How does Anchor's Semi-Dynamic Earn Rate work?

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@anchor_protocol's yield went from 19.5% APY to 18% APY a few days ago. They've switched to a semi-dynamic model for the earn rate. Here's what's going on 👇 🧵 [1/27]

twitter.com/shivsakhuja/status/1474870079682609153?s=20 This thread explains how anchor works in a perfect (i.e - sustainable) world.

In the explanation above, the inflows (green) were greater than the outflows (red). i.e: (inflows - outflows) is positive So the yield reserve goes up because @anchor_protocol is earning more than it is paying out.

What's really happening is that inflows are less than outflows. i.e: (inflows - outflows) is negative So the yield reserve is going down because @anchor_protocol is earning less than it is paying out.

An analogy is that you are dipping into your savings (yield reserve) to buy something (outflows) that you cannot afford with your income (inflows).

The Yield Reserve is currently declining very rapidly. You can track this here: mirrortracker.info/anchor

The yield reserve was topped up with $500M by LFG in February. But in less than 3 months, it has already fallen to < $200M. It's become painfully clear that this yield is not sustainable - not right now, anyway.

So @anchor_protocol is moving to a semi-dynamic earn rate. How will this work? Simply put: • If the yield reserve is growing, the earn rate will increase. • If the yield reserve is falling, the earn rate will decrease.

How often can we expect rate changes? The yield reserve change will be evaluated monthly (approximately). twitter.com/anchor_protocol/status/1520667539600293889?s=20

How much can we expect the rate to change? The earn rate will be reduced or increased by the same % amount as the yield reserve declines or grows. BUT the earn rate cannot decrease or increase by more than 1.5% at a time.

Some examples to clarify: twitter.com/anchor_protocol/status/1507052927889854464?s=20

More examples to help clarify: 5. Yield reserve ⬆️ by 1.1% ➡️ Earn rate ⬆️ by 1.1% 6. Yield reserve ⬇️ by 0.8% ➡️ Earn rate ⬇️ by 0.8%

Since the current rate is far from sustainable, we are likely to see the following rate changes: June: 18% ➡️ 16.5% APY July: 16.5% ➡️ 15% APY (if no top up) July: 16.5% ➡️ 18% APY (if top up) . . .

For now, there's a floor of 15% on the earn rate and a ceiling of 20%. Earn rate will only go below 15% if the yield reserve is completely empty.

If the yield reserve is empty, the earn rate will fall to market rates (single-digit %). Though I think it's more likely that LFG will top up the yield reserve before letting that happen.

"But ser, I thought Anchor's APY was fixed?" Yep it was, but now that fixed rate will be readjusted every month by a certain finite amount. i.e - It won't fluctuate minutely like most earn rates. But, it will only be fixed for a month at a time. (unless yield reserve empties)

Anchor already increases or decreases borrower incentives (ANC tokens) to encourage or discourage borrowing.

But that wasn't enough. @anchor_protocol cannot get enough borrower demand to meet the earn demand. So, a semi-dynamic earn rate was required to make the protocol more sustainable.

@anchor_protocol becoming more sustainable is generally a good thing. We need to see more sustainability, and fewer ponzis in DeFi for the market to mature. Even 15% is great yield for stablecoins.

But there are a lot of other competitors lurking around now, ready to offer higher (unsustainable) rates of 20% (USN) and 30% (USDD). Will be interesting to see if @anchor_protocol can retain market share even at lower rates than competitors, through the trust they've built up.

Some additional resources to read up on this if you're interested: Anchor's Official Governance Post forum.anchorprotocol.com/t/dynamic-anchor-earn-rate/3042

Anchor's tweet explains the basic mechanics: twitter.com/anchor_protocol/status/1507052921745256449?s=20

@Route2FI's explains what is likely to happen going forward twitter.com/Route2FI/status/1519266438833446914?s=20

@danku_r's video on the semi-dynamic rate explains what it means, and assesses the likely impacts. youtube.com/watch?v=wK1mL6gOsCU

And follow me @shivsakhuja for more useful DeFi / Crypto threads 🧵 twitter.com/shivsakhuja/status/1470898910218440708?s=20