Not so long ago, in a place not so far away, banks offered decent yield on savings accounts. I know, surprising right?
Banks generated yield for depositors and stimulated the economy through responsible borrow & lending practices. Unfortunately for the world economy, the “responsible” part didn’t last so long. We learned that the hard way in 2008 when the entire world economy crashed. The banks took (and continue to take) our hard earned money, and used it in illicit and careless ways with no care for the depositor. Today’s abysmal savings rates reflect this carelessness. Traditional savings accounts offer on average only 0.06% APY according to the FDIC. According to this CPI calculator the projected inflation rate for 2021 is 6.22%. That means by keeping your $$$ in savings account…
YOU ARE ACTUALLY LOSING MONEY!
Good thing we have crypto, which offers a long list of of yield generating opportunities on stablecoins, cryptocurrencies pegged to the US dollar. This way we can outpace inflation and keep the purchasing power of our hard earned cash. Enter: Anchor Protocol.
Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.
Anchor is a savings protocol offering the highest APY in DeFi on stablecoin deposits.
Anchor generates yield from the collateral assets (the ETH/LUNA you deposit to take a loan) and also the interest collected from borrowers (just like the bank does on loans)
Anchor is built on Terra, a blockchain with a burgeoning DeFi ecosystem and exploding TVL.
What is Anchor Protocol?
Anchor Protocol is a savings protocol built on the Terra blockchain offering users an impressive 19.5% APY on $UST, the blockchain’s native stablecoin. Anchor operates as a “neobank,” leveraging the power of cryptocurrency to offer yield banks no longer offer, as well as crypto native services. Anchor’s goal is to be the DeFi savings product ready for mass adoption, and its suite of features includes:
19.5% APY Savings Account on $UST
Borrow & Lending
Staking / Bonding
How Does Anchor Generate Yield?
Anchor aims to offer DeFi’s “benchmark savings rate” by operating as a traditional money market with a crypto twist. In addition to accruing interest from users who borrow from Anchor’s pool of deposited stablecoins, the protocol also collects block rewards generated from the proof of stake assets deposited by borrowers into the platform as collateral.
Now that we have an overview of what Anchor Protocol is and seeks to achieve, let’s explore it’s different features and how it’s able to offer the highest APY on stablecoins in DeFi.
Stablecoins are cryptocurrencies pegged to the USD that create a bridge between the TradFi and DeFi ecosystems. A depositor deposits $UST, Terra’s native stablecoin, into Anchor in order to earn yield. Stablecoins such as $USDC, $DAI, $USDT, and $UST maintain their peg in different ways. For the sake of this article you can deem them equivalent. $UST has deep liquidity; you can swap it with other stablecoins with little to no slippage.
Anchor’s stablecoin deposits are pooled into Anchor’s “money market” and is then lent out to borrowers. The interest earned from these borrowers are distributed to all individual depositors on a pro-rata basis. In return for depositing $UST into Anchor, users mint and receive $aUST. $aUST represents the depositor’s share in Anchor’s stablecoin pool. $aUST is a receipt redeemable for your share of the stablecoin pool plus the accrued interest on your principal deposit. Since $aUST takes into account the interest accrued on your principal, it always trades at a slight premium to $UST. You can redeem $aUST for $UST at any time.
In order to borrow $UST from Anchor, the borrower must lock up one of two whitelisted assets accepted by Anchor as collateral and borrow below the protocol’s defined Loan-To-Value-Ratio, or LTV. LTV is a ratio measuring the relationship between the market value of the collateral asset and the loan amount. Depending on your LTV ratio, borrowing can be safe or risky. Generally the higher the LTV ratio the higher chance you will be liquidated and lose your collateral. In the cryptocurrency market volatility is normal and important to consider when determining your LTV. Borrow safely anon.
Anchor’s Money Market
Anchor accepts only yield bearing Proof-of-Stake assets as collateral. Currently, bETH & bLUNA are the only two acceptable collateral types. Anchor is actively working towards expanding its list of accepted collateral to include additional popular PoS assets such as $SOL (Solana), $ATOM (Cosmos), and $DOT (Polkdatot). As Anchor’s attractive yield and borrower incentives burgeon the crypto and public consciousness, we posit Anchor’s TVL will grow substantially. At time of writing, Anchor holds over $5B of collateral value on only these two accepted collateral types.
As stated previously, Anchor accepts only PoS assets as collateral. That’s because in Proof-of-Stake networks, the native currency of the network (ie: $LUNA for Terra, $SOL for Solana) is a yield generating asset, often ranging from 6-10% annually. In comparison to banks and other “neobanks” Celsius that generate yield for users strictly through borrow & lending, Anchor also earns staking rewards, unlocking an additional layer of yield generation. After PoS assets are deposited into Anchor as collateral, Anchor automatically stakes them to begin earning staking rewards.
The staking rewards earned are denominated in the cryptocurrency staked, then converted to Terra stablecoins. These rewards are then distributed to lenders and compiled into the yield reserve pool. This process often involves interchain transactions and is only triggered at most once every 3 hours. If the amount of yield generated is greater than the protocol’s target deposit rate, the excess yield is deposited into the yield reserve. If the amount of yield generated is less than the protocol’s deposit rate, the yield shortfall is replenished by the yield reserve. This is limited to 10% per subsidization to prevent the yield reserves from being drained. Anchor’s yield reserve currently holds ~78M $UST.
(Source: Anchor Protocol Whitepaper)
bAssets & Liquid Staking
In order to deposit PoS assets into Anchor one must first “bond” the asset with Anchor, turning the asset into a “bonded asset” or a “bAsset.” When staking PoS assets, traditionally the cryptocurrencies are locked with validators, eliminating the asset’s liquidity and mobility. Liquid staking protocols solve this problem by staking cryptoassets on your behalf, then issuing you a tokenized representation of that asset; in Anchor’s case a “bAsset.” bAssets, like any liquid staking derivative token, are liquid, tokenized representations of the PoS assets deposited into Anchor. bAssets accrue block rewards just like the underlying staked asset and are fungible, transferable, and redeemable for the original staked asset. This allows PoS assets to be borrowed against, remain liquid, accrue staking yield, and secure the network. bAssets can be transferred for one another for equal value despite possibly different underlying properties of the asset such as the validator it is staked with. Underlying assets that suffer from loss of staking rewards (slashing) due to validator delinquency will incur “socialized losses” amongst all bAsset holders in order to maintain fungibility.
When taking out a loan against your collateral bAssets, it’s important to note an account can only own a single loan position. If the user wants to take out multiple loan positions, multiple accounts on Anchor must be made. A user can post multiple collateral types to one position, diversifying price exposure and (if handled properly) mitigating liquidation risk. Cross-margining is not currently offered. Borrowers are incentivized to borrow in order to gain access to liquidity without losing price exposure to the underlying asset they have long term conviction in. Anchor also incentivizes borrowing through distribution of $ANC to borrowers in proportion to the amount they have borrowed.
Okay 19.5% is Great, But What are the Risks?
After reading the above, it’s natural to think: “okay… but what’s the catch?” Well, there isn’t a catch, but there certainly are risks. After telling you all the seemingly great things about Anchor, it would be irresponsible of us to not also share the risks. The three main risks are: smart contract risk, oracle risk, and depeg risk. On a longer time horizon, the protocol also needs to prove its yield generation is sustainable.
Let’s discuss these risks and give you options on how to mitigate them.
As is the case with all DeFi protocols, funds are locked in a smart contract. Smart contracts are lines of code that execute transactions automatically based on sets of predefined conditions. These contracts are subject to failure or attack vectors if there are vulnerabilities in the code. Ethereum dApps have been hacked for billions of dollars over the years due to smart contract vulnerabilities.
You should not consider Anchor protocol as safe as your bank account.
$UST is an algorithmic stablecoin, meaning there is a robust mechanism of algorithms (“smart contracts”) that execute transactions constantly in order to keep 1 $UST = $1 USD. During times of extreme market volatility, there is increased risk that $UST will lose its peg, which can cause unnecessary liquidations and loss of faith in the protocol. On May 22, 2021 during a market crash, $UST traded 5% below 1 $USD, causing panic in the $LUNA community. The stablecoin regained its peg in approximately 48 hours, and has since kept peg stability.
Anchor’s prices for collateral assets are provided by an oracle. This oracle is subject to error, and there have been instances in the past where the Anchor oracle delivered inaccurate price information leading to unnecessary liquidations.
Anchor is building out a suite of insurance options, an important feature for them to improve upon as they aim to capture a non crypto native audience. We’ll be doing a deep dive on these insurance options in our next article on Anchor – stay tuned!
The old saying “if it sounds too good to be true, it probably is” is usually right. Crypto seems to be an exception to this rule. The astronomical gains the industry has experienced this year were previously thought to be impossible, and our entire conceptual understanding of money is changing. Anchor Protocol appears to be another exception to this rule, offering 19.5% APY on our “dollars,” yield unable to found elsewhere. The protocol is nascent, has risks, and needs more time to build reputation as a safe haven for stablecoins in order to reach its goal of mass adoption. It is a viable option for stablecoin holders to store their stables and an interesting protocol to keep an eye on.
Thanks for reading!
How To Use Anchor Protocol
Download Terra Station Wallet
Buy $UST off CEX or DEX of Your Choice (ie: Kucoin)
Send $UST from CEX/DEX to Terra Station (Double Check Your Addresses & Memos!)
Go to Anchor Protocol – Press “Earn” Tab
Deposit $UST & Start Earning!