Anchor Protocol: A Savings Protocol Offering Up To 20% APY
Author: @Pathfinder0x18D
⚠️Disclaimer: Not Financial Advice || Do Your Own Research!⚠️
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, its recent updates, 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 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.
How does Anchor Protocol work?
Anchor protocol serves as a money market between lenders and borrowers of stablecoins. The lender can deposit their stablecoins on the platform for lending and earn interest on it. The borrowers, in turn, can borrow these stablecoins by providing stakeable assets as collateral. These assets are regarded as bonded assets, and currently, bLUNA is the only bonded asset that can be used as collateral. The bonded asset is then locked up, and UST is borrowed against it at an LTV ratio defined by the protocol, which is currently a maximum of 40%. Anchor Protocol operates using a liquid staking mechanism. Staking rewards earned on bLUNA by borrowers are liquidated by the protocol into UST for depositors allowing them to earn target yield up to 20 %.
Althouth 20% APY appears too good to be true, it is real. 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 LTV rate. Also, the loans are over-collateralized 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.
According to the planned upgrades, bETH will be soon deployed on the Anchor mainnet as collateral. Following bETH, other PoS staking derivatives including bATOM, bSOL, and bDOT will 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 next 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 1 billion UST. Users can check the Anchor dashboard to get all the latest information and data about the protocol. The dashboard was recently updated to include yield reserve, TVL, ANC supply and market cap, and ANC buyback indicators. The total deposit, borrow, and collateral value is now visualized as well.
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 as collateral. The reward distributed in ANC tokens is higher than the interest attached to 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 exchange liquidity for ANC by 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 it is recommended to borrow at the LTV ratio of 45% or even lower while liquidation occurs at 60%.
Several measures have been put in place to mitigate the losses and one of those is the feature added to the Anchor desktop that allows users to turn on LTV notifications. You can set a threshold on LTV and once it passes that you will be notified. This enables users to manage risk more efficiently on Anchor. It is available on desktop browsers through WalletConnect, Chrome extension, and View an address with Ledger. Significantly, Anchor is now also available on mobile via the WalletConnect integration to which any user with Terra Station mobile can connect.
TUTORIAL ON USING ANCHOR
Anchor allows you to earn a stable 19.5% yield on your UST deposits. There are two main ways to access this. The first is using the Terra Station
https://station.terra.money/
Method 1: Terra Station
In your Terra Station app, click Wallet in the top left. You will see ANCHOR EARN in the bottom right of your screen. Click earn.
This takes you to the Anchor Earn screen. From here simply select the amount of UST you want to deposit, type in your password, and click submit.
Give the protocol a few seconds to process your transaction, and then you are all done! Your funds are deposited and earning interest. You should see a success confirmation message.
Method 2: Anchor Web App
The other main method to use Anchor savings is through the Anchor Web App
https://app.anchorprotocol.com/
Once you open the Anchor Web App, head to the Earn page. You can select this in the tab at the top of the screen. Click Deposit.
In the pop-up display that appears, type in the amount of UST you want to deposit. Then click Proceed.
You will be given the option to Deny or Post the transaction. Choose Post.
After a few seconds your transaction will process and your deposit will be complete! You should see a completion confirmation message appear.
Now on the Anchor Earn page you will be able to see the total value of your deposit in the top left. You will see your expected annual interest just below this, and the interest rate you are earning on the right.
Borrowing:
The easiest way to borrow on Anchor is head to the web app
https://app.anchorprotocol.com/
First we need to prepare our assets to provide as collateral for the loan. We can use either Luna or ETH (soon to be others too!) and will be able to borrow up to 50% of the value of our collateral.
In this example I will use Luna to take out a loan. Head to the bASSET tab in the Anchor web app. Click the Luna/bLuna option.
We are now going to “Mint” some bLuna by “Burning” our Luna. bLuna is bonded Luna, and is the asset we need to take out a loan. You will be able to turn your bLuna back into Luna at 1:1 ratio if you change your mind, don’t worry!
Type in the amount of Luna you want to turn to bLuna and click Mint at the bottom of the screen. Wait for the transaction to compelte, and you will have your bLuna and be ready to borrow!
Now head to the Borrow tab of the Anchor Web App. At the bottom of the page you will see an option to provide bLuna. Click this.
Type in the amount of bLuna you want to provide as collateral. The more bLuna you provide, the higher your borrow limit.
At the bottom (green bar), you will see your loan-total-value (LTV). This shows the value of your loan relative to your collateral. This is an indicator of the risk on your loan. If this reaches >60%, your collateral will be liquidated to repay your loan.
Click proceed, confirm the transaction and you are ready to go! Borrow complete.
On the borrow tab of the Anchor Web App you will be able to see the details of your loan. On the left you can see the value of your collateral, in the middle your borrowed value and on the right the net interest you are paying on this loan (ANC rewards minus borrowing interest rate). Keep an eye on the the green LTV bar at the bottom of the screen. If you see this creeping up towards 60% you might want to repay some of your loan, or post more collateral. You don’t want to get liquidated!
Repaying your loan:
When it comes time to repay your loan, click the Repay button at the top of the borrow page. Type in the amount of UST you want to repay. To repay your loan in full, click the “Max” number just below the Repay Amount tab (this is indicated in red in the screenshot below).
The more UST you repay, the more your LTV will decrease. Add UST until your LTV falls to a value you feel comfortable with. Then click proceed. Confirm your transaction, and you are good to go.
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.
⚠️Disclaimer: Not Financial Advice || Do Your Own Research!⚠️
This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions.