Terra News | Establishing a $10 Billion BTC Reserve, Anchor Moving Towards Semi-Dynamic Interest Rates, New Proposal: BTC/UST Reserve Pool

The semi-dynamic interest rate proposal put forward by Anchor Protocol, a fixed income platform based on Terra, has been approved and the code has been reviewed, scheduled to go live next week. In addition, the founder of Terra reiterated the reserve targets of $3 billion in the short term and $10 billion in the long term for UST, while the venture capital firm Jump Trading proposed deploying a reserve liquidity pool for Bitcoin to maintain the pegged relationship between UST and Bitcoin.

1. Anchor Switches to Semi-Dynamic Interest Rates

Following the yield reserve crisis, the Luna Foundation Guard LFG swiftly conducted a $1 billion private token sale and established a Bitcoin-denominated UST foreign exchange reserve. Participants include 3AC by Three Arrows Capital, Jump Crypto, and others.

Meanwhile, Anchor also introduced the ve token and a dynamic interest rate proposal. From 3/2 onwards, the dynamic interest rate proposal has been approved. As described earlier:

The semi-dynamic interest rate will be linked to changes in the yield reserve over a period of time. If the yield reserve increases, the interest rate will rise, and vice versa. According to the formula, assuming a 5% increase in the yield reserve (YR) funds within a month, the yield will increase by 1.5%, and vice versa.

Terra ecosystem researcher bitN8 indicated that the code has been reviewed and will go live next week. However, some community members expressed concerns that even with the switch to semi-dynamic interest rates, the yield reserve depletion rate is still significant. With a decrease in interest rates, users may turn to other borrowing protocols.

0xOnlyFacts pointed out:

The average reserve fund consumption over 21 days is 3.4 million, growing at a rate of approximately 2% daily. Based on this calculation, the day when the yield reserve (YR) reaches zero is less than two months away.

Eric Kryski also stated:

Upon calculation, it is found that this plan is not feasible. Deposits increased by 0.99% per day over the past 50 days, from a TVL of $8.54 billion to $16.98 billion. The yield reserve deficit in the past 50 days consumed -1.37% per day. At this rate and with the formula of this proposal, the YR will deplete before the interest rate falls to 15% or lower.

Proposal submitter bitN8 responded:

It is impossible to predict the impact of the large influx of new collateral in the coming months from ETH, Matic, AVAX, which might buy us more time and allow for an interest rate increase of 5-7% or more. The parameters in the proposal can also be calibrated further until they take effect. Even if the interest rate falls below 10%, it is still about three times that of other protocols, and data shows that the deposit and withdrawal volumes of Aave and Compound have minimal impact on interest rates.

2. Long-Term Goal for Foreign Exchange Reserves: $10 Billion

In a debate with Blockstream CEO Adam Back, Terra CEO Do Kwon responded that $2.2 billion has been injected into the Bitcoin reserve and plans are in place for short-term $3 billion and long-term $10 billion reserve goals.

Adam Back questioned whether the reserve was based on pre-sale LUNA, to which Do Kwon pointed out:

The LFG recently completed a $1 billion token sale, raising $1.2 billion with the sale of UST, leaving about $800 million to reach the short-term goal.

3. Bitcoin Reserve Liquidity Pool

Venture capital firm Jump Trading proposed the deployment of a Bitcoin reserve liquidity pool to maintain the peg between UST and Bitcoin. The summary is as follows:

• The reserve pool is similar to the LUNA <> UST minting mechanism.
• Bitcoin liquidity is provided by LFG.
• The initial Bitcoin reserve size is $2.5 billion.
• In the event of a UST price drop or detachment, retail investors can exchange 1 UST for $0.98 worth of BTC.
• After surviving the reserve crisis, traders can exchange $1 of BTC for 1 UST to reduce accumulated excess UST during the crisis.
• Jump Trading suggests adding a daily redemption cap of 10-30% of the total reserve to prevent a run.

This model is predicated on UST having external demand and numerous use cases. The seemingly loss-making operation of "1 UST for $0.98 worth of BTC" is profitable when UST undergoes a significant discount. Returning to LUNA in the original manner may result in even lower value.

Some community members are concerned that this may diminish the capture value of LUNA and whether CW20-wrapped tokens raise centralization concerns. Jump Trading is currently engaging with the community on this proposal.