Anchor rates are used to parameterize Notional’s AMM. More specifically, anchor rates position the AMM curves in the X-Y plane.
Visual representation of AMM curves for different anchor rates (keeping the scalar rate constant)
Impact of anchor rates on slippage
As showcased above, the choice of the anchor rate has an impact on the tradable interest rate range. Moreover, the selected anchor rate also has an impact on slippage (interest rate change when executing a trade).
At a constant interest rate (ex: 10%), slippage decreases alongside the anchor rate. This is because low anchor rate markets need to trade at higher proportions to reach the same interest rate level (see figure above). Due to liquidity provider’s increased leverage at higher proportions (LPs mint more fCash relative to cash at higher providing proportions), all else being equal, slippage usually decreases as the trading proportion increases, except when utilization is really high.
Although lower anchor rate pools exhibit less slippage, a larger part of the liquidity provided to the pool goes unused as negative interest rates are not allowed. Thus higher anchor rates curve exhibit more slippage but can accomodate wider interest rate ranges.
We estimate that most of the stablecoin and crypto-asset trading activity is likely to occur at interest rates between 1%-7% and 0%-6% based on the following data points :
Compound treasury and Coinbase announced fixed interest rate products on USDC with yields of 4% APR and 4% APY, respectively;
Circle Yield offers a 1 year fixed yield of ~0.5% on USDC;
Compound’s average historical stablecoin supplying and borrowing rates ranged between ~1% and ~4.0% respectively;
Compound’s average historical ETH supplying and borrowing rates ranged between ~0.1% and ~2.0%, respectively;
Compound’s average historical WBTC supplying and borrowing rates ranged between ~0.1% and ~3%, respectively.
We selected the liquidity pools anchor rates in conjunction with the selection of scalar rates (see Scalar rates section) with the objective of:
minimizing slippage for the 1% to 7% (stablecoins) and 0% to 6% (crypto assets) trading interest rate ranges;
enabling permissive AMM curves with interest rate ranges of 0% to ~15%. These wide ranges aim to accommodate extreme market conditions and high redeemability for nTokens as we feel quite confident that end-users would actively lend at fixed rates of 15%;
ensuring that the selected leverage thresholds are set at implied interest rates of̴ ~ 7%(stablecoins) and ~ 6% (crypto assets) (see the nToken Leverage threshold section).