MRC-1: New Asset Listing - ANC

Description of the Proposal

Delphi Labs proposes to list ANC as a collateral asset for lending and borrowing on the Red Bank.

Background

Anchor is a savings protocol built on top of Terra. The main objective of Anchor is to offer depositors stable interest rates. To accomplish this, borrowers first deposit liquid staking derivatives, referred to as bAssets, as collateral before they can borrow UST. The staking yield generated by the bAssets and the interest charged to borrowers is used to pay this stable rate to lenders.

The Anchor Token (ANC) is Anchor Protocol’s governance token. ANC captures a portion of Anchor’s yield, and is also used as incentives to bootstrap borrow demand.

Motivation

Out of all the dApps on Terra, Anchor’s token has the highest market capitalization, standing at ~$700m at the time of writing. Listing the ANC token would bring a flow of liquidity and TVL in the form of ANC tokens as collateral to borrow against it. Ultimately, this will generate more fees for Mars as the demand for borrowing assets increases.

Currently, the yield generation strategies on Mars entail that Mars’ users provide liquidity to certain liquidity pools on Astroport. If ANC is listed on Mars, token holders will be able to earn additional yield with a different risk profile from the risks associated with providing liquidity on a DEX.

Basic Information

Market Risk

Following the Red Bank Risk Framework, we calculated the following market risk metrics and scores:

  • Maximum intraday drawdown: - 31%
  • Volatility: 8.6%
  • 24hr volume: $58.71M
  • Worst 7-day volume: $5.68M

The above metrics lead to the following scores:

Ticker 1D Worst Drawdown (1y) Volatility (90d) Volumes (90d 24hr avg.) Volumes (Worst week 1yr)
ANC C C C D

Technical Risk

Different parts of the contracts have been audited as follows:

Furthermore, the protocol has been live for over a year and during that time the protocol has accumulated significant TVL without experiencing any security issues. Specifically, we calculate the honey pot coefficient at >4.04 (more on this metric here), which suggests the protocol has supported high levels of TVL since launch.

Note: Data taken to calculate the honey pot coefficient above is taken from defillama which shows TVL reflecting data from 22 April 2021 to 22 March 2022.

In terms of the quality of the smart contracts, we find that they were written using standard reference contracts provided by the CosmWasm team with very minimal modifications. These have been battle-tested by many protocols over a long period of time. Regarding testing, however, the smart contracts did not include testing scripts so we could not assess how the tests were conducted.

Other relevant links:

  • GitHub page where source code is hosted.
  • On-chain contracts.
    • Terra14z56l0fp2lsf86zy3hty2z47ezkhnthtr9yq76

Given the above, we suggest the following scores:

Ticker Honey Pot Time since launch # of SC audits Quality of SCs
ANC A B B A

Centralization Risk

  • Smart contracts upgradability: Anchor currently has a multisig in place that can upgrade the protocol’s smart contracts and is controlled by members of the Anchor team. There is a plan in place to change this to a DAO process.
  • Team: Anchor Protocol is built by Terraform Labs (TFL). TFL created the Terra blockchain. TFL is a widely known and highly respected team that has been building in the space for several years.

Given the above we suggest the following scores:

Ticker Permission/Trust Key Contracts Centralization
ANC A D

Oracle Risk

We propose that this asset uses the ANC-UST Astroport pool as the basis for a TWAP oracle. This pool should be safe enough to use for a TWAP given its significant levels of liquidity:

  • Current liquidity: $151.03M
  • Past 30 days average liquidity: $251.91M
  • Past 60 days average liquidity: $199.32M

These levels of liquidity would make manipulation attacks highly costly and thus, unlikely. For further research on this topic please refer to this piece by Delphi Labs.

For the specific implementation of the TWAP we propose using the Mars TWAP (same implementation being used on Fields) with the following parameters:

  • Window: 32 minutes
  • Tolerance: 2 minutes

Risk Parameters Suggestion

Following the methodology provided in the Red Bank Asset Listing Risk Framework we propose the following risk parameters:

  • Loan-to-Value: 40%
  • Liquidation Threshold: 50%
  • Liquidation Bonus: 15%
  • Interest Rate Model: This asset will use a 2-slope (kinked) interest rate implementation with the following parameters:
    • Base Rate (interest rate at 0% utilization): 0%
    • Slope 1: 7%
    • Slope 2: 300%
    • Optimal utilization: 45%
  • Whether the asset will be usable as collateral: Yes

Disclosures/Disclaimers:

This proposal is being made by Delphi Labs Ltd., a British Virgin Islands limited company. Delphi Labs engages in incubation, investment, research and development relevant to multiple ecosystems and protocols and was part of the joint venture which researched and developed the Mars Protocol. Delphi Labs is one of several entities which associate with one another under the “Delphi Digital” brand. Delphi Digital’s associated entities and/or equityholders or service providers of such entities hold ANC, ASTRO and MARS and may have financial interests in this proposal. Such entities and persons may also have financial interests in competing projects or ecosystems. These statements are intended to disclose relevant facts and to help identify potential conflicts of interest, and should not be misconstrued as a recommendation to purchase any token.

All risk assessments set forth herein are Delphi Labs’ evaluation of publicly available facts in its possession against the specified risk framework. Interpretation of these facts against these frameworks could reasonably vary. Additionally, Delphi Labs may lack access to all relevant facts or may have failed to give appropriate weighting to available facts. Delphi Labs is not making any representation, warranty or guarantee regarding the accuracy or completeness of its risk assessments or any of the statements set forth in this proposal, and Delphi Labs shall have no liability in the event of losses or damages ensuing from approval of the proposal. Each user and voter should undertake their own factual research and make their own independent interpretation of the facts against the risk frameworks and all other relevant risks in order to arrive at their own personal risk assessment regarding the proposal.

Data shown in the proposal above is as of 22 March 2022 and sourced from Flipside Crypto, Coingecko, Coinhall and DefiLlama.

19 Likes

Thank you for this now we have a fantastic template going forward as a community. This proposal is very well thought out, however there are issues I have.
The focus with this proposal is on the risk of failure and fails to consider risk of failing to succeed.
The proposed LTV and Liquidation Thresholds for ANC are quite conservative and speaks to the wider problems on Mars.

Currently the Fields of Mars have been a success but the Red Bank is an unattractive unsustainable failure, though I believe we can make it a success.

The Red Bank must be attractive with good rates for depositors and borrowers, what do you think will happen when the warm hearted Luna whales no longer want 0.00% on their Luna deposits in the Red Bank?
There are many possible solutions LunaX, vesting the Luna deposited or simply raising the Mars token distribution amount. Let’s fix the fundamentals of the Red Bank.

3 Likes

Great suggestion!
Agree that the LTV is a bit on the conservative side, but think the focus should be on ANC getting listed with as low risk as possible, with it’s recent price-volatility i think the suggested parameters makes sense.
I believe the real attraction of the Red Bank will come once the PID-controller dynamic-interest rates are voted through by governance, but we need assets listed and the protocol fully functioning before that can be introduced… until then borrowing UST at the current interest-rate against your ANC tokens with the suggested parameters is still an attractive alternative for users.

4 Likes

To kick off the proceedings of the Mars Council, let us just say that we are extremely excited to start voting on proposals.

As the yield on UST for those entities in the lockdrop is still below 1%, once the addition of ANC as collateral to the Red Bank provides a successful blueprint for the process, we would like to suggest that the other key assets of the Terra ecosystem be added in short order. Only by adding collateral can we increase the returns on lockdrop UST for those confident in the protocol. We believe that the Council should make it a priority to increase those rates to be in line with market rates (however that may be defined) as soon as possible.

With this in mind, we fully support the cautious approach advocated by @delphilabs for adding ANC as outlined in the OP.

But after we get ANC available on Red Bank, let’s fast track the following:

MIR - Mirror Protocol
ASTRO - Astroport
Psi - Nexus Protocol
MINE - Pylon Money
APOLLO - Apollo DAO
ORION - Orion Money

All of the above are regularly seeing $1M per day volume on Astroport and are currently receiving ASTRO emissions for their staked LP tokens, meaning that enabling these assets as collateral would open up a lot of profitable opportunities for not only whales in these 4 tokens looking to borrow UST but also UST whales looking to diversify away from the Anchor Earn rate as that begins to go dynamic.

It would seem to us that most of the Council would approve all 6 of the above tokens immediately, so we would suggest getting that done quickly rather than spending 1 week per token (which would have a drag on lockdrop UST yield).

We look forward to being an active member in this forum and hope the entire Terra community can coalesce around providing input on what we consider to be a lynchpin protocol for Terrans.

9 Likes

Risk management should always be the priority.

4 Likes

xAstro
Atom
bETH

hope also in near future native/synt BTC, RUNE etc.

3 Likes

Risks and benefits have been well discussed by all angles. Cant see a good argument for not listing ANC for Collateral.

For a lending and borrowing platform, more assets equal to more endurance and success.

Also, Will give additional utility to ANC token.

Win - Win situation.

1 Like

Thanks Delphi Labs for the proposal and I must say the template and the basis on a risk framework is great for a healthy development of the protocol.

I support the addition of the ANC token and given the risks laid out, the LTV ratio looks good to start with. I have invested in ANC before and I know how fluctuated it could get and it does have some uncertainties both short term and long term, i.e. change of earn rates and the yield reserve problem.

The way I see it Mars Protocol is fully risk aware if not risk adverse which is a good thing for long term development. I will watch for the capital flow on the 3-m 6-m mark and so forth where locked-up capital will be released and we’ll see how the deposit rate goes.

1 Like

Im fine with beeing risk aware and taking things slowly, but from my perspective Delphilabs should provide more of their thought input in this forum. It feels like a lot of debates just hang in the air because no one involved in coding can for example point out risks of proposed collaterals, etc.

In combination with the 100000Mars Barrier for proposals I feel like the community can not contribute as much as it wants to.

But anyway starting with ANC is nice and I will vote for it. But in future I would appreciate it if Delphilabs would contribute more to this forum.

1 Like

I am totally fine with the listing of ANC as it is a central LUNA Ecosystem Token and ANC provider of the 19% interest rate for UST.

2 Likes

Hey @Regi, thanks for your comment!

We agree that the risk parameters fall on the conservative side. However, we feel like that’s the best approach at the moment given the nascency of Mars and the Terra DeFi ecosystem as a whole. Having said that, these parameters are modifiable by governance at any point in time and we encourage the community to propose changes when considered safe.

In terms of the current money market deposit interest rates, we share your concern. As you suggest, we think that as new assets are added to the Red Bank and the caps are increased on the different Fields strategies these rates will start to increase to better reflect market conditions.

2 Likes

Hey @Fomocraft, thanks for your thoughtful reply. We’re also very excited to start participating in Mars governance!

We agree that increasing interest rates for depositors should be a priority for the protocol. As you suggest, adding new assets to the Red Bank is one way to achieve this goal. Another one is expanding Fields and increasing the caps on the current strategies.

In terms of listing new assets on the Red Bank, one of the main blockers we’ve encountered is finding robust oracles for some of these assets. As you may know, an insufficiently robust oracle may be manipulated, creating a systemic risk for the whole platform. In other words, one unreliable oracle could put at risk all the assets in the platform, as was recently experienced by Cream and has been experienced to a lesser extent by many other lending protocols.

More broadly, though, every new asset that is added to the Red Bank increases the risk to the protocol. In this sense, we as a community and Mars contributors should strive to strike the right balance between adding new assets (which may increase TVL and borrowing demand) and increasing the risk to the platform, particularly when the risk can materialize in a systemic way.

Going back to the oracles subject, for this particular ANC proposal, for example, we think using a TWAP makes sense given the high levels of liquidity of the ANC-UST pool, as outlined in the proposal. The higher the liquidity in a pool, the more expensive it is to manipulate the TWAP, all else being equal. We recently released a research report on this topic and are currently conducting more research specifically in relation to the use of TWAP oracles within money market protocols. We’ll be happy to share it with the community once it’s done!

Going forward, we think Chainlink, which recently launched on top of Terra, is going to be a significant help in this regard.

Anyways, just some thoughts from our end. Very happy to have you as a fellow contributor in the forum!

3 Likes

We’ve certainly seen our share of money market protocols destroyed by TWAP attacks! Another attack vector is the team or a hacker loading up reserve tokens into the supply side to drain the borrow side. But that concern is left for another day…

Guarded launches are a good way to prevent TWAP attacks, don’t you think? For instance, we could normalize that, if a collateral must rely on a TWAP price, then there must be a cap on the amount of collateral that can be contributed. An interesting mechanism could be limiting the cap to some % of their Astroport LP liquidity.

Looking at the assets in question and using a 10% threshold would yield the following caps at the time of post:

  • ANC - $14m
  • ASTRO - $7m
  • MINE - $4.4m
  • MIR - $3.5m
  • Psi - $5.2m (if you include all 3 incentivized pools)
  • APOLLO - $1.1m
  • ORION - $700k

In this way, we could kickstart the community’s ability to incorporate having their tokens on Mars into their trading/farming strategies without endangering the protocol as a whole. Then it could evolve from there. The important thing is to let that process of creativity begin, though. Perhaps even this cap could be coded into the smart contract so that it is dynamically changing? This is beyond our circle of competence. We just present it as an interesting possibility.

But in short, you’re right! Looking at the potential assets for collateral from the perspective of LP liquidity provides a more nuanced view. You can see where risk vectors are, at least in terms of TWAP manipulation, more easily this way.

Thus, we could explore some sort of staged release of collateral into the protocol.

1st step - Adding with TWAP with caps
2nd step - Increasing caps
3rd step - To have the collateral be uncapped, there must be established a more robust oracle (using Chainlink or Band or Supra, let’s make them compete!) once other reliably liquid pricing venues have been established, as we’ve seen with ANC and MIR (for example, listings on Binance, Kucoin, OKX, Huobi, Coinbase, etc.)

Just our thoughts on how to operationalize this process so that onboarding collateral assets can happen safely AND quickly. We hope the community will provide additional comments in this regard.

5 Likes

" * ANC - $14m" - 10 % ? Why?
A substantial price change at TWAP would require a $10,000,000 ANC sale.
This is not an attack, this is insanity!

Is there a deadline planned for this discussion before the proposal is put up for vote ?

2 Likes

This is not to suggest a requirement for ANC but, rather, by way of example, begin a discussion on establishing a path for lower liquidity tokens to be accepted as collateral.

To be clear, the $14m refers to the amount that would be allowed to be contributed to the Mars platform as collateral. And is just an example for discussion.

Hey @gamerguv, the plan is to have the debate open for at least 7 days on the forum before moving the proposal to on-chain voting.

1 Like

This is definitely an interesting approach. One issue with its implementation, though, at least at the moment, is that the current Mars smart contracts don’t allow to establish caps on money market deposits.

Having said that, we think it’s really valuable to kickstart this discussion and start thinking about potential solutions not just to the oracle issue discussed before, but more generally, to the issues related to listing nascent or long-tail assets. We think this is a fascinating area of research that’s mostly been under-explored in the broader DeFi ecosystem until recently. One potential approach is having a methodology to cap deposits, as you suggest. There are other interesting approaches that involve siloed money markets or using borrowing caps (rather than deposit caps) to mitigate the risk that certain assets may impose on the protocol.

Once again, thanks for your comment! It’s really surprising and gratifying to be having these kinds of discussions in the open and so early in the protocol’s life.

2 Likes

But until it does review it’s LTV and interest rate I’m sorry I and i guess a lot of others won’t be using it.

Borrowing caps sound interesting! That seems like it would avoid most of the big exploits that have happened to Cream/Zenterest/etc. How would that be implemented and would it require an upgrade to the existing smart contracts?

Alternatively, maybe the right approach is to have like a “minor league” or “pink sheets” section for this type of long-tail collateral (which would use smart contracts that have a few as-yet-undefined guardrails on them, and would be different than the “major league” table with UST, LUNA, ANC, etc.).

As for participation, could we also get a link to the Astro forum on the ASTRO page as well? The fact that the Mars Council page has a link to this forum is probably why we are in here so much. Currently, there is only a Discord link on the xASTRO page.

1 Like