For the last six months, we have seen a phenomenal and never seen before bull market. I know the way you must be feeling all the adrenaline rush and doubling or tripling of portfolio overnight. It’s like being on top of the world!
But let us face another reality also. The music has to stop one day, and you should be prepared for that day when it comes to your door. When the bull run ends, what should I do with my portfolio? Should I keep it idle on my exchange or wallet? Or is there any way to earn passive income on my investment holdings?
Indeed, there are few ways. One of the main ways is to deposit your investments into a lending protocol and earn interest on your lent assets. Let me introduce you to one such lending platform which seems promising to me, the Anchor Protocol.
Anchor is an open and permission-less savings protocol that provides effortless savings and borrowing products to its users. As of April 29, 2021, Anchor offers a phenomenal return of 20% APY on its stablecoin UST (TerraUSD) savings account.
UST offers a less volatile return rate compared with the existing money market, which is supposedly unrealistically high for the first few weeks and then plummets down closer to the US bonds rate.
Therefore, this stable yield could help investors or hodlers to earn a decent amount of interest throughout the year. This would help with appropriate financial planning.
The Anchor Protocol is a smart-contracts-based platform developed on Terra Network, established by Terraform Labs (TFL). The protocol is a decentralized open-source platform that is governed by its in-house governance token ANC (Anchor Token).
As we know what Anchor Protocol is, let us understand how exactly this lending platform works.
There are two parties in a transaction, a Lender and a Borrower.
A Lender is a person who comes on the protocol to earn a stable yield on his or her stablecoins, i.e., UST (TerraUSD). Thus, a lender lends money to a borrower.
A borrower is a person who borrows stablecoin, i.e., UST (TerraUSD) from the Anchor money market. Against the borrowed money, the borrower would deposit bAssets (Bonded assets) in collateral against the loan. We will discuss bAssets (Bonded Assets) in detail in a short while. The borrower has to maintain a Loan-to-Value Ratio (LTV Ratio) below the pre-decided maximum percentage. LTV ratio can be understood as the amount of loan taken compared to the value of bAssets deposited as collateral. Once the LTV ratio crosses the pre-decided maximum percentage, the protocol can liquidate the bAssets of the borrower and return the money with interest to the lender.
To understand the transaction mechanism more clearly, you can refer to the below-mentioned images:
A liquidator handles the process of identification of bad or risky loans and further liquidating bAssets. The liquidator places the bid to purchase the bAssets deposited by the borrower as collateral and pay UST (TerraUSD) in return. This UST (TerraUSD) is paid back to the lender.
Scenario 1 – When the borrower maintains the LTV ratio and repays the loan. This means that there is no liquidation of assets in this situation.
Scenario 2 – When the borrower cannot maintain the LTV ratio, and his collateral is liquidated.
Now, as we have more clarity on the transaction mechanism, let us understand the features of Anchor Protocol.
We have categorized features of Anchor Protocol as service features and other features. Let us dive into them.
As discussed above, a lender can deposit Terra Stablecoins (currently only UST) and earn a stable return. Anchor protocol can pay this high return on stablecoin based on the staking rewards earned on the assets deposited as collateral by borrowers. Anchor Protocol makes around 24% staking rewards on these assets, out of which 20% is paid to the lender.
Further, the amount lent by the lender is collateralized by these assets only. So, in case the LTV ratio of the borrower goes above the pre-decided maximum limit (50% or LUNA token), the protocol may liquidate the assets and pay the principal to the lender along with interest.
Further, when a lender deposits UST (TerraUSD) on the Anchor Protocol, the lender receives aUST (Anchor Terra). Currently, there is no utility of aUST token, except it can be used to redeem the principal and interest amount earned on it. However, it will have a fascinating use case in the coming days.
Mirror Protocol is a synthetic platform developed on Terra Network by Terraform Labs (TFL). It is a synthetic asset platform on which any user can mint his synthetic assets called mAssets (for example, synthetic version of equity shares of Tesla, Netflix, Facebook, etc.). For minting any mAsset, a user has to provide assets as collateral. Mirror V2 update, which is expected to be launched sometime in May 2021, will allow aUST (Anchor Terra) as collateral for minting mAssets. For better clarity, I would suggest you read our “Mirror Protocol Fundamental Analysis”.
Thus, a lender has several benefits, which can be listed as follows:
You can read more about the earn feature here.
This is a very interesting feature of the Anchor Protocol. As we know that a borrower pays the cost of a loan in the form of interest. Right?
Wrong. Not anymore
So, the borrowing feature of Anchor Protocol pays a net positive return to a borrower for the loan amount that he has taken. As of 29 April 2021, the APR (annual return) for the borrower is 42.08%. This does not make sense, right?
Let me help you to understand how Anchor Protocol makes this happen. The Anchor Protocol has an in-house governance token called Anchor Token (ANC). The distribution plan of Anchor Protocol is divided over the next four years and includes incentives for borrowers, as mentioned in the below image.
So, although a borrower has to pay the interest on the loan amount, he also gets borrowing incentives in the form of ANC tokens. Currently, this distribution leads to a positive return in the hands of a borrower.
The return earned by the borrower = Borrowing Incentives – Interest on Loan
Please note that as the no. of borrowers would increase on the platform, these incentives will be decreased for an individual borrower. Thus, in the future this return for borrowers may or may not be there. But currently, you earn interest by borrowing money (UST) which you can further deposit on “Earn” to gain more interest income. Isn’t this amazing?
The process of borrowing is also straightforward; you deposit an asset on “Bond” page (currently, only Terra token LUNA can be deposited) and create a Bonded Asset (bAsset) called bLUNA. Then you go to the “Borrow” page, deposit your bLUNA as collateral and receive a loan in the form of UST.
Thus, a borrower has many benefits, which can be listed as follows:
For more information, you can read Borrow, and bAssets features given by the Anchor Protocol.
In addition to the service features, the Anchor Protocol also has some other features, which we will discuss now.
An oracle feeder is used to incorporate off-chain data on the protocol. Majorly it is used to fetch the current price of bAssets to determine the borrower’s LTV ratio. This is further used to determine whether any liquidation of bAssets is required or not. Anchor protocol currently uses its own on chain oracle, but in the future, through governance, the protocol can take help from third-party oracle feeders.
The Anchor Protocol has a pretty solid security system in place. All contract codes and balances are verifiable publicly, and security researchers can scrutinize and report undiscovered vulnerabilities of the protocol.
Recently, Cryptonics Consulting issued an extensive audit of the systems and issued a Security Audit Report that you can refer to here.
Terra Station is a decentralized non-custodial wallet developed by Terraform Labs (TFL) with a very simple, interactive, and user-friendly interface. Terra Station supports the holding and transaction of assets on the Anchor Protocol.
The wallet can also be used with other decentralized applications developed on Terra, such as Mirror Protocol and Spar Protocol (an upcoming platform). You can read more about Terra Station Wallet here.
Governance is another essential feature of the Anchor Protocol. The development and growth of the platform are driven by community governance. Governance rights of the platform are available to the stakers of the Anchor Token, the in-house governance token of the Anchor Protocol. In other words, by staking ANC on the platform, a user gets rights to participate in the polls initiated on the platform related to the development and governance of the platform.
The platform distributes protocol transaction fees to ANC stakers, thus benefitting them as the adoption of the platform increases. By staking ANC, users provide liquidity to the token, and therefore, users are eligible for the rewards in the form of ANC. Further, as discussed above, ANC token is also distributed to the borrowers as “borrowers incentive”, which would lead to more adoption of the platform in the coming weeks.
The maximum supply of ANC token is 1 Billion, which is planned to be issued in the next four years or more. The token was released in March 2021 and currently has a circulating supply of 57 Million (approx. 6% of the maximum supply) with a market cap of USD 334 Million.
ANC token is available on the following quality exchanges:
I understand that Terra as a community is bringing to us a number of exciting projects, and the Anchor Protocol is one of them. The Anchor Protocol allows you to earn a stable 20% return on UST, and the structure of Anchor would allow keeping this return stable for a good 5-6 years. Watch this below video to learn how to earn 20% fixed income using Anchor protocol:
Thus, as an investor, you will be better positioned to manage your finance due to the stability of return. This is far better than hunting for good yields on your assets now and then.
I understand that the growth in the Anchor Protocol would result in the upward movement of two tokens, ANC (Anchor Token) and the native token of Terra network, LUNA.
Also read: Mirror protocol analysis
Please note that I am not a financial advisor, and this is not financial advice. DYOR before investing.
I hope this article would provide you a good insight into the Anchor Protocol. Let me know the DeFi projects that you would like me to review.
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