Anchor Protocol is a savings platform that provides its users with returns that (at the time of writing this note) are around 20% and have low volatility, which means that they will most likely remain at that profit rate for a long time.
The Anchor Protocol platform was created by the South Korean company Terraform Labs and has been operating since March 2021. It allows depositing stable digital currencies (stable coins) and obtaining a stable return on investment, unlike other protocols, which vary their percentage of return according to market fluctuations.
What is Anchor Protocol?
In 2018 Terraform Labs was founded, the company behind the blockchain Terra, best known for its stable coins such as TerraUSD (UST), which is currently the fifth-largest stable coin in the world in terms of market capitalization. On March 17, 2021, Terraform Labs launched its most recent project, the decentralized financial protocol (Defi) called Anchor - an accessible savings and loan platform built on the Terra blockchain.
A decentralized economy must depend on decentralized money
said Do Kwon, CEO of Terra. And that's essentially the core thesis behind what Terra is developing, in the sense that we have these stable coins that are pegged to several different fiat currencies, like the US Dollar, the South Korean Won, the SGD, and so on, that they are fully decentralized and cannot be censored. In addition to these things, we have applications like Anchor, which allow stablecoins to be deposited in smart contracts. And leveraged by multiple blockchain bets to drive a 19.5% return.
The Anchor Protocol platform was well received by the community of investors, as it managed to raise a total of $20 million in the sale of tokens from an initial coin offering (ICO) that ended on March 20, 2021.
Ways to earn with Anchor Protocol
While there are multiple ways to benefit from Anchor Protocol, its main attraction is the savings protocol that offers almost a 20% annual return on UST deposits. That attractive yield attracts investors to deposit their stable coins - such as UST - with Anchor.
Borrowers, for their part, obtain loans on UST by offering their assets from the largest blockchains as collateral. The form that these loans take is what in the Anchor lexicon is called bAssets: tokens that represent a right over the assets offered as collateral.
Initially, Anchor only offered returns for UST deposits. But it subsequently partnered with Orion Money to launch its EthAnchor cryptocurrency. Thanks to that partnership, Anchor began to support the deposit of Ethereum-based stable coins, such as BUSD, DAI, USDC, USDT, and UST, with an EthAnchor "wrapper".
How does Anchor Protocol work?
Under the Anchor Protocol, depositors lend Terra Stable Coins (UST) to Anchor's money market, and Anchor in turn offers loans backed by bAssets. The interests paid by the loan are delivered to the depositors, together with the amounts generated by the rewards of the deposited asset.
When depositing their cryptocurrencies in Anchor, the user receives a cryptocurrency called aUST, that is, what they offer is to simplify the way to obtain aUST, which always increases its value in a stable currency, so that the user can buy and sell whenever they want, in just a few seconds and in an extremely simple way.
It offers a hybrid between DeFI (decentralized finance) and CeFi (centralized finance): the user directly buys the resulting Anchor Protocol token -which represents invested money-, which pays an interest that is currently 19.5%.
In this way, the user knows what he is buying, what the cost is and can be informed about the operation he is carrying out. Other centralized systems only offer the user to deposit their money, without informing them what will be done with it.
In turn, Anchor is a DeFi in which funds can be supplied and loaned, offering a fixed annual rate for deposits in UST. The funds remain liquid, which means they can be withdrawn at any time.
They choose this modality, that of selling directly to aUST over the CeFi model, to be transparent to the user and that he knows exactly what he is buying. In traditional CeFi, as they are centralized, cryptocurrencies are managed by a third party (the platform), so each user must previously investigate the history and reliability of the company where they will deposit their assets.
What can I do in Anchor Protocol as an.. ?
The Anchor protocol primarily serves as a money market between stable coin lenders and borrowers, but there are other roles in the Anchor Protocol mechanism as well, such as liquidators, liquidity providers, and oracle feeders. Let's see what role each of them plays:
Lenders If you want to act as a lender, you can deposit your stable coins on the platform for your loan and earn interest for it.
Borrowers If you want to be a stable coin borrower, you can borrow stable coins deposited by lenders, offering stable assets as collateral.
Liquidators The liquidators are the ones who supervise the existence of risk loans and request the liquidation of the loan guarantees when it is necessary. The guarantees are settled through the execution of offers in the Settlement Agreement.
Liquidity providers Liquidity providers are entities that provide liquidity to the Terraswap ANC-UST duo. They manage the initial start-up of the liquidity of the exchange between ANC tokens and UST tokens.
How does Anchor Protocol sustain the 20% APY?
Anchor Protocol works with a liquid staking mechanism. The staking rewards obtained by borrowers in bLUNA are settled by the protocol in UST for depositors, which allows them to obtain a target return of up to 20%.
Anchor is an innovative form of savings that offers an unprecedented APY on stablecoins, mainly UST, but gradually includes Ethereum-based stablecoins as well. The good structure of Anchor ensures that the returns are stable and reliable. Being built on top of the Terra blockchain means better scalability and cheaper rates. In addition, in the long term, Anchor is positioned to be sustainable and further drive DeFi adoption.
Is Anchor Protocol stable?
To date, this project has proven to achieve high and stable yields. Looking ahead, this may be an indicator of reliability, but we must not forget that every investment carries its risks.
Today we can find countless projects or protocols that pay users to deposit their stable coins an interest rate that can vary from 5% to 25%, and in some cases with a lot of risk up to more than 50%. Among these options, Anchor offers one of the safest, most stable, and lowest-risk investments on the market.
If you are looking for a way to insure your funds on the Anchor Protocol, make sure you check out our article on Anchor Protocol insurance
Anchor Protocol risks and dangers
As the Anchor protocol is a DeFi protocol, the risk of a hack can never be ruled out.
Anchor has not suffered hacker attacks so far. Its administrators have taken precautions, such as auditing their smart contracts through third parties, such as Cryptonics Consulting and Solidified.
Risk of loss of value
Currently, Anchor's protocol sets Anchor's interest at approximately 20% per year, but this percentage may change based on Anchor's governance system. The rate fluctuates when the ratio of lenders to borrowers changes, with the premise that if the number of borrowers remains high, it is easier to maintain the Anchor Rate.
Until now, the Anchor Rate has not presented noticeable fluctuations, always staying around 20%.
Currency exchange risk
Currency risk refers to the losses that an international financial transaction may suffer due to currency fluctuations. Also known as currency risk, FX risk, or exchange rate risk, it describes the possibility that the value of an investment will decline due to changes in the relative value of the currencies involved.
Since the UST stable coin is pegged to the US dollar, you have to deal with fluctuations in the price of the greenback. But one important thing to note is that there is a guarantee from Anchor Protocol that your capital will continue to be preserved. This is due to Anchor's settlement protocol and the sub-collateral requirement. Even if the Anchor Protocol interest rate goes down, you can withdraw the money at any time and deposit it elsewhere.
Anchor Secure protocol
Those who prefer to always have a containment net can purchase Anchor Protocol insurance. Said insurance covers against risks such as hacking of smart contracts. The cost of the insurance is reasonable: it reaches a maximum of 2.5% per annum of the insured value.
Insurance is undoubtedly convenient, but you should carefully read its terms and conditions with someone who understands legal terms before hiring it. In this way, you will avoid that, in the event of a claim, the insurance company finds a legal loophole to avoid the obligation to compensate your losses.
In parallel to this, Terraform Labs is building a project called Ozone that will provide insurance for Anchor Protocol, so we must stay tuned for future developments.
We hope that this article has helped you to understand in depth the operation of Anchor Protocol. Despite this information, you are the one who must decide where to deposit your money. Good luck with your investments!