Today Josh and I are diving deep into the Anchor Protocol where you can earn a juicy 20% interest on your stable coins. We discuss not only how to use Anchor, but how it works, the dApp ecosystem being built on Anchor and we answer the questions on everyone’s mind “How the hell can they pay ~20% on your stable coins. And can it last?”
About Terra & Anchor
As we discussed on our recent Terra episode, this ecosystem is filled with jargon. A few terms to keep in mind:
- Terra - The blockchain Anchor is built on
- LUNA - The base asset of the Terra blockchain is minted and burned to help UST maintain it's $1 peg
- UST - The primary stable coin of the Terra blockchain and the only stable coin you can deposit into Anchor
- Anchor - A dApp which exists on the Terra blockchain
Anchor describes itself as a savings protocol. Sometimes referred to as the "Stripe for savings". The simplest way to think about Anchor is as a high interest savings account.
How Anchor Works
In a lot of ways, Anchor is no different from a traditional bank. Savers deposit stable coins to earn interest and borrowers pay a fee to borrow those stable coins. But since we're in DeFi Land, Anchor can do a few cool things that banks can't.
Let's start with the questions on everyone's mind, "How the hell can Anchor pay 20% APY!?". Typically when you hear of giant returns there's something highly risky or down right shady going on, but not with Anchor. Anchor earns revenue in three ways:
- Anchor charges a fee to borrowers
- Anchor earns staking rewards on bonded assets (more on this later)
- Anchor earns 1% when a borrow's collateral is liquidated
- Unconfirmed, but Anchor plans to provide extra UST as liquidity to other projects
Preparing To Use Anchor
Before you can use Anchor you'll need a Terra wallet called Terra Station. The Terra Station wallet comes as a desktop app (Windows, Mac OS), mobile app (iOS, Android) or Chrome extension. We highly recommend using the browser extension because it can be paired with a Ledger hardware wallet for maximum security. Once you have the Terra wallet setup, you'll have a Terra address (sometimes called an account) which works similarly to using MetaMask and your Ethereum.
Once you've got a Terra wallet you'll need some native UST to deposit into Anchor Earn or some collateral like ETH or LUNA if you plan to use Anchor Borrow. UST is sold on many exchanges, however it's often wrapped on the Ethereum network making it wUST, which can't be deposited directly into Anchor without first bridging it to Terra. You can find step by step instructions for getting native UST into your wallet in our guide to Anchor Earn.
How To Use Anchor
To use Anchor protocol, head over to app.anchorprotocol.com. Unlike many DeFi apps, Anchor has a clean design and is pretty easy to use. You'll see a basic tab navigation across the top as well as a button to connect your Terra wallet on the top right.
Dashboard - Shows basic stats about Anchor Protocol including Total Value Locked, the price of aUST and ANC, the current yield reserve and a breakdown of collateral deposited.
My Page - Shows your current asset breakdown and an area for claiming your ANC rewards if you're staking or borrowing.
Earn - This is why most of you are here. All you have to do is click the "Deposit" button to drop your native UST into Anchor to start collecting that ~20% APY. It really is that easy. You're also free to withdraw at any time. Your deposit remains liquid. For detailed instructions checkout our Anchor Earn guide.
Borrow - To borrow against ETH, first you'll need to stake it with Lido and withdraw it as bETH to your Terra wallet. To borrow against LUNA, first you'll need to bond it in the Bond tab to convert it to bLUNA. Once you have a bAsset, you can "Provide" it as collateral and borrow here on the Borrow tab! Sounds tricky but it's not! For more details, read our step by step Anchor Borrow guide.
Bond - There are three sections to the Bond tab: Mint, Burn & Claim. Mint allows you to convert your LUNA to bLUNA to provide as collateral in the Borrow tab. Burn is how you reverse the process to get bLUNA back to LUNA, however this process takes 21 days so we recommend "Instant Burning" which charges a small fee for swapping immediately. If you choose to wait, you can claim your LUNA 21 days later in the Claim section. Also of note, is that bAssets earn rewards on their own which can be claimed here as well.
Govern - ANC token holders can stake their ANC to earn rewards and vote on governance proposals and help guide the direction of the Anchor Protocol. Feeling ambitious? Here you can even create governance proposals of your own.
The ANC Token
The ANC token is Anchor's "Governance" token, meaning it can be used for proposing and voting on protocol changes. When Anchor is running profitably, ANC also captures a portion of Anchor's access yield which is used to buy back ANC and reward ANC stakers.
But as it stands today, ANC is primarily used to incentivize borrowing on Anchor. Currently, to operate smoothly Anchor charges a ~15% APR to borrow, which is high! But the protocol issues 15% rewards to borrowers to help balance it out making it (sometimes) free to borrow against bAssets in Anchor. The fees and rewards for borrowing fluctuate depending on supply and demand as well as how much UST is deposited in Earn.
One way that many LUNAtics earn ANC rewards is through staking their LUNA. 5% of ANC's total supply will be paid out to LUNA stakers over the course of 2 years.
The total supply of ANC tokens will reach 1B after 4 years. You can read more about the ANC's tokenomics and ANC issuance in the docs.
Anchor Protocol Risks
No DeFi project comes without risks. A few risks of using Anchor include:
- UST Depegging - The only asset you can deposit into Anchor Earn is UST, meaning your savings are held in UST. The entire Terra blockchain is specifically designed to maintain the peg of its stable coins, but if UST was to depeg from $1 and was unable to rebalance, this would put the entire Terra ecosystem at risk, including Anchor.
- Smart Contract Failure & Hacks - Software running on a blockchain is called a "smart contract". All DeFi protocols are written as smart contracts. Like any software, they can run into issues if not carefully written and audited. Anchor has been through several audits and institutes a bug bounty program to stay on top of vulnerabilities. You can read more about Anchor Security here.
- Price Oracle Failure - In order for Anchor's smart contracts to function, they needs to accurately know the price of UST, LUNA and ETH. This information is external to the Terra blockchain so Price Oracles are used. If these oracles ever report incorrectly, it can cause unjustified liquidations to occur. This actually happened in Dec. of 2021.
- Supply/Demand Imbalance - Anchor's yield comes from loaning UST to borrowers. If there are more savers than borrowers, or vice versa, the system breaks down.
Anywhere we have risk, we have insurance! And Anchor is no different. A few companies offer various insurance options but be sure to read the fine print!
- Unslashed Finance - 4.687% /year for UST peg and smart contract insurance
- Nexus Mutual - 2.6% /year for smart contract insurance
- Risk Harbor - ~2% /year for smart contract insurance (depeg coming). Built on Ozone, Terra's native insurance product
Anchor Protocol Sustainability
Now for the question on everyone's mind, "How can Anchor pay 20%! And how long can it last!?". The answer is quite simple. If we calculate Anchor's revenue and subtract it's costs, we can get a clear understanding of the Anchor Protocol's sustainability.
December 1st, 2021
- Income: 338,080,564 bLUNA rewards + 18,802,256 bETH rewards + 238,412,076 Lending = $595,294,896
- Expense: 2,530,720,000 * 0.1956 = $495,008,832
- Total: 595,294,896 - 495,008,832 = $100,286,064 gain!
However, since December a lot has happened. Specifically, the deposits in Anchor Earn doubled from $2.5B to $5B without much change to the amount of collateral in the system. $1.26B of which came from Abracadabra's UST "degen box", a tool which allows people to borrow against the money already in Anchor and loop it up to 10x!
We mentioned Supply/Demand Imbalance as a risk, well here have it. Anchor's current P&L is as follows:
January 6th, 2022
- Income: 452,221,461 bLUNA rewards + 19,052,860 bETH rewards + 298,015,187 Lending = $769,289,508
- Expense: 5,305,330,643 * 0.1956 = $1,037,722,673
- Total: 769,289,508 - 1,037,722,673= -$268,433,165 loss!
As it stands right now, the Anchor Protocol is paying over $1m/day from its yield reserves which is at $65,719,032. This obviously can't last forever so something has to change. A few options include:
- Lowering the savings rate
- Attract more (and types of) collateral
- Borrow collateral or money to extend the runway
Our guess, all of these options will happen. 20% was an introductory rate used to attract people to Anchor. That worked, maybe too well. We already know that bATOM and bSOL collateral types are in the works and should launch soon. And Terra Form Labs (TFL), the core development team of the Terra blockchain, has topped up Anchor's yield reserve in the past.
Anchor dApp Ecosystem
Assuming Anchor can get its P&L back in check, the Anchor Protocol will continue to thrive. The protocol has not only attracted lenders and borrowers but also a collection of developers eager to build on top of Anchor including:
- Nexus - Automated yield optimization. Deposits your collateral, borrows UST against it, drops your UST in Anchor and manages your LTV for you to maximize your return.
- Kujira - Participate in Anchor collateral liquidations. A cool way to buy the dip, at a discount!
- Pylon - Yield redirection. Use your interest to pay for things, not your principal. The Pylon “Gateway” allows you to "invest" your interest in startups launching on Terra.
- Angel - Charitable endowments via Anchor yield redirection. Donate your Anchor interest to charity!
- Alice - Debit card and mobile banking. What if you could pay for things IRL directly from your Anchor balance?
- Orion - Anchor bridge from ETH, BSC, Polygon. Don't want to mess with Terra wallets and UST? Deposit other stable coins into Orion and let them handle it for you.
What's Next For Anchor
Exciting times ahead for Anchor and the entire Terra ecosystem! A few things we've heard are on the horizon for Anchor include:
- bANC, bSOL and bATOM collateral This will enable tons more collateral to come into Anchor from the Solana and Cosmos ecosystem
- Lock Ups - In a podcast interview with Anchor's GM Matt Cantieri, he mentioned they were exploring the idea of offering higher yields to people willing to lock up their UST for a given period of time, akin to a CD type deposit at a bank.
- TradFi Integrations - Lots of crypto exchanges and banks are drooling to offer their clients even 1/10th the return that Anchor does, expect to see many more partnerships and integrations with Anchor over the coming years.