Cryptocurrency and blockchain technology has come a long way since 2009 when Bitcoin was first introduced. From being merely an alternative currency to fiat money, a whole financial system has developed known as Decentralized Finance (DeFi). The DeFi space has witnessed tremendous growth in recent years but as laudable as this growth is, mass adoption is yet to be achieved. This is primarily due to the volatility of crypto assets, the complexity of DeFi protocols, and the low interest rates that make getting involved not worth the risk. But can you imagine a DeFi platform where you can earn as much as 20% APY on your crypto holdings? That is exactly what you get using Anchor protocol. In this article, we examine what Anchor protocol is all about, how it functions, and how to earn using it.
What is Anchor Protocol?
Anchor Protocol is a protocol based on the Terra blockchain that provides its users with low-volatile up to 20% yields on it’s stable coin called $UST. The platform was built by the South Korea-based Terraform Labs and launched on March 17, 2021. Initially, Anchor protocol helped to increase the demand for UST, which is Terra’s USD-pegged stablecoin, and its ultimate goal is to be the interchain protocol where users can borrow layer-1 native tokens. UST is the algorithmic stable coin of Terra Blockchain.
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At first, yields with Anchor Protocol were only available on deposits in UST, but this soon changed with the launch of EthAnchor. With this update achieved in partnership with Orion Money, users can now deposit Ethereum-based stablecoins like USDC, USDT, DAI, and BUSD as well as wrapped UST onto EthAnchor. The yield for wrapped UST is between 19.5% ~ 20.5%, and for all other stablecoins is ~ 16.5%. It is worth noting that in the future Anchor protocol is also planning to introduce non-USD pegged stablecoins, such as EUT, AUT, JPT, KRT, etc.
How does Anchor Protocol work?
Anchor protocol serves as a money market between lenders and borrowers of stablecoins. The lenders can deposit their stablecoins on the platform for borrowing and earn interest on them. The borrowers, in turn, can borrow these stablecoins by providing stakeable assets as collateral. These assets are regarded as bonded assets, and currently bLUNA and bETH are the bonded assets that can be used as collateral. The bonded assets are then locked up, and UST is borrowed against them at the borrow limit defined by the protocol.
Anchor Protocol operates using a liquid staking mechanism. Staking rewards earned on bLUNA or bETH by borrowers are liquidated by the protocol into UST for depositors, allowing them to earn target yield up to 20 %.
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Although 20% APY appears too good to be true, it is real. For example, Anchor protocol can generate at least 24% staking revenue on deposits as a result of the 12% per annum LUNA staking yield and the maximum borrow limit. The loans are overcollateralized meaning that the staking rewards are magnified, which further contributes to the high-interest rate. Even though the system can generate over 20% in returns, by fixing it at 20%, Anchor ensures a dependable and stable yield.
Following the successful bETH deployment, other PoS staking derivatives including bATOM, bSOL, and bDOT are planned to be added as collateral.
Another integral element of the Anchor protocol is the Anchor Token (ANC). It is the native and governance token of the Anchor protocol. Users have to deposit ANC to create governance polls and those who stake ANC can vote on those polls influencing the protocol’s future decision. But ANC is more than just a governance token. It was designed to capture a portion of Anchor’s yield, allowing its value to scale linearly with Anchor’s assets under management. This means that ANC stakers receive protocol fees to their stake and benefit as adoption of Anchor increases.
ANC tokens are also distributed as incentives to UST stablecoins borrowers proportionally to the amount borrowed. Anchor protocol has a total supply of 1 billion ANC tokens and 40% of that has been set aside as borrower incentives for the period of 4 years. This means that users are rewarded for borrowing UST, and both lender and borrower can earn using Anchor.
Since its launch, Anchor has witnessed immense growth and adoption. At the time of writing this article, the total value locked in the Anchor protocol is more than 13 billion UST. Users can check the Anchor dashboard to get all the latest information and data about the protocol.
How to earn using Anchor protocol?
There are several ways to earn with Anchor, and they include:
Deposit: The easiest way to earn is to deposit your UST onto the Anchor protocol. The protocol positions itself as a savings product, and with a 20% APY, no other DeFi platform truly compares.
Borrow: Users can borrow UST by providing bonded LUNA or ETH as collateral. The reward distributed in ANC tokens is higher than the interest paid for the loan. You can check the exact Net APR on the borrow page.
Stake ANC: Users can also purchase and stake ANC to earn the staking rewards on the Anchor platform and participate in governance. The current APR for staking can be checked on protocol page.
Provide liquidity: It is also possible to earn rewards by providing liquidity for ANC through staking ANC-UST LP tokens. You will find the actual APR on this page.
Using Anchor protocol is relatively easy. There is nothing like account freezes or a minimum amount to deposit before earning yields on savings, and there is a possibility to withdraw funds instantly. All it takes is a few basic steps and the user is good to go.
Check out our step-by-step guide on using the platform and yield farming strategies on Anchor.
How to Stake on Anchor Protocol?
The process is simple. Just visit the Anchor Protocol page. Visit the “Earn” section. Once here click on “Deposit” and enter the required crypto details for the deposit.
If you do now own any UST, you can purchase luna or UST from an exchange that features these assets.
After purchasing it, you will need to withdraw the sum to your Terra Station wallet. Make sure you write down your password and mnemonic phrase.
You also have the option of using the Terra Wallet to swap from luna to the stablecoin UST, and vice versa. Must keep LUNA for pay all transaction fees.
Once you have staked your stablecoin, the interest will be paid to you in an aUST token, which you can convert into UST later. You can then withdraw it whenever you wish, without any inconveniences.
Users can now deposit stablecoins that are based on Ethereum as well. These include BUSD, USDC, DAI, and USDT. The yields are provided in reference to the Anchor Rate.
Risks associated with Anchor protocol?
Before invest your hard earn money into anchor protocol you should know the riks associate with Anchor protocol. We discuss few major risk associate with the protocol.
Liquidation risk
Like all DeFi platforms, Anchor protocol has one major risk that users should be aware of and it is loan liquidation. This can happen when the value of the collateral falls below the value of the loan. This is common to all DeFi platforms so the recommended borrow usage ratio is 75% or even lower.
Smart Contract Risk
This is always a risk in every blockchain that there might be a bug in the code that allows a hacker to steal funds. While Anchor has been audited by Certik, so was Poly Network that was hacked for $600,000,000 this year (loot was later returned).
Auditing, while nice to know that a 3rd party reviewed the code, is not the final say on whether there is a bug that can provide an opportunity for theft of funds. Hackers are clever people and always trying to figure out new ways to probe security. Additionally, new major security bugs that span the whole internet come out all pretty regularly, so no bugs in the past does not guarantee no bugs in the future.
UST De-Pegging Risk
Since UST is determined algorithmically and is only backed by the value of its sister coin LUNA, the conversion ratio can deviate from 1:1 during periods of market stress. Bringing UST back to $1 requires burning LUNA for UST, which makes fewer LUNA available to sell and provides an arbitrage opportunity for when the peg returns for those willing to take the bet.
UST has only been around for a year, so it really hasn’t been battle tested during the worst periods of market volatility. However, back in Dec 2020, the UST lost 15% before later recovering. It also had another episode in May 2021.
Anchor Protocol Insurance
Now that you know about the risks that exist with Anchor protocol, it’s important to understand that you can mitigate these risks by purchasing Anchor’s insurance plans. Crypto insurance has become increasingly sought after in these volatile times. Thus, Anchor Terra has partnered with third-party insurance providers who offer plans for the purpose of reducing the risks of de-pegging and smart contracts. Insurance can be purchased by effectively lowering your annual yields.
Even though the premium price for an insurance plan differs with each insurer, the average price is around 7.3% per year. Keep in mind that the insurer determines how much they pay out in the event that you file a claim, which means that there’s a risk the payout could be lower than you’d like. However, these insurance plans are a great way to lessen the amount of risk you take on when you invest in Anchor protocol. diminishing risks of fears of depegging and DeFi hacking.
Conclusion
Anchor protocol is an innovative saving product offering unprecedented APY on stablecoins, primarily UST but gradually including Ethereum-based stablecoins as well. Anchor’s structure ensures that the returns are stable and dependable. It is built on the Terra blockchain, which means better scalability and cheaper fees. In the long term, Anchor is positioned to be sustainable and further drive DeFi adoption.
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