ANC A Terra-based Program That Is Currently One Of The Highest-Yielding Stablecoin

What Is Anchor Protocol?

Founded in 2020 by Daniel Shin, Do Kwon, Anchor Protocol is a lending/borrowing protocol operating on the Terra blockchain. There are various financial applications such as staking income and savings product on the platform. It offers close to 20% APY to investors, and the aim of the project is to increase interest in Terra’s native stablecoin, UST, by attracting investors from traditional markets to the DeFi space.

The Terra Ecosystem consists of a series of DeFi projects built on top of the Terra blockchain, all tightly integrated with each other. Other notable Terra ecosystem projects include Pylon Protocol, Astroport, Valkyrie Protocol, StarTerra and Orion Money. One of them is Anchor Protocol.

Anchor Protocol is a project consisting of 3 components. Using ANC token incentives/management, money markets and diversified stake returns. These components help create a completely decentralized fixed income vehicle.

Anchor accepts Terra deposits, allows instant withdrawals and pays depositors a low volatility interest rate. Anchor deposits liquid stake PoS assets from major blockchains to borrowers who put bAssets (bonded assets) as collateral to generate returns. Anchor balances the deposit interest rate by transmitting a variable portion of the asset return to the depositor. It guarantees depositors’ principal by cashing in debtors’ collateral through liquidation agreements and third-party arbitrageurs.

Believing that providing a stable interest rate to depositors is a necessary feature of a savings product with broad appeal, the Anchor team thus rates the highly cyclical nature of deposit interest as a solution to one of its key limitations as composite and constructive savings products.

How Does Anchor Protocol (ANC) Work?

Three main mechanisms run the Anchor Protocol (ANC). bAsset, money market and loan liquidation.

The bAsset (bonded asset), a tokenized stake on a PoS blockchain is one of Anchor’s key primitives. A bAsset token symbolizes ownership of a staked Proof-of-Stake asset.
A bAsset, like the underlying staked asset, gives block rewards to the holder. A bAsset, unlike a staked asset, is both transportable and fungible. As a result, users may transact with bAssets in the same way they do with the underlying PoS asset. In conclusion, a bAsset lets its owner collect block rewards while retaining the liquidity and fungibility that staked assets lack.
bAssets can be produced on any PoS blockchain that supports smart contracts, making them widely applicable. bAssets are a vital component of Anchor, and they hold great importance in providing a constant interest rate to Terra deposits.
The Terra money market is a WASM (Web Assembly) smart contract on the Terra blockchain that permits depositing and borrowing of Terra stablecoins — TerraUSD (UST).

This is the foundation of the Anchor savings protocol. A pool of Terra deposits generates interest from loans, defining the money market. To borrow Terra from the pool, borrowers put down digital assets as collateral. The interest rate is calculated using an algorithm based on borrowing demand and supply, which is represented by the pool’s utilization ratio.

Taking out a loan from the Terra money market is as simple as securing collateral in return for a loan. The borrowing capacity of a debt position is the maximum amount of debt that an account may accumulate. The amount and quality of locked-up collateral define an account’s borrowing capability. For each form of collateral, Anchor establishes a loan-to-value ratio (LTV), which reflects the percentage of a collateral asset’s worth that contributes to a debt position’s borrowing capability.
Anchor calculates depositor and borrower rates for Terra using an automated interest rate algorithm based on borrowing demand and availability. The Terra pool utilization ratio is the algorithm’s most important input.

The Anchor Rate is the interest rate objective for Terra deposits, and it is a key component of the Anchor protocol. To reach the desired rate, the Anchor smart contract dynamically divides block rewards from collateral bAssets between borrower and depositor.

What Is Borrow? How Does It Work?

The Anchor Protocol also includes the “Borrow” option. This allows users to apply for loans. To do this, the users need to initially generate bAssets (bLuna or bETH). They can do this by visiting the “bAssets” tab. 

bAssets

Terra’s money market is a WebAssembly smart contract. It functions on the Terra blockchain. Terra stablecoins are borrowed and deposited.

Terra money market allows anyone to obtain a loan. However, they must have the appropriate amount of collateral in order to be eligible for the loan. Anchor Protocol maintains an algorithm that determines the interest rates for both the borrower and depositor. This algorithm generates interest rates for loans based on current availability and borrowing demand.

In order to lend Terra stablecoins on the Anchor’s market, incentives are provided. Borrowers receive the Terra stablecoins through a bAsset collateralized loan. They provide interest to depositors. Furthermore, deposited collaterals generate subsidies.

The “Borrow” element of the Anchor Protocol potentially offers large rewards for users. At a nominal rate, users can borrow stablecoins (UST), against their collateral (LUNA/ETH).

borrow

When you want to withdraw your funds, you will need to hit the “Repay” button. This allows you to withdraw the collateral that you have provided. You will then visit the “Bond” tab and “Burn” that collateral. 

bonded assets

The platform will provide you with two options on the “Burn” tab. With “Direct Burn,” as the name implies, you will have to wait for 24 days to receive your Luna collateral back. The wait time is due to the coin being part of Terra’s staking system.

You also have the option for “Immediate Burn.” With this, you receive an instant withdrawal. However, you will need to pay larger fees overall. 

What Does Anchor Promise?

Beyond offering low volatility returns, Anchor is an attempt to provide its main investor with a single, reliable rate of return across all blockchains. Anchor aims to determine the comparative interest rate of the blockchain economy by collecting block rewards from all major PoS blockchains.

One of Anchor’s core principles is a bonded asset (tokenized stock asset), which is a product specified on a PoS blockchain. bAsset is a token that represents ownership of a staked PoS asset. Like the underlying stake asset, a bAsset pays its holder block rewards.

A stock asset, a bAsset is both transferable and tradable. Therefore, users can transact with bAssets with the same ease as the underlying PoS asset. In summary, a bAsset allows the holder to earn block rewards while maintaining the liquidity and exchangeability of staked assets.

Investors can evaluate their assets in Anchor in two ways. One is the stake and the other is the savings product method. Considering that crypto assets have high price volatility in the savings product, they may not be the ideal choice for users looking for passive income with low price. Anchor offers a solution with the Terra stablecoin currency markets. Users who deposit Terra stablecoins will receive stablecoins in return, thus avoiding the high volatility of most cryptoassets. Anchor’s deposit interest rate stabilization mechanism provides additional protection against volatility by providing stable returns.

In stake and interest yields, users can take advantage of their positions by putting their assets as collateral to borrow fixed money and buy more of the same asset. Users can similarly take advantage of low-rate periods by borrowing cheap stablecoins and purchasing bAssets whose yield exceeds borrowing costs. Users looking for extra stablecoin liquidity can do so with little or no additional interest, as their deposit interest rate assets are subsidized by block rewards.

In liquidation contracts, however, if users are not interested in taking deposits or borrowing, they can join the Anchor liquidity pool, a higher-risk, higher-yield product that provides liquidation financing for Anchor debt positions. Liquidity contract writers can benefit from premiums from passive income as well as liquidation fees earned during contract execution.

Why Anchor?

Before diving into the mechanics of Anchor, it’s important to provide some background and context on why it’s a uniquely appropriate product from 2 primary angles:

  1. The Macro Angle
  2. The Crypto-Native Angle
The Macro Angle

Savings has been deprecated for decades since the age of central bankers blossomed in the wake of WW1. Interventionist monetary policy became the standard as the world departed the gold standard and eschewed saving for the future for rapacious consumerism.

Today, central bankers are financial celebrities. Following Black Thursday, of March 2020, when fears of COVID-19’s economic havoc were peaking, the US Federal Reserve unleashed a torrent of stimulus ranging from open market operations to special-purpose debt vehicles and a ham-handed cut to the Federal Funds Rate — currently sitting at 0.25, the lowest ever. The goal? Plunge protection for the equities and bond markets falling synchronously — something not supposed to happen.

Often hailed as saviors, the underlying trade-off of rampant fiscal stimulus by central bankers (with no historical precedent) is difficult to grasp. But the cost is high.

Artificial suppression of interest rates has always operated as a drug. A quick hit, noticeable buzz, and tapering off of the short-term effects. However, in the long-run, perpetually low-interest rates pose significant latent effects, such as the continued devaluation of money (diluting savers and eventual implementation of capital controls), larger asset bubbles, and augmented consumerism.

But the reverse strategy, hiking interest rates, is just as daunting for the central bankers.

The Crypto-Native Angle

When the short and long-term debt cycles of the macroeconomic environment are plagued by artificial suppression of interest rates, low-risk yield is scarce and the market is risk-on. Assets are inflated by a deluge of new money, leverage is high, and everyone is arguing over inflation expectations.

DeFi provides a refuge from the doldrums of the Keynesian “boom and bust” cycle. Rather than being masked in obscurity like government bailouts for proprietors of CDO-cubed during the 2008 financial crisis, DeFi is out in the open. Anonymous users scour open-source smart contracts of emerging money legos applications looking for the next YFI, yield farming gem, or some other degen opportunity.

Good thing yield in DeFi is flourishing. With a massive bull market currently underway, demand for margin is high as degen traders, professional funds, and whale farmers battle for passive cash flow streams via liquidity provision and asymmetric payouts using leverage.

DeFi’s yield is pure, not dislocated by a centralized intervention. DeFi’s yield is wild, erratic, yet wholesome. It represents the transparent and massive on-chain demand for credit in what its ardent followers believe is a new financial system. But such machinations are nothing new. Variable debt cycles based on fluctuating credit demand reminiscent of TradFi occur in DeFi too, like towards the end of the Summer of DeFi in 2020 when yields plummeted alongside sharp price drawdowns.

DeFi needs fixed-income instruments. Its high-yield, variable interest rates are derived by leveraged demand for credit — an issue afflicting TradFi markets at their core as well. Projecting future LP cash flows based on incumbent money market interest rates is fickle since they’re variable. Retail users will never care to navigate DeFi’s entangled protocols searching for the best yield either.

Fixed income instruments offer simplicity, but in DeFi, also much more.

The beauty of DeFi is that it’s not beholden to artificial rate suppression. Permissionless networks and their composability enable new tooling and on-chain innovation not possible with legacy finance. They allow for the creation of a benchmark rate to reference as an industry yield curve develops.

So how do you kill two birds with one stone? How to provide mainstream investors starved for yield with an accessible, stable, attractive, and risk-off savings vehicle while concurrently creating a benchmark rate for DeFi to reference?

The transparency, composability, and censorship-resistance of DeFi are the zero-to-one innovations. Let’s use them to create a decentralized federal funds rate, an Anchor rate for DeFi’s burgeoning credit market. One that is unlevered, has low volatility, and sources cash flows from macro-tethered protocols — PoS blockchains. Accessible to all.

What Is ANC Coin?

Anchor Token (ANC) is Anchor Protocol’s governance token. Users can deposit or stake ANC tokens to create new governance polls that can be voted on by users who stake ANC. Anchor distributes the protocol fees according to the stakes of the ANC stakers. ANC’s stakeholders are further encouraged to propose, discuss and vote on governance proposals. ANC is also used as an incentive to restart borrowing demand and initial deposit rate stability. The protocol distributes ANC tokens to stablecoin borrowers on each block in proportion to the amount borrowed.

ANC Coin, which has a market value of more than 500 million dollars with its growing audience, has a total supply of 1 billion and a circulating supply of 223 million. While it saw its lowest price at $1.27 this year, it experienced its highest price at $8.31.

Cumulative Distribution Schedule Of The ANC Token

The ANC token distribution complete details can be found here. The final token distribution graphic is below.

What Makes Anchor Protocol Unique?

Anchor stands out from countless other money market protocols like Aave and Compound thanks to its elegant user interface and simple-to-use functionality. The protocol’s core value proposition is connecting borrowers and lenders by offering the former a way to borrow in stablecoin without forfeiting their investments and the latter an attractive interest rate on stable assets.

Lenders connect their Terra Station wallet and deposit UST by paying a 1.60 UST transaction fee and earn the protocol’s 19.5% annual interest rate on a pro-rata basis for every block transaction (every eight seconds).

Borrowers bond their LUNA tokens and receive bLUNA (bonded LUNA) in return. They can borrow up to 60% of their deposited collateral in UST and pay an interest rate that is slightly higher than that paid to lenders. Bonded LUNA can be unbonded after 21 days. However, they also receive ANC tokens distributed by the protocol to incentivize its adoption.

The protocol uses revenue from the spread between borrowers’ and lenders’ interest rates to earn staking rewards on Terra, which are between 5% and 7% annually. The Anchor Yield Reserve is the protocol’s treasury that covers its expenses when rates have not reached a stable equilibrium. For instance, during the summer 2021 crypto market correction, Terraform Labs injected 70 million UST into Anchor’s Yield Reserve to ensure protocol stability.

How Many Anchor Protocol (ANC) Coins Are There In Circulation?

ANC is the protocol’s native governance token that can be staked to receive voting rights and influence Anchor’s future. Its total supply is 1 billion, with a current circulating supply of 222 million. The ANC token is distributed as follows:

  • Borrower incentives (40%)
  • Investors (20%)
  • Team (10%)
  • Luna staking rewards (10%)
  • Community fund (10%)
  • ANC liquidity (5%)
  • Airdrops (5%)

Anchor does not offer any information about vesting schedules. The ANC token reached an all-time high of over $8 shortly after its launch, but has significantly lost in value since. However, if UST supply continues to expand, ANC could potentially revisit its trading range between $3 and $4.

Benefits Of Anchor Protocol

Anchor Protocol looks to distinguish itself from potential market rivals through a few essential features. First of all, it provides a high yield in exchange for deposits. Furthermore, it allows for instant withdrawals of funds. Lastly, the interest rate involves low volatility. All of this makes it a potentially good savings opportunity. 

Users who have acquired bAssets can earn a steady yield through staking. This incentivizes the use of the protocol. Because it accepts bAssets as collateral, the Anchor Protocol has the qualities to become a long-term proposition.

Generally speaking, crypto assets are not the best choice for customers who are searching for low-risk passive income. Anchor looks to solve this. Depositors of Terra stablecoin will be able to receive stablecoins in return. In this way, the volatility associated with crypto assets is avoided. 

Users can borrow stablecoins with their assets. They can also then buy more of the same asset to increase their leverage. Users can also benefit from low rates by borrowing stablecoins at a lower cost and investing in bAssets with a higher yield than the borrowing cost.

Risks Involved

We’ve looked at the opportunities presented by Anchor Protocol. To fully understand the situation presented here, it is important to also look at the risks involved. In this case, they refer to two types. The first is the smart contract risk. The second is the risk associated with the UST pegging status. 

Smart contracts are an incredible use of modern technology. Still, they are also susceptible to cyberattacks and technology failures. Like any other software code, smart contracts require rigorous testing and appropriate controls to minimize potential risks to blockchain-based business processes.

Hackers may be able to steal money from users if there is a security hole in the blockchain network that hosts a smart contract. The fraudulent activity might not be detected. Hackers can exploit this.

Terra has, however, partnered with various third-party insurance providers to offer plans that reduce the risk of smart contracts and de-pegging. Furthermore, Terra has contracted two audit firms to ensure that the protocol is safe for all its users. They conduct regular audits to identify any potential security issues.

Stablecoin Stability

Another risk is the one regarding the consistent value of the stablecoin. An algorithm calculates the value of UST. The cryptocurrency LUNA backs its value.

It is possible that the conversion ratio to the stablecoin can differ when the markets for LUNA are particularly volatile. To bring UST back to $1, LUNA must be burned. This will mean that less LUNA can actually be sold.

UST has remained fairly stable. However, it has only been around since the late 2020s. Market volatility conditions require further tests. For example, IRON, a USD-pegged coin, saw its value plummet in 2021. This happened despite USDC backing. However, throughout Terra’s ecosystem, UST can be found. Pylon, Anchor, and Mirror protocols are part of it.

Anchor Protocol (ANC) - All information about Anchor Protocol ICO (Token  Sale) - ICO Drops

Anchor Protocol (ANC) Price Prediction And Future Outlook

The Anchor Protocol (ANC) solves a core problem that borrowers face. You see, most borrowers are charged a high cost by the bank, in most cases, a 22 percent annualized rate on their credit. Few lenders would pay such high lending rates and forego double the collateral’s income. As a result, the bank lowers the effective paid rate by giving the lender more bank shares than the 22 percent charge, allowing the borrower to profit from the loan.
Deposits are used to fund the loans by Anchor. From the borrowers’ collateral yield and the loan rate they pay, the procedure can give depositors a great yield. We also have some extra fees to give to our “bank’s” shareholders and keep the yield reserve.
In the longer run, users need the ANC tokens to be worth more than the whole asset side minus the liabilities for Anchor to sustain such strong returns. This is possible as long as token holders expect future earnings to increase by a factor of two. Not only that but there must be enough tokens remaining to distribute so that debtors may be reimbursed. Provided Anchor does not issue new shares, the borrowers can still be subsidized if token holders expect the balance sheet growth to be greater than the dilution produced.

Overall the Anchor Protocol (ANC) is a strong project with a viable utility that is the centrepiece of the entire Terra ecosystem.

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