What is Anchor Protocol?
Until not long ago, a savings account was one of the safest places to store your money and build wealth. However, with inflation on the rise and interest rates falling, the tables have turned. Individuals are losing significant amounts of their savings within shorter periods of time, causing many individuals to look for other investment vehicles to build wealth. Individuals started to invest in stocks, bonds, real estate, and now also in Decentralized Finance (DeFi).
Various DeFi platforms offer multiple investment options to achieve yields such as borrowing and lending, liquidity providing, and savings products. The savings products offered on these DeFi platforms mostly differ in the supported cryptocurrencies and proposed interest rates. One of the most common savings products in DeFi is called “single asset staking” which allows users to earn interest on one supported cryptocurrency. The earned interest is disbursed in the staked cryptocurrency, with the drawback that the asset can depreciate faster over time than the offered interest rate.
Other DeFi platforms attempted to solve this problem of volatility by offering savings solutions against dollar-based stablecoins, cryptocurrencies pegged to the US dollar. However, these platforms faced the problem of cyclical interest rates, creating similar problems with a low interest rate against a depreciating US dollar.
Anchor aims to solve this issue by providing users with a decentralized money market that operates on the Terra blockchain. The protocol enables users to borrow and lend the stablecoin TerraUSD (UST), Terra’s native stablecoin. The yield within Anchor is generated through interest and dividends based on staking rewards. Individuals who deposit UST will be rewarded with a fixed interest rate of 19.5% on their deposits, one of the highest interest rates on stablecoins. This results in stable returns on savings that outweigh the current inflation rate and therefore provides the possibility to build wealth over time.
In order to fully understand the underlying technology of Anchor Protocol, the Terra Money Market has to be properly explained. The market consists of borrowers and lenders of UST, lenders earn interest on their deposits, and borrowers put down bonded Assets (bAssets) as collateral to borrow UST from the pool.
A bAsset is a token that represents a staked cryptocurrency on a Proof-of-Stake blockchain. Like the underlying staked asset, a bAsset pays the holder staking rewards. Unlike a staked asset, a bAsset introduces the opportunity to be transferred between users, this creates a transferable yield generating token. Currently, Anchor supports Luna, Ethereum, Atom and Avalanche bAssets as collateral.
The collateral bAssets create a passive income through staking rewards, which Anchor converts into UST and distributes as an interest to the lenders in its attempt to maintain the 19.5% ‘Anchor Rate’.
Anchor protocol offers a borrowing and lending market exclusively for the stablecoin UST. Lenders of UST experience high interest rates on their deposits without the risk of their assets depreciating over time. Users are able to borrow the deposit of the lenders against a certain interest rate, the only requirement is collateral equal to or greater than the borrowed sum.
The protocol offers multiple options but the most chosen collateral is bLuna. This is no surprise as Anchor is created by Terraform Labs, the founders of the Terra blockchain. Luna is the native coin of the Terra blockchain and the use of Luna within Anchor provides direct benefits for the value and ecosystem of Luna.
The founding of Anchor has aided the growth of the Terra and UST ecosystem. Currently, UST is the only cryptocurrency on which interest can be earned on the Earn page, creating a demand for the asset. In order to acquire bLuna, Luna has to be bought and it needs to be bonded. A total of $5B worth of Luna is bonded at Anchor alone, which drastically decreases the supply of Luna while increasing the demand.
Anchor protocol has grown into one of the biggest money markets in DeFi. The total value locked has risen to almost $20B, which has attracted not only more users but also many DeFi projects. These organizations include Mirror protocol, which is a DeFi platform that enables users to issue crypto assets that can track the price of real-world assets. Another close partner of Anchor is Mars protocol, which aims to attract deposits and lend this while managing illiquidity and insolvency risk.
The most notable partnership of Anchor is with Terraform Labs, which provides financial infrastructure for the next generation of decentralized applications. The organization is the developer of the Terra Blockchain and the corresponding Luna and UST token.
Since recently, it’s been possible to use staked Avalanche (sAVAX) as collateral in order to borrow UST. The community voted on the matter and decided that the addition of sAVAX will further develop the ecosystem as users have more collateral options. Since the implementation of sAVAX on 23rd March, the total collateral value of the asset has risen to $21.62M.
Due to the large inflow of new users in the past few months, the disbursed interest has grown exponentially. However, the generated staking rewards have not been sufficient to completely cover the disbursed interest. As the additionally needed funds are covered by the yield reserve, this reserve has been declining rapidly over the past few months. To counter this, the community voted in favor of a proposal to adjust the interest rate according to the funds in the yield reserve.
If the yield reserve increases by 1,5% or more, the Earn rate increases by 1,5%, and vice versa if the yield reserve decreases. Ultimately, this correction is the best long-term solution for both parties, the investor has a fair estimate of what he is going to earn and the protocol has a more sustainable business model.
Since its token launch at 3.72$, the ANC token skyrocketed above the 7$ territory which was quickly lost as Bitcoin dropped in May 2021. Since then, the token has shown signs of accumulation between the 2$ and the 4$ range as displayed below.
The most recent move up from 1.5$ to 6$, coincided with the token’s launch on Binance, giving it a large exposure to retail traders. The timing also matched with the attention cycle on the Terra ecosystem, where it became apparent that users could get a 19.5% stablecoin yield during a sideways market environment.
In the short-term, the price displays a higher high, relative to the low at the beginning of February, the strength of which remains to be seen. The token has yet to reclaim its 200 daily moving average (displayed in black) and the chart might display a Death Cross soon, as the 50 daily moving average crosses the 200 daily moving average from above.
Notably, governance decisions of the Anchor Protocol haven’t led to significant volatility in the price of the ANC token thus far, which might imply that the token holders are more long-term oriented.
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