How to earn 20% APY on stablecoins
ANY PART OF THIS ARTICLE ISN’T FINANCIAL ADVICE. ALWAYS DO YOUR OWN RESEARCH.
What if I told you, you could earn a 20% interest rate annually on the cash you hold? In a world where a traditional bank savings account offers you interest rates a fraction of that, you would be surprised right? Well with the magic of Defi, which involves removing the third party cut takers, that has been made possible. In this article, I will talk about the Terra ecosystem and what LUNA is trying to achieve and how you can profit off of that and also go over the risks involved.
LUNA, UST and ANCHOR PROTOCOL
So to keep this article as concise as possible I will try to go over each aspect of this process briefly.
LUNA is a cryptocurrency currently trading at 90$, at the time of writing this article, with a market cap of 32 billion dollars. It is a layer one smart-contract platform similar to Ethereum. The whole aim of LUNA is to create algorithmic decentralised stablecoins, in this case, UST. This solves a major problem in the crypto world due to the uncertainty and doubt masses have towards centralised stablecoins, like USDT, for example. People have negative feelings about it as people fear that Tether, the company behind USDT, do not have the reserves to maintain its peg to the US dollar. Rumours say they keep minting more USDT while using the funds to invest in other assets classes such as stocks and bonds. This can cause the price of USDT to tank and lose its peg in the case of a catastrophic event.
That’s where UST comes in, as discussed earlier, it is the decentralised stablecoin in the Terra ecosystem. Without going much in-depth, UST can retain its peg to the US Dollar value as any time more UST is minted, an equal amount in dollar value of LUNA is burned. This also makes LUNA hyper deflationary. UST recently proved its strength when the market, alongside LUNA, crashed 40%. This is not to say, of course, it doesn’t come with any risk.
In fact, on May 19th 2021, we saw UST dropping to $0.85 (see the picture below).
So why did UST lose its peg?
May 19th was an absolute bearish day in the market. People who got afraid sold both normal coins and stablecoins to USD or Euro, many of them to never return to crypto ever again.
UST hovered between $0.96 and $0.99 from May 20 to May 24, before climbing back to $1 25th of May. Comparatively, the USDC stablecoin fluctuated between $0.99 and $1 in that whole time period.
Though something like this can happen again, since then, Terra team has improved the peg algorithm stability(like adding BTC reserves backing UST) since the May crash to prepare for new bear markets. This just goes to prove anything in Defi isn’t risk-free.
Additionally, in the September crash, UST was the most stable coin of them all.
And to just end this, you can buy insurance for both smart contract risk and peg risk on Anchor Protocol (see picture below). As of what I’ve heard this would cost you 2.5% APY per year, reducing your yield from 19.5% to an acceptable 17%.
ANCHOR PROTOCOL
This is where Anchor Protocol comes in.
•Anchor Protocol is decentralised finance(DeFi) money market savings and lending platform built on the Terra blockchain.
•It was built by Terraform Labs, the company that is also behind the core development of the Terra platform and its associated products like LUNA, UST, and Mirror Protocol.
How does Anchor Protocol work?
Anchor Protocol works like a bank that facilitates deposits and loans, except the bank is replaced by an automated smart contract. The protocol’s smart contract automatically processes the deposits and loans.
Anchor incentivizes lenders to deposit their UST into the protocol with its attractive 19.5% yield. Whereas, there is no lock-in for borrowers so they can pay off their loan at any time. However, Anchor does require a 21-day unbinding period to have access to your collateral.
How is Anchor able to provide a 19.5% yield?
The 19.5% fixed-income yield that Anchor pays to Depositors is primarily financed by two levers:
•Borrowing interest paid by Borrowers
•Staking rewards earned through Borrower’s collaterals
Now let’s get to the juicy part, the part you came to read this article for. How can someone like you and me can earn 19.5% APY on their fiat.
To use Anchor Protocol, you must first hold UST in your Terra Station Wallet.
You can buy UST:
You can buy UST:
-Directly on Anchor Protocol via Transak
-Directly on Kucoin, Coinbase, Uniswap or Terraswap
-By buying LUNA on most exchanges –> send it to Terra Wallet –> convert LUNA to UST
Once you have UST in your Terra Station wallet, you can simply head over to the Anchor Protocol web app where you will be prompted to connect your Terra Station wallet.
STEPS TO FOLLOW IN WEB APP
•Navigate to the “Earn” tab and then click “deposit” to deposit your UST into Anchor Protocol.
•Once the transaction is completed, your funds should show up in your Terra wallet as aUST(pegged to UST, so 1 aUST= 1 UST), and you should see your expected deposit in the “Total Deposit”
•That’s it, your UST is now earning interest daily with Anchor Protocol.
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