Thread by @TheCryptoCents

How we can prevent future $LUNA flash crashes and $UST de-pegging?

What is clear to me is that the way #anchorprotocol’s subsided earn rates are set up poses a systematic risk for the ecosystem. The good news is that it can be fixed.

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1/ This is not to say that Anchor rates can't be subsided to bootstrap ecosystem growth and adoption. Rather, @anchor_protocol should differentiate between long-term and short-term depositors by introducing different rates for different lockup periods.

2/ This will have the effect of staggering the flight of capital during a liquidity crisis and market dumps.

3/ For Example:

6-Month Lockup - 18.5% (max rate)
3-Month Lockup - 16%
1-Month Lockup - 12%
Liquid deposit - 10%

This does multiple things and is beneficial for both @anchor_protocol & @terra_money.

4/ First, it rewards long-term depositors with higher APY, and short-term users, which are typically mercenary capital, get a lower earn rate.

Secondly, the average earn rate paid out on Anchor will now be less making $ANC yield reserve more sustainable.

5/ Last and arguably the most important is that it will prevent the TVL or capital from being all pulled out of anchor protocol at the same time. It will in essence stagger the flight of capital during a liquidity crisis and future market dumps.

6/ I can't emphasize this enough. The problem isn't that capital is choosing to go elsewhere, but rather that they are doing so simultaneously.

7/ Anchor has seen over $7 billion of its $14 Billion in $UST deposits leave in the last few days. And this creates havoc like cascading liquidations, puts immense pressure on the peg, and creates situations akin to a bank run.

8/ Imagine if banks allowed everyone from chequing acct holders, saving accts, GICs, bondholders, etc to pull their funds out anytime they like and get the same rates. Bank runs would be a regular occurrence.

9/ #Anchorprotocol rates are extremely attractive, undoubtedly it will attract a lot of capital. But enabling massive amounts of funds to flood in and out simultaneously in an unpredictable fashion isn't good for anyone.

10/ At least for now, if @terra_money chooses to use #anchorprotocol's earn rate to bootstrap growth and adoption in the ecosystem; there needs to be a mechanism to stagger the flight of capital during crisis.

11/ Otherwise, situations like today where a selloff develops into something much bigger than it needed to be will be a regular occurrence during market volatility.

12/ The good news is that the fix isn't that difficult. Banks and other lending platforms have already done this. If the same amount of capital left but was spread out over even just a month instead of days, $LUNA would have no problem keeping the $UST peg.

13/ Please help share and retweet so the community can discuss and come up with future improvements. This may be the most important thing I've ever written on Twitter.