This is a sequel to the first piece on the unstable stablecoin UST, which lives on the Terra Luna ecosystem that is essentially an AppChain utilising Cosmos Network’s SDK.
In the first chapter, one can derive that 1 UST is actually only worth like 0.72 dollar using the non-redeemable discount of ~28% that is calculated using the public data from Grayscale Bitcoin Trust.
In fact, if taking into account of the US CPI of ~10% per annum, one can say 1 UST is worth even less, only ~0.62 dollar in one year’s time presuming the same CPI throughout the year.
So Anchor Protocol exists in Terra Luna’s ecosystem as a yield platform, to create utility for UST mainly.
If a stablecoin has no yield, no one will even want to hold them.
“Yield is the holy grail of Defi. High APY is the best sales pitch”
Chapter 2: Why Anchor Protocol is a Ponzi Scheme
So Anchor Protocol warrants 19.5% APY, not bad huh?
Let’s have a look based on the 6 April data from Anchor Protocol’s perspective.
Liability side
$12.45 billion UST paying users 19.5% APY so it means $-2.45 billion of UST payout in 1 year’s time.
Assets side
$7.09 billion collaterals (bonded Luna, bonded ETH, staked AVAX) generating staking yields and UST minting/lending income.
Staking yield examples are 6.5% on Luna, 3.9% on ETH, 11% on AVAX. So let’s say on average 6.5% APY staking yield.
Collateral backed UST minting/lending (borrowing for users) yield is a net of 5.92% APY. This is a sum of actual lending yield of 13.29% and a payout of ANC rewards of 7.38%.
Income vs Cost
Income 1 is staking yield of $0.46 billion, which derives from the $7.09 billion collaterals generating 6.5% APY.
Income 2 is the collateral backed UST minting/lending income of $0.27 billion, which derives from the 65% borrowing limit over the $7.09 billion collateral that is charging a net 5.92% APY.
So total income (sum of income 1 and income 2) is $0.73 billion in 1 year’s time.
There are still $0.34 billion of yield reserve remaining.
So total income plus reserve is $1.07 billion, not sufficient to cover the cost of $-2.45 billion payout in one year’s time.
The annual $-1.35 billion Income vs Cost Deficit of Anchor Protocol
So this is a huge deficit, the elephant in the room that no one talks about.
As the projected annual income is only to meet ~43% of the projected annual cost.
In other words, the runway (the days left till bankrupty) for Anchor Protocol is 0.43*365 = 157 days or 5 months if nothing changes.
Or UST needs to devalue 57% to breakeven.
So it means 1 UST = 0.43 dollar, so this is an even lower intrinsic valuation for UST compared to using the GBTC non redeemable discount.
That’s why the protocol/community is trying to change to a lower dynamic yield as the current one is heavily subsidized and not sustainable in the long run.
One can argue that Anchor Protocol is no different than the infamous DeFi 2.0 the high APY projects like Olympus DAO OHM (>900% APY)and Wonderland Money (>80000% APY), both are ponzi-schemes according to many people.
Anchor Protocol is only using lower APY to have a longer runway.
Unless Anchor Protocol is making some drastic changes to fix this loss-making/bleeding situation. Sooner or latter there will be a bank run like what happened to USDN and Wave today.
This is not an attack, this is a Call to Change on UST to avoid future systematic failures on the #DEFI space.
