Anchor 101: the ultimate DeFi bank
Anchor is a savings, lending, and borrowing platform. Anchor’s savings protocol blows traditional banks out of the water with 19.36% APY on UST deposits. Anchor’s goal is to disrupt central banks by providing a decentralized central bank target rate that will become a reference rate for the DeFi ecosystem. Anchor’s low volatility interest rate is the highest amongst stablecoins. This has drawn many to UST.
Anchor aims to solve one of the biggest problems in DeFi: unstable, volatile, high risk rates, through its stable interest rate. Anchor’s rate is stable, a huge plus when compared to the diminishing rates of most DeFi protocols. Most existing money market yields on stablecoins were too volatile for people to use until Anchor.
Anchor uses a very clever mechanism to consistently deliver a high yield. To understand how lenders (people that deposit UST on Anchor) are paid, it’s important to know about the borrowing side of Anchor.
Borrowing on Anchor is special in a few ways. Anchor only accept interest bearing tokens as collateral. Only bAssets can be staked on Anchor. bAssets are liquid, tokenized representations of staked (bonded) assets in a PoS blockchain. In order to borrow UST on Anchor, you must provide bLUNA (staked LUNA) or bETH (staked ETH). Anchor loans are overcollateralized. The maximum borrow limit is 50% of the value of your collateral. UST borrowers also pay a borrowing fee to lenders and forfeit the yield they would have earned on their collateral.
The overcollateralization of loans effectively boosts the PoS yield available to lenders. For example, if collateral worth $200 was to earn 10% yield ($10), up to a 20% yield could be paid out to borrowers. Only $100 was lent and the $20 generated from this amounts to 20% of the loan amount. $UNA and ETH are volatile though. Anchor has a reserve that it uses to deal with fluctuations in the value of collateral. If the yield is not enough to pay lenders, then lenders are paid through the reserve. Here’s a great graphic by @_supercycled that depicts how lenders are paid in Anchor.
At times the yield generated by the borrowing pools outperforms the amount paid out to lenders this excess is used to replenish the Anchor reserve. Anchor’s 20% yield is sustainable only if the yield produced by the borrowing pool is > 20% during good times, and if the yield reserve is big enough during bad times. Essentially, the borrowing pool should not be used up completely.
Anchor defines a “threshold deposit rate”, which is the minimum deposit rate the protocol needs to keep when yields are below the target to be sustainable. When the realized deposit rate is below the target rate, the deposit rate is subsidized via Anchor’s Yield Reserve borrowing is incentivized through ANC tokens. ANC tokens are paid out to borrowers in this scenario.
Anchor’s Yield reserve is currently about 370 million UST. Take a look at the TVL and current rates:
Anchor savings also has no minimum deposits, account freezes, or signup requirements. Anyone with an internet connection can use anchor and start earning money. There is definitely a strong focus on UX, and Anchor is much easier to use than many DeFi services.
Anchor is changing the way we think about DeFi. It’s pioneering high, stable yields in the space. Moreover, it’s bringing users onto the Terra ecosystem and promoting the use of UST and stablecoins. Moreover, it’s easy to get started and the yield is great.