The Curious Case of Anchor Protocol
Are you like me? You cannot be like me but you can be an investor like me who is worried about the 20% return on UST in Anchor Protocol. The talk of the crypto twitter and among the fan boys/girls of UST is all about the stability of the best stable coin return in the whole industry.
What is Anchor Protocol?
There are many articles on Anchor Protocol and it’s platform written by @forexbrokr. The Anchor Protocol lives on Terra blockchain and is a defi protocol that is touted as a fully decentralized fixed income instrument. The protocol works as lending and borrowing market created around UST stablecoin. Lenders can provide crypto collaterals and borrow stable coins. The protocol plays around the lending and borrowing schemes and provides staking rewards to depositors and borrowers. Refer to the link below if you want to know the details.
https://docs.anchorprotocol.com/protocol/overview
Why is everyone worried about the health of the protocol?
The protocol rewards UST depositor with 20% return which is really huge compared to other stable coin returns those averages at around 10%. Because the return is so high, investors like to deposit UST in the protocol and in turn provides liquidity to the terra luna network. The protocol is considered the single biggest liquidity generator for the network. The health of this protocol could directly impact the health of the terra stable coin and the price of Luna token.
Because of this dynamic, it is important to understand that investors are panicking on the potential around the stability of 20% yield. The Luna price is dumping and that decreased the collateral value in the protocol. That means the stable coin reserve (yield reserve) which was fed by the money the protocol was making is depleting every day. The risk lies in the fact that the day the yield reserve emptied the protocol cannot provide 20% reward to depositors risking the capital flight to another network with higher yields. That’s what everyone is talking about.
What could happen?
For me, I am not very worried. I am concerned about the Anchor Protocol reputation but the yield reserve issue does not bother me. The whole concept of having yield reserve is to be used in a situation like this. The rate of reserve depletion is almost around 1 million per day. With that rate, it would take 15 days for the protocol’s reserve yield to go to zero.
The day it goes to zero, the protocol will reduce the yield and it will be decided by the market rate. That could be around 10% yield which is not bad. It is not up to the reputation but I don’t see how that would risk the whole protocol. It could definitely have cascaded effect and may trigger the coin price dump. But that is another story which related to the structure of the terra Luna ecosystem.
The CEO of the Terra Luna fired a twitter thread noting the preventative measures they are taking. Take a look at this thread.
A quick update of the current state of Anchor Protocol and the "holy" 19,5% APY.
— Route 2 FI (@Route2FI) February 8, 2022
With only $15M in the yield reserve, people are starting to get worried.
Let's take a look at the facts and what's next for Anchor:
/THREAD
1/18 pic.twitter.com/QTW7UHQh4k
As a user, these are interesting times to follow the rise (and fall-may be) of Anchor protocol and Terra Luna ecosystem. I am hopeful that nothing bad will happen and my funds are safe in the protocol. Let’s see how this unfolds in the next two weeks when the reserve will dry and there is no more money left to give to depositors like me.
Are following the chatter on Anchor Protocol?
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