative Commons CC0 2

11 Likes

Firsty, It’s a huge deal that Terra labs and Flow ventures are creating a proposal for Merit Circle DAO.
It greatly solidifies the image of MC DAO.

Secondly, This is a straight YES! for me.
I love Terra and I love MC.

One question: Why not 20mil? Since its 100% liquid.

Thanks.

2 Likes

Love the idea. its a yes from me. this will make use of idle assets instead of sitting and waiting for something to popup (while maintaining the flexibility to jump into an opportunity at any time)

1 Like

Great proposal, thats a yes from me. Generating passive income on a sizeable amount like 10m USD is a no-brainer given the inflationary climate we’re headed into.

1 Like

Greetings @DAOCoreContributors ,

This is Admiral Erik von Pumpson of the MC Enterprise. We hope you’re well, as we are not. Our ‘great’ mechanics have been trying to fix our space-gel machines for nearly a week now, to no avail. Without proper nutrition, we’ll likely starve to death on this terrible moon.

We are a little conflicted. We are not a fan of LUNA nor UST, due to regulatory concerns in the future, and the depeg risks that seem to come up frequently - but, the same could be said for being a USDC or USDT maximalist so we accept this risk.

We’ll let the others decide on whether or not 10m is sufficient or too much, but our fleet will vote “yes”.

Signed,

Erik von Pumpson
Admiral of the MC Enterprise
Ascending Galactic Federation

3 Likes

This proposal can be directly yes. I support it. It allows the Treasury’s assets to be used flexibly to enhance their value

1 Like

Hello friends,

Thank you for the fantastic proposal, it is very promising to see such entities getting involved in the governance forum.

I have been digging into UST on Anchor for quite some time and also had concerns about de-pegging due to reserves. This did become evident throughout the TIME/MIM fiasco. Due to the recent influx of capital to their reserves, much of the concerns have subsided for now.

I do feel this has largely been resolved and I currently farm yield on there. The system is smooth and effortless.

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.

Forgive me if I am wrong but the rewards generated are in fact compounded which would give roughly $12,152,477 if the current rate of 19.5% stays the same (over 365 days with daily compounding).

Given the DAO is already generating a yield on Maple Finance, through Maven11’s USDC pool, it would make sense to split some risk and proceed with Anchor exposure. The DAO should have the right to remove our UST at ease if there are ever future concerns due to reserves. Maple has a 90-day lockup versus no lockup on Anchor, so the risk/reward ratio is in our favour, in my opinion.

I think the amount is a reasonable figure and I would be in favour of such a number. I would vote YES if this proposal continues to vote.

Best regards,

AS

2 Likes

Meow,

Thank you to Terra Labs, DAO Core Contributors and Flow Ventures for this proposal.

We agree that further deploying our stable-coin reserves will be beneficial for the treasury, and that a consistent 19.5% annual yield is attractive for stable-coin deposits. While we do have some concerns about the long term stability of UST, overall we believe the risk to be low enough that it is still worth depositing a portion of our stable-coin reserves.

The depeg that occurred on May 23rd 2021 was resolved quickly, and with minimal harm to Anchor, UST and LUNA. With that being said, a depeg did still occur, and so further depegs are still a real possibility. The marketcaps of UST and LUNA were both far lower in May 2021 than they are now and it is unclear how a depegging scenario would play out now that the marketcaps of both assets are much greater.

We agree with the authors that should another depeg occur, it will likely be temporary and market incentives should re-arbitrage the UST peg back to $1.

Overall, we believe the 19.5% annual yield to be worth the risks as explained by the authors, and will be voting ‘Yes’ to this proposal.

Signed with left paw,
Baron Notouchy

5 Likes

I understand the polarization of LUNA and UST. As someone actively participating in the Terra ecosystem for quite a while, I’ve paid attention to just how resilient UST has been and seen it continue to improve upon its’ resiliency.
I think this risk:reward here is suitable for a 10M position, and I intend to support this proposal.
We’ve seen market wide crashed e.g. March 2020 when Covid-19 first came about, UST lost its peg briefly, but proved it’s viability by regaining it’s $1 price through the arbitrage system its designed around. Since then various improvements have been made to further strengthen its’ ability to do this efficiently. Dapps exist to buy liquidations ensuring liquidity, dapps exist to make arbitrage available to anyone, making the system more robust.
In short, I recognize the potential pitfalls but think sufficient stress testing has occurred by now proving that UST is a viable stablecoin, and Anchor a viable dApp and source of yield.

I would just like to add that naturally different insurance products may become available at a later stage that the DAO may deem sufficient, so we should consider that down the road insurance may be a good option, and remain open to it.

Yes.
-Joey

4 Likes

Glad that this proposal has been suggested to put more of the USDC funds to use and generate additional income for the DAO. I think £10million is a good amount and happy to vote yes on this proposal.

This is a well written proposal and seems very sound and balanced to me. The cost of circa 50mil in usd sitting idle with even “just” 5% inflation is 2,5mil$/year. This proposal offsets that, great downside protection. Yes for me!

I am supportive. Would vote yes. Appreciate the history and commentary on risks posted in the other comments.

Team and Terra Labs,

Thank you for this proposal. I am all for utilising undeployed stables for yield purposes. Thus, I second most of the responses shared already and that the risk/reward makes sense in this respect (would in practice give the DAO a few “free” gamefi investments over a year).

I would however like that you also address the possible risks relating to the actual swapping of USDC to UST through Wormhole (and back in the future), in light of fairly recent discovered vulnerabilities in the Wormhole bridge (risks which generally apply to cross-chain bridges). I think this deserves some mentioning in the “Risks” section of the proposal. I assume that you have considered the pros/cons and alternatives in this respect of course.

1 Like

Forgive me if I am wrong but the rewards generated are in fact compounded which would give roughly $12,152,477 if the current rate of 19.5% stays the same (over 365 days with daily compounding).

The displayed figure is based on a 19,5% APY and hence factors in compounding.

1 Like

Great point. The bridge risk exposure is very small, as the Wormhole UST is directly transferred to native UST. There is no ongoing Wormhole UST exposure.

There is of course always a risk in bridging itself.

There have not been any exploits on the Terra side of the wormhole bridge to date. Structurally it is a safer and better design than many of the centralized bridges that rely on multi-sigs.

Lastly, even with the exploit on the Solana side of the wormhole bridge, we saw the damage was backstopped by large ecosystem players with vested interests. This is speculation, but there is a significant chance the same would happen with Terra in a worst-case scenario.

For more information on the wormhole V2 bridge and the security nuances I would point to this article:

3 Likes

Given the overwhelmingly positive response to this proposal, and the two days that have passed for discussion, we have moved this proposal to voting.

https://vote.meritcircle.io/#/proposal/0x20f45fab6813322dfe420c3a8c9a033a5379b720815b9d617fe3768eec5ba4ec

1 Like

Want to thank the Team and Terra Labs for another awesome proposal.
This will be a good way to get through this stagnant market, be able to reevaluate often enough and still have liquidity for other investments.

Will vote yes

I do not like the idea of tying up a larger % of the treasury in USD.

It seems $BTC may be the safer AND better performing option from here onwards.

The highest amount of dry powder EVER is on the sidelines right now in terms of stablecoins on exchanges. On top of that, this would be following the herd into the trap $UST is right now. MM’s/VC’s are probably slobbering over their keyboards seeing so much of retail fall for these yields while Bitcoin and Altcoins are about to have a huge rally.

Stable coin yield farms right are a HUGE TRAP.

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