- Anchor, a DeFi lending protocol, got a lot of attention this week with a 20% yield on stablecoin UST.
- High payments have raised questions about the source of the yield and whether it is sustainable.
- Cryptographic analysts expect anchors to eventually lower their payments while finding more sustainable borrowing demand.
Decentralized lending protocols offer a higher-than-usual annual rate of nearly 20% amid a stagnation in the broader crypto market amid rising interest rates, high inflation and the outlook for geopolitical uncertainty. It is attracting the attention of investors.
Anchor Protocol (ANC), a decentralized lending application built on the Terra Blockchain (LUNA), currently offers a fixed exchange rate of 19.57% per annum to depositors of TerraUSD (UST), Terra’s native dollar peg stablecoin. I will pay by the system.
Depositors can earn such high APYs or “anchor rates” because the deposited stablecoins are pooled and lent to the borrower to earn interest. To borrow UST, the borrower must pledge bet tokens, including bet LUNA and bet ETH, as collateral. This will allow you to win stakes.
If the sum of interest earned and staking rewards is not enough to maintain an anchor rate of nearly 20%, the protocol withdraws from its yield reserve to close the gap between earnings and payments.
The process of depositing UST with an anchor is simple. Investors must first download Terra Station, the Terra blockchain wallet, before proceeding to the WebApp of Anchor protocol. There, they can connect the wallet, deduct transaction fees, and deposit as much UST as needed for the protocol.
The 20% yield is comparable to the 0.04% interest rate on the average US savings account. Indeed, decentralized finance revenues are exposed to security and regulatory risks in the absence of insurance provided by the Federal Deposit Insurance Corporation.
Still, according to CoinGecko data, investors flocked to the anchor protocol at a yield of 20%, pushing up ANC and LUNA tokens by 112.6% and 57.2%, respectively, last month.
Unsustainable high yield
According to Martin Gaspar, a research analyst at the crypto exchange Cross Tower, there is an “inherent imbalance” under high yields that are almost “too good for the truth.”
In his view, anchors distribute ANC token rewards to borrowers to encourage the formation of loans, so some of the borrowing is done by users who want to take advantage of low borrowing rates and token rewards. These borrowers may repay the loan when the rewards shrink and eventually disappear. This results in less collateral for the borrower and therefore less return to meet the 20% yield promised to the depositor.
This system could be gamed as some knowledgeable users “borrow a UST loan with an APR close to 2.5% and deposit that UST with an anchor to earn 20%”.
“The point is that there is an inherent imbalance, and at this point there is much more demand for 20% yields from depositors than for borrowers for UST,” Gaspar wrote in a recent research note. I am. “Without ANC incentives, we don’t have enough borrowers and we have enough collateral to pay 20%. Therefore, to be sustainable, we need to significantly reduce the yield paid to depositors. there is.”
Indeed, to meet unsustainable high yields, the protocol has run out of its yield reserves, shrinking from about $ 70 million in December 2021 to about $ 6.56 million as of February 13.
Short-term remedies and long-term solutions
In February, the Luna Foundation Guard, a non-profit organization launched to grow the Terra ecosystem, agreed to recapitalize Anchor’s yield reserve at UST 450 million in response to governance proposals. Did.
Gaspar sees the $ 450 million injection as a marketing move. This is because high yields are likely to allow more users to access the Terra ecosystem.In addition, buy more time to develop and release new anchors v2 borrowed model..
In a client note on March 8, Genesis Trading analysts said the new borrowing model “prioritizes cross-chain deployments and facilitates the introduction of new collateral assets that organically drive borrowing demand.” ..
$ 450 million will extend the reserve for another 47 weeks, but it remains a short-term solution.
“I’m very skeptical that anchors can maintain that ultra-high rate, so in the end, I think this solution will only save time in the hope that UST use cases will become more widespread.” Gaspar said in a memo.
To improve the long-term sustainability of the Protocol, researchers and venture capitalists have proposed shifting fixed APYs to more flexible rates or reducing payments on deposits above 10,000 UST.
So far, the anchor rate remains close to 20%, but it won’t last long.
“Anchor rates could drop at least once during the next year. ANC will adopt new, higher-valued tokenomics to enable native deployment of anchor launches in avalanches and Solana.” Genesis analysts wrote in a memo.
