Monica Vierveijzer, 7 months ago

What is Anchor Protocol? A high-yield protocol explained

Please note the publication date of this article. A lot has happened since publishing and not all information may still be valid or accurate. Always DYOR before investing.

Anchor Protocol (ANC) is a lending and borrowing protocol. It is known for having high yields on deposits up to 19.5%. Normally speaking, with high yields come high risks. Since Anchor Protocol is a lending and borrowing platform for stablecoins, users can benefit from both high yield and low volatility.

The protocol was founded in March 2021 by Terraform Labs, the company behind the Terra blockchain. Terraform Labs is a South Korean fintech company founded by Daniel Shin and Do Kwon. It may come as no surprise that Anchor Protocol runs on the Terra blockchain.

How is Anchor Protocol able to offer their high yields and attract investors? In this article, we’d like to dive into more specifications.

How does Anchor Protocol work?

Anchor Protocol is a decentralized savings protocol. It creates a money market between lenders and borrowers. Lenders are looking to earn stable yields on their stablecoins (somewhat like earning interest on your savings account) as a way of making passive income. Borrowers are looking to borrow stablecoins on stakeable assets. They lock up “Bonded Assets” or bAssets as collateral, and borrow stablecoins in return.

The stablecoins in question are Terra’s stablecoins (UST). You may very well already be familiar with Terra’s native token, LUNA. UST is Terra’s own stablecoin solution. Lenders on the Anchor Protocol can deposit their UST and earn rates on their investments. Borrowers on the other hand, can use their LUNA as collateral without giving up control of it.

Using Anchor Terra

Deposited stablecoins in the Anchor Protocol are represented by “Anchor Terra” (aTerra). These tokens are redeemable for the deposit, along with the accrued interest. This way, you can collect interest just by holding them. Anchor Protocol provides its depositors with:

  • High and stable deposit yields
  • Instant withdrawals through pooled lending
  • Principal protection via liquidation of loans in risk of undercollateralization

Since Anchor Protocol is open and permissionless, anyone can connect and start earning interest.

Are the high rates sustainable?

Anchor Protocol’s native governance token is ANC. On Anchor Protocol, ANC can be staked to receive voting rights.

In March 2022, a community vote passed to implement semi-dynamically adjusting interest rates. Each month, the rates will increase or drop by 1.5%, depending on the yield reserve. This aimed at making Anchor Protocol more sustainable long term.

Anchor Protocol has over $16 billion worth of tokens locked at the time of writing, and is the largest lending tool on Terra. Their interest rates are generated via staking rewards from multiple major proof-of-stake blockchains and as a result they are considered higher than their competitors.

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