Docking DeFi: Is the Anchor Protocol's Lucrative APY Sustainable?

Docking DeFi: Is the Anchor Protocol's Lucrative APY Sustainable?

DeFi is risky, which means there are as many horror stories as there are wild successes. But which category does Anchor Protocol fall into?

Docking DeFi: Is the Anchor Protocol's Lucrative APY Sustainable?
Guy Ovadia

ByGuy Ovadia

Updated Jun 22, 2022

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Passive Income

Passive Income

The yield earned through traditional saving accounts is nothing compared to what investors can make with decentralized finance (DeFi). That said, every platform uses a different mechanism for staking and offers different reward rates, and depositing your assets into any one protocol requires a serious risk calculation. 

Although the remaining 40% of ANC's supply is allocated for borrower rewards, the tokenomic situation is damaged…

While DeFi seems like a no-brainer when compared to old-school banking, it's important to mitigate risk by spreading your funds across multiple platforms—and Anchor is a perfect example of why this diversification is important. Let's dive into what the Anchor Protocol is, how it works, and why investors should tread carefully in the potentially deadly waters of DeFi.

What is Anchor Protocol?

Anchor is a Terra-based DeFi stablecoin savings protocol that allows users to earn high APY by depositing Terra algorithmic stablecoins into the protocol. Anchor also allows users to enter collateralized debt positions against liquid staking tokens minted through the protocol. This means that on top of offering high-yield stablecoin savings, Anchor enables investors to participate in proof of stake consensus protocols while simultaneously borrowing the UST stablecoin against their staked cryptos.

Anchor "Earn"

The protocol's main feature is high yield stablecoin savings, and users can access Anchor's stablecoin savings through the "Earn" section of the Anchor WebApp. This is where UST can be deposited into the protocol to earn a high interest rate, currently advertised as 18.36% APY. Anchor says it plans to support other Terra stablecoins in the future, but this may have been thwarted by the recent UST depegging event and subsequent crash of LUNA crypto.

In light of UST's depegging from the US dollar, many have criticized the high APY rate offered through the Anchor Earn UST savings protocol for being unsustainable and contributing to the destabilization of Terra stablecoins. While this has some validity, it's more likely that the crash of the UST stablecoin was caused predominantly by Terra's flawed stablecoin minting mechanism. Anchor has other mechanisms for generating yield for its users, but heavy reliance on the Terra protocol and UST has severely hindered the profitability of Anchor.

Bonded assets (bAssets)

The Anchor Protocol also offers a liquid staking mechanism that enables users to borrow UST against crypto assets they've deposited into staking contracts. This means users can earn staking yield from some of the best proof of stake cryptos while simultaneously using those staked assets as collateral for a stablecoin loan. Anchor's liquid staking tokens are called bAssets (bonded assets), and they're a derivative representation of cryptos deposited into staking contracts.

For example, users who deposit LUNA into Anchor's LUNA bAsset staking contract will have their LUNA coins automatically delegated to Terra validators in return for bLUNA. bLUNA holders earn the same annualized interest rate as all LUNA stakers—currently around 38%—but are also able to leverage their bLUNA to borrow UST. Other bonded assets that can be used as collateral are bETH for staked ETH, bATOM for staked Cosmos ATOM, and bSOL for Solana staking.

Anchor Borrow

Anyone holding a bAsset can provide it to the protocol as collateral for borrowing stablecoins. However, the Anchor Protocol only supports the UST algorithmic stablecoin, which means loans can only be distributed in a stablecoin that has depegged from its target value. While Anchor is unique in that their liquid staking solution and stablecoin borrowing mechanism are all built into the same protocol, it's probably wiser to borrow collateralized stablecoins through a DeFi borrowing and lending like Aave and use a compatible liquid staking platform like Lido.

ANC token

Users who borrow stablecoins from the Anchor Protocol (or deposit ANC-UST Terraswap LP tokens into Anchor) earn ANC tokens, which is the governance token of the Anchor Protocol. ANC token holders can stake them to vote on polls that decide the fate of the Anchor Protocol while earning in-kind participation rewards. A portion of all fees generated by the protocol is used to buy ANC from the ANC-UST liquidity pool on the TerraSwap decentralized exchange. 

The initial distribution of ANC granted 50 million tokens as an airdrop to LUNA stakers. However, the ANC purchased using a portion of fees generated by the protocol—bAsset fees, liquidation fees, and the vaguely described "excess yield"—is redistributed to ANC stakers rather than going into yield reserves. Furthermore, ANC suffers from poor tokenomics: 30% of the 1 billion supply goes to investors and Terraform Labs—the developers of Terra LUNA, Terraswap, and Anchor—while 5% goes into the liquidity pool from which the Anchor Protocol buys ANC, and 10% goes to LUNA stakers. 


A tenth of the total ANC supply goes to a dedicated Anchor community fund, but it's unclear exactly what purpose this fund serves. Although the remaining 40% of ANC's supply is allocated for borrower rewards, the tokenomic situation is damaged by cross-pollination within the Terra ecosystem as well as the Anchor Protocol's buying of ANC, which constitutes a price-pumping feedback loop. This combination of leveraged borrowing against staked LUNA and Anchor's ANC buyback mechanism trading against UST may have contributed to the collapse of LUNA.

Anchor on Avalanche

The Terra blockchain and LUNA ecosystem are in steep decline. Meanwhile, the Anchor Protocol could still live on, since it was deployed on the Avalanche blockchain in addition to Terra. While this opens up Avalanche (AVAX) as a bonded asset to be used as collateral, the base currency of the protocol is still the failed UST stablecoin. So, while Anchor could survive on Avalanche and perhaps other networks as well, making it a viable protocol would require a major restructuring around a collateralized stablecoin like USDT or USDC.

"Money is my military, each dollar a soldier. I never send my money into battle unprepared and undefended. I send it to conquer and take currency prisoner and bring it back to me."

Kevin O'Leary would agree that investing is a numbers game in every sense of the word. You need to be prepared to fail 99 times before even one of your ventures sees success. This truth was taken to the next level with the experiment we call cryptocurrency. While utility may seem like everything—and no currency can compare to the US dollar when it comes to utility—we often disregard how important investor confidence is. The value of the US dollar is derived from a shared fiction of what it represents, but that value disappears the moment we snap out of our collective delusion. How can this be prevented?

"Money is my military, each dollar a soldier. I never send my money into battle unprepared and undefended. I send it to conquer and take currency prisoner and bring it back to me."

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