Here are the key features of Anchor Protocol according to Terraform Labs:
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Anchor Protocol works like a bank that facilitates deposits and loans, except the bank is replaced by an automated smart contract. The protocol's smart contract automatically processes the deposits and loans.
Let's look at the two sides of Anchor's money market.
Anchor incentivizes lenders to deposit their UST into the protocol with its attractive 19.5% yield. While your UST is deposited in Anchor, it will be represented in your Terra Station wallet as aUST (Anchor UST).
Initially, Anchor only allowed UST deposits, but it later partnered with Orion Money to launch the EthAnchor bridge. This allows lenders to earn yield on Ethereum-based stablecoins like USDC, USDT, DAI, BUSD, and even wrapped UST with Anchor. Anchor also has plans to allow deposits in other stablecoins on the Terra network like EUT, KRT, and THT in the future.
Borrowers can use Anchor to borrow UST by putting up various Proof-of-Stake crypto assets as collateral. After putting up their collateral, borrowers receive “bAssets” or bonded assets which are tokens that represent their collateral like bLUNA or bETH.
Why would anyone want to borrow with Anchor? Anchor incentizes borrowers to participate by rewarding them with Anchor tokens (ANC) when they take out UST loans. At the time of writing, the Annual Percentage Rate (APR) for borrowers is 11.6% and the distribution APR is 9%. This means that borrowers must pay a net APR of 2.6%.
There is no lock-in for borrowers so they can pay off their loan at any time. However Anchor does require a 21 day unbonding period to have access to your collateral.
You're probably wondering how Anchor is able to maintain a stable yield of nearly 20%.
Here is a brief explanation from Anchor's docs:
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Remember that all returns carry with them some risk, and higher yields often imply higher risk. Here are Anchor Protocol’s key risks to consider:
Since Anchor is a programmed smart contract at its core, there is a risk of hacks or exploits to Anchor's code that could compromise user's assets.
On the flip side, Anchor's smart contracts have been audited multiple times. In addition, Anchor has a bug bounty program that rewards ethical hackers for finding vulnerabilities within the protocol. You can read more about Anchor's security here.
UST is an algorithmic stablecoin that is pegged 1:1 to the US dollar using a stability mechanism that depends on arbitrage activities by users with the Terra (LUNA) token.
For example, when the price of UST falls to $0.95 against the USD in secondary markets, users can purchase 100 UST for $95 USD on exchanges, then use the 100 UST to purchase 100 USD worth of LUNA tokens on the Terra platform.
Since it is algorithmic and decentralized, there are no US dollar reserves backing UST.
UST has temporarily lost its USD peg in the past although it was quickly restored to be 1:1. A long term loss of this peg would be disastrous to UST holders.
At the time of this writing, the “Anchor Rate” that Anchor provides to lenders is 19.5% APY. This high yield is not fixed and is subject to change by Anchor’s governance system. The “Anchor Rate” of nearly 20% may not be sustainable long term which brings us to our next point.
If too many lenders and not enough borrowers use the platform, then the “real yield” earned by the borrower’s crypto collateral may fall short of the Anchor Rate, and to make up for the shortfall, Anchor’s yield reserve will need to be drawn down.
This is exactly what is happening at the time of writing, with about 6.2B UST deposited and only 1.5B UST being borrowed. This imbalance is currently causing the yield reserve to be drawn down, and at the current rate, the yield reserve will be depleted in a matter of weeks. In the past, Terraform Labs has provided a cash infusion to replenish the yield reserve, but currently there is no indication of where this would come from.
To use Anchor Protocol, you must first hold UST in your Terra Station Wallet.
There are limited US-based exchanges that sell UST directly. Here is the process that I have followed to purchase UST:
Once you have UST in your Terra Station wallet, you can simply head over to the Anchor Protocol web app where you will be prompted to connect your Terra Station wallet.
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