The Anchor Protocol is the poster child of Terra’s blockchain and live up-to its name of “Anchor” as it anchors the whole Terra Blockchain. Anchor protocol provides a superior savings account on Defi with an eye popping 19-20% returns! If you are thinking what with your mouth wide open, let me repeat – Anchor offers 19%+ returns on your UST (USD stablecoin) on Terra blockchain.
Though it is been less than 1 year since the launch of Anchor Protocol, it is the second largest Defi Protocols. Guess who is at the top? Its is AAVE and it is been around for ages ( ~ 4 years ) in terms of crypto timescales. During this period Anchor also boosted UST market cap from $2 billions in mid 2021 to $10+ billion with a staggering 5 times in growth. If you are wondering 5x growth is not a big deal for a crypto blockchain, look carefully there is B in the market cap. We are talking about 5X growth at billions scale, not at hundreds or millions scale. Also Anchor propelled UST to get past DAI, the first decentralized stable coin built using over collateralization.
So how did Anchor propelled UST market cap as well as Terra blockchain’s growth? Remember your were wonder how the hell one would get 19% returns on UST deposits? Yes those 19% returns attracted millions of users to Terra blockchain and several developers built application on top of Anchor to provide even more returns for those who can take bigger risks!
In order to provide 19% returns Anchor has been using it 75 millions of reserves that were infused into protocol till Feb 2021 and when those reserved were exhausted another 480 millions were added to top up. But just like a venture capitalist who can not keep on pumping money in to a start up that burns more cash than it revenues, Terra’s lead Do Kwon recently opened up discussion on dynamically adjusting Anchor’s returns based on reserves. The community proposed Prop 20 to introduce the variability and it is been passed.
1/ With the passing of Prop 20, Anchor will now implement a more sustainable semi-dynamic Earn rate!— Anchor Protocol (@anchor_protocol) March 24, 2022
Let’s cover what this will look like 🧵
According to the newly passed proposal, Anchor will adjust the earn rate by 1.5% every month. Here is a simple explanation how this would work.
5/ Four examples of rate adjustments:— Anchor Protocol (@anchor_protocol) March 24, 2022
1. Yield reserve ⬆️ by 1.5% ➡️ Earn rate ⬆️ by 1.5%
2. Yield reserve ⬆️ by 3% ➡️ Earn rate ⬆️ by 1.5%
3. Yield reserve ⬇️ by 1.5% ➡️ Earn rate ⬇️ by 1.5%
4. Yield reserve ⬇️ by 7% ➡️ Earn rate ⬇️ by 1.5%
According the proposal recently infused $436 million reserves will have a run way of Week 47 of 2022. Along with the variable earn rate and the top up of yield, Anchor will be able to become self sustainable by Q3 of 2022.
Impact of declines in “Earn Rate”
Though many cheered the variable earn rate of Anchor Protocol as it helps Anchor Protocol to stabilize its yields, several community members are a bit upset as 20% returns are not guaranteed anymore.
Other defi lendnig & borroring protocols like Aave & Compound has experienced negative growth whenever the interest rates were reduced and we could safely assume that Anchor will see similar patterns whenever the rate drops below 19%.