11 min read
In the Terra network, users, creators and those who build the ecosystem on a daily basis agree on one point, stablecoins are extremely important. Not only for Terra, but to spread the adoption of the crypto world in general..
Terra owns its own stablecoin, “tied” to the price of the dollar, called UST. Its value comes from the network’s native token, Luna. To create UST it is necessary to “burn” Luna, a mechanism that makes it scarcer. So what better than to create applications that use UST?
Of course, Anchor Protocol is one of them. By reading this article you will be able to answer the question “What is Anchor Protocol?” and understand why it is defined as “the workhorse” of the Terra network.
What is Anchor Protocol?
In simple words I can define it as a deposit and loan application, which pursues a really particular objective and found a way to achieve it, with an innovative and extremely flexible method.
One need look no further than its White Paper, written by Nicholas Platias, Eui Joon Lee and Marco Di Maggio in June 2020, to recognize the level of innovation that has governed this protocol since its inception.
According to the writers of this excellent scientific piece, the number of quality financial products born within the DeFi ecosystem is astonishing. But in their eyes, one element needed to attract new users was missing: stability.
The stablecoins were a great advance to introduce outsiders to the ecosystem, but where stability is absent is in the returns provided by the deposit platforms. The vast majority of platforms, in order to guarantee this return, depend on the interest paid by those who request a loan. Both groups, depositors and borrowers move without permission, which impacts rates in the form of volatility.
In order to fill this gap, the Anchor team worked on an innovative solution.
How to guarantee a stable rate?
We are in DeFi, an ecosystem where the impossibility of prohibition on users’ movements is one of the main flags. Therefore, the Anchor team knew they had to come up with solutions to keep the rate of return for depositing UST stable, without compromising the users’ freedom.
They arrived at the following points:
- It is necessary to encourage borrowing in order to ensure a constant interest rate to cover the cost of return on deposits.
- When the previous point is not sufficient, a treasury or reserve must be generated, which allows for intervention and thus sustains the stable rate of deposits.
It is in point two, where Anchor becomes a pioneer in this ecosystem. Before unraveling the mystery, let’s clarify what the user can do within Anchor’s platform.
What can I do in Anchor Protocol?
As I made clear at the beginning, it is a deposit and lending platform. Anchor also has its own token, known by the ticker ANC, which serves extremely important functions for the health of the platform.
So, without further ado, I will go on to unravel the possibilities within the protocol and unveil the particular mechanism for maintaining rate stability.
Anchor’s greatest attraction, without a doubt, is the return of around 20% APY on UST deposits. The protocol, thanks to its mechanisms, has never, even after the fall of May, seen its return below 17%, nor above 22%, the “normal” being the famous 20%.
In short, for the user it is as simple as connecting their Terra Station Wallet to Anchor’s website, clicking on the “Earn” section, selecting the desired amount and start generating 20% per year in dollars.
Those who entrust their deposits to the protocol will receive a token, called aUST, as proof. Initially, aUST had no use, but if you follow me to the end of this article, you will find out what’s new about its uses.
ANC is the token of the platform and is the tool by which its holders participate in the decisions about the direction of Anchor. To fulfill this form of active participation within the protocol, it is necessary to go to the “Governance” section where the active votes are located.
Also, within the same section, ANC holders can deposit it and receive a percentage of, as of the date of the article, 6.53% per annum. Another option is to provide liquidity in the ANC-UST pool, which offers a return of 56%.
Just like any other deposit platform, there is a flip side: loans, available in the “Borrow” section. It is from the interest paid by borrowers that 20% of the deposits are generated.
At the moment, those who apply for a loan at UST must pay a rate of 25.15% per annum. But, next to this rate, you can check another number, 26.43%, under the heading “Distribution APR”.
This is where the percentage paid to borrowers is specified. This is the loan incentive method, through the platform token, since this percentage is paid through ANC.
So, as of today, borrowers on the platform are making a 1.28% profit for borrowing. Yes, literally Anchor pays those who apply for a loan.
So far, so “normal”. But the innovation lies in the coins enabled to collateralize, or leave collateral, to apply for a loan. There are two options, bETH and bLUNA… These are two tokens that you may not be familiar with. And this is because we are dealing with two “bAssets” and, now we come to the mechanism for holding the stable rate for UST deposits.
What is the “bond” and “its bAssets”?
In the “Bond” section we can deposit Luna and in return for our deposit, we will receive bLuna. The action of depositing Luna in this section, is none other than to delegate those Moons with a validator of the network, for this reason is that we must select a validator to deposit Luna and mine bLuna.
It is time to define a bAsset. It is a token that represents a native coin of a Proof of Stake network, in this case Luna, delegated with a network validator. These bAsset, have a substantial difference with cryptocurrencies delegated with validators by the usual method. Their utility is different and they can be used, in this case, as collateral to apply for a loan in Anchor.
Now, if bLuna is the representation of Luna delegated with a validator, where do the rewards obtained by the creation of a new block go? And here comes the magic of Anchor Protocol. The rewards are collected by the platform, automatically sold by UST and accumulated in the treasury of the protocol. In this way Anchor ensures that it can sustain the stable rate of 20% for those who deposit their UST.
In case it detects that treasury reserves are decreasing, Anchor’s algorithm increases the rewards in ANC for borrowing, which generates two scenarios:
- Increase in interest paid on loans
- Increase in the mint of new bMoons, which generates greater rewards and greater accumulation in the treasury.
This mechanism allowed that, even during the large fall in May and other smaller falls that occurred closer in time, the percentage of return on UST deposits was not affected.
The future of bAssets and their flexibility
The method by which Anchor maintains its famous stable rate is not only innovative, but also flexible.
A section ago, I mentioned that there is not only the possibility to collateralize via bLuna, but also via bETH. This token, born in the same way as bLuna, but represents ETH staked in the “beacon chain”, Ethereum’s Proof of Stake chain.
Behold, the greatest value of bAssets, any currency native to a Proof of Stake network could be transformed into a bAsset, contribute to Anchor’s treasury and serve as a deposit guarantee when applying for a loan in UST.
The future of Anchor and its bAssets looks interesting to say the least.
Summarizing the Anchor Protocol options
If I have met my objective, by now you will have no doubt that Anchor Protocol is not a simple decentralized application in which you can deposit capital to obtain a return or apply for a loan to obtain the necessary capital for your investments.
It is therefore better to summarize the options in order to get an orderly idea, without any intention of giving financial advice:
- In the “bond” section it is possible to deposit Luna and to issue bLuna
- These bLunas can be provided as collateral or guarantee, in the “borrow” section, to apply for a loan in UST, paying, to date, 25.15% per annum, but receiving, today, 26.43% in ANC, Anchor’s governance token.
- In the “Earn” section, the UST deposit is enabled, with a stable rate tending to 20% per annum.
- Finally, there is the possibility of depositing ANC in exchange for 6.53% or providing liquidity to the ANC-UST pair with a return of 56%.
The possible combinations of these options are highly attractive.
More opportunities? Yes
Don’t close the tab just yet, the benefits derived from Anchor Protocol don’t end there. The token you get when you deposit UST on the platform, the aUST token, has gained traction on the Terra network. As of today, it serves as collateral on the Mirror platform, while continuing to generate that attractive 20%.
On the other hand, Anchor is Terra’s “workhorse”, because its 20% rate is easily extensible to other applications. How? Through the SDK, software development kit, that the platform itself provides to simply integrate these benefits to any platform, even outside Terra’s network.
Brief reflection on Anchor
At the end of this article, it is clear why Terra Labs, the organization behind the Terra network, understood Anchor’s potential early on and followed its development closely.
Stability in returns for depositing stable coins, those that replicate the price of a fiat currency, in this case the dollar, is an unprecedented feature in the crypto ecosystem.
Anchor protocol not only offers this possibility, but also allows other platforms to make use of its stable rate. In addition, its bAssets invite all POS networks to join. With applications with such innovative mechanisms, the future is bright for Terra Network and its “Lunatics”…