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 savings protocol based on the Terra blockchain that provides its users with low-volatile up to 20% yields. 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. To learn more about Terra, read our Terra Ecosystem Overview: A Guide for Newcomers.
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 %.
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 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. 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 pro rata 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 10 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 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 this 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.
Are there any risks associated with using Anchor protocol?
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.
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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