Anchor targets veTokenomics as Luna Foundation adds $450M to DeFi protocol reserves

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

Following the announcement, a new proposal was made on February 18 to modify Anchor’s business model to include the token theory of blocked voting (ve), apparently as part of a series of interventions aimed at solving the problem of the depletion of reserves.

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

the injection of money means that the protocol could maintain its high deposit rates between 19% and 20% for the next year. About $503 million now sits in the Anchor Performance Reserve after the top-up.

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

Anchor reserves are dwindling

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

The DeFi lender pays around 20% interest on deposits of UST, the US dollar-pegged stablecoin originating from Terra. Known as the “peg rate”, the rate is fixed and significantly higher than rates between 0% and 8.5% currently offered by industry competitors.

Anchor is able to pay this high rate from the interest charged on the loans, liquidation fees and the return generated by borrowers’ collateral. But with the crypto market downturn, borrowers have become scarce, forcing the protocol to dip into its reserves in order to maintain its “peg rate,” designed to become an industry benchmark.

Blocked tokenomics vote comes to Anchor

The Luna Foundation Guard’s cash injection was never intended as a long-term solution to the problem of dwindling reserves at Anchor, just a temporary fix until a more sustainable business model was developed.

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

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

Now Retrograde Money, a participant in the Terra community, 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, until at four years old. The plan builds on a decentralized finance (DeFi) concept known as escrow(ve) voting, pioneered by Curve Finance.

By incentivizing borrowers, Retrograde hopes to keep deposits and loans in balance and prevent a situation that forces Anchor to dip into its yield reserve as it may run out. According to Retrograde’s proposal, the five tokens cannot be transferred, although 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 speculating on short-term price swings. Those with strong conviction are rewarded the most over time. Vote-locked ANC creates a flywheel effect where emissions drive higher TVL, in turn generate more fees, and lead to more value added to the ANC token. This better aligns incentives between ANC holders and key Anchor Protocol stakeholders.

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

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