Different Ways to Earn on Anchor Protocol
Introduction
Anchor is a savings protocol that allows depositors to earn a stable yield in Decentralized Finance (DeFi). Currently, there are four different ways to earn on Anchor, and these different strategies can vary in difficulty. This article will break down each of them.
How To Get Started
Before we get started, make sure you have a Terra Station wallet on Chrome Extension. This allows you to interact with different Terra dApps such as Anchor and Mirror.
Link to download: https://chrome.google.com/webstore/detail/terra-station/aiifbnbfobpmeekipheeijimdpnlpgpp
The process for setting up a Terra Station wallet is similar to other crypto wallets. You will be given a seed phrase; make sure to write it down and keep it in a safe location as this allows anyone to be able to access your wallet.
Once you have Terra Station set up, now you need to get access to Terra native tokens such as UST and LUNA. This can be done through various exchanges. A good way to check which exchange offer these tokens is through CoinMarketCap. There’s a section below each token called “market” that allows users to see which exchanges the token is being traded on.
In order to swap between Terra native tokens, you can swap them in Terra Station, at the ‘Swap’ section. This allows you to be able to swap between tokens (UST, LUNA, ANC) that are needed to earn in Anchor.
With everything now set up, you’re ready to start earning.
Different Ways to Earn
- Anchor Earn
This first way is probably the easiest and it’s through Anchor Earn. This method provides a stable rate of 20% APY but can dip down to around 18% APY at certain times if there is not enough collateral to support the depositors.
In order to start earning from Anchor Earn, all you need to do is deposit your UST.
In this method, you will be able to deposit or withdraw your UST at any time with no lockup period. Once you deposit your UST, you will start earning interest almost immediately.
2. Anchor Governance
Anchor governance is another easy way to earn through Anchor. Although in this method, instead of using UST you will be ‘staking’ ANC tokens. The returns for staking ANC can vary upon Anchor’s performance, but at the time of writing this article, it is providing a rate of 2.57% APR.
Staking ANC also allows users to be able to vote in governance proposals on Anchor. Keep in mind, voting in governance will lock up your ANC tokens until the proposal is done, otherwise, there is no lock-up period for staking ANC in governance.
3. ANC-UST LP
This method of earning on Anchor is a little bit more complicated. If you are not familiar with the concept of ‘liquidity pools’ (LPs), I would recommend checking out a few resources listed below:
- https://learn.zapper.fi/articles/what-is-a-liquidity-pool
- https://www.youtube.com/watch?v=cizLhxSKrAc
Liquidity pools are one of the core concepts for DeFi, so learning it will not only allow you to use Anchor but other DeFi protocols as well.
The returns from this method can fluctuate as it depends on the amount of funds participating in it. Generally, if there are more people participating in it, the APR will lower, and if there are fewer, the APR will be higher. At the time of writing this article, returns from ANC-UST LP are at 60.35% APR.
To participate in the ANC-UST LP, you would need an equal dollar amount of ANC and UST. For example, if ANC = $2 and I wanted to provide $1000 in liquidity, I would need 500 UST ($500) and 250 ANC ($500).
Once you provide liquidity, you are given LP tokens. These tokens signify your ‘stake’ in the liquidity pools. They are also needed in order for you to get back your liquidity. In order to start earning rewards, you need to stake these LP tokens. This can be easily done on the ‘stake’ tab of the ANC-UST LP page.
There are no lock-up periods for participating in the ANC-UST LP. You can unstake your LP tokens at any time, and use them to get back your liquidity. Keep in mind, the main risk of participating in a ‘liquidity pool’ is ‘impermanent loss’, and this can result in a different amount of liquidity than you provided. Here’s a good resource that explains ‘impermanent loss’ in more detail:
4. Borrowing
Of all the ways to earn on Anchor, this is the most complicated and riskiest strategy, but if you manage your risk appropriately, you will be rewarded with the highest rate of return. At the time of writing, the borrowing APR is at 234.4%.
Now, this might sound confusing because you are actually getting paid to borrow instead of paying to borrow. This is possible because Anchor is incentivizing you to borrow by rewarding you with ANC tokens.
In order to start borrowing on Anchor, you need to provide collateral. Currently, Anchor only supports LUNA as collateral, but they plan to add other assets such as ETH, SOL, DOT, and ATOM.
To provide collateral, you need to switch your LUNA into bLUNA. This can be done in 2 ways. The first way is to mint bLUNA through the ‘Bond’ page on Anchor. The exchange rate between LUNA & bLUNA in this method is consistently 1 to 1.
Another way to get access to bLUNA is through swapping it on TerraSwap.
Link to TerraSwap: https://app.terraswap.io/#Swap
The exchange rate between LUNA and bLUNA can fluctuate in this method, but most of the time bLUNA will be trading at a discount to LUNA.
Now that you have bLUNA, you can start providing collateral on Anchor. This can be done on the bottom of the ‘Borrow’ page on Anchor. The more collateral you provide, the more amount you will be able to borrow.
Once you have provided collateral, you are ready to start borrowing. One thing to keep in mind while you borrow is the Loan to Value (LTV) ratio. On Anchor, the max amount you can borrow is up to 40% LTV. If your LTV reaches 50%, you are at risk of liquidation which means part of your collateral can be sold off at a discount to pay back your loan.
How much you decide to borrow is up to you, but Anchor determines the ‘safe LTV’ to be at 35%.
In this method, it’s especially important to keep track of your loans, because your collateral could decrease in value at any time which puts you at risk of liquidation. A good way to keep track is to remember the liquidation price of your bLUNA. In the example shown below, it is $4.852.
Keep in mind, in this strategy you will only be rewarded for taking out a loan. If you provide bLUNA as collateral but don’t take out a loan, you won’t be earning the borrowing APR of 234.4%.
To withdraw your bLUNA from the collateral, you need to make sure your loans are paid off to an amount where your LTV is under the ‘safe LTV’ of 35%. Once you have withdrawn your bLUNA, there are a few ways you can switch your bLUNA back to LUNA.
The first way is through the “Bond” page, but this time instead of ‘minting’ you are ‘burning’ your bLUNA. With this process, you will be receiving your LUNA from bLUNA at a 1 to 1 rate, but it takes at least 21 days.
If you want to instantly swap your bLUNA for LUNA, you can either do an ‘instant burn’, or you could swap it at TerraSwap. Both methods will typically cost you as you are exchanging bLUNA for LUNA at a premium.
To keep track of all your rewards, go on the ‘Govern’ page of Anchor. This page will show the accumulated rewards from all the various strategies to earn on Anchor.
Conclusion
Now that you have gone through this guide, hopefully, you have a good overview of the various ways you can earn on Anchor:
- Anchor Earn
- Anchor Governance
- ANC-UST LP
- Borrowing
Remember that some ways are riskier than others and therefore require more attention, but at the same time, you will be compensated more for taking on that risk.
