Anchor Protocol: The Premiere Crypto Savings Account?
What is Anchor Protocol?
Anchor Protocol ($ANC) 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
Governance
Insurance
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.
Depositors
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.
Borrowing FAQ
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, I posit Anchor’s TVL will grow substantially. At time of writing, Anchor holds over $5.4B of collateral value on only these two accepted collateral types.
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 me 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.
Smart Contract
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.
DePeg Risk
$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. As the collateral and trust grows - this will become less of a risk.
Oracle Risk
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. I’ll be doing a deep dive on these insurance options in my next article on Anchor – stay tuned!
Conclusion
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. Although the protocol is nascent and has risks, it is a viable option for stablecoin holders to store their stables and an interesting protocol to keep an eye on.
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
Press “Deposit”
Deposit $UST & Start Earning!