Qi Capital
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Qi Capital

How Anchor Protocol Works

Introduction

Anchor is a savings protocol that enables a high and stable yield in Decentralized Finance (DeFi). It is currently offering a 20% APY, which is by far one of the best rates being offered in Traditional Finance (TradFi) and even in DeFi. To understand how Anchor is able to pay out this ridiculous yield, we need to dive deeper into the inner workings of Anchor.

Diving Deeper

Similar to how traditional banks work, Anchor leverages borrowers’ demand to pay out interest to its depositors. Where Anchor differs from traditional banks, is its ability to make use of collateral assets being put down by borrowers. Anchor only accepts Proof-Of-Stake (PoS) assets as collateral, which means it can generate additional yield than just borrowers' interest.

Currently, Anchor only accepts bonded Luna (bLuna) as the PoS collateral. In the near future, there are plans to add other major PoS assets such as bEth, bSol, bAtom, and bDot.

This is best illustrated by the graphic below which depicts the revenue generated (inflow) and the interest being paid out (outflow).

You can see in this graphic, Anchor has two sources of revenue; Borrowers’ Interest and Yield of PoS Assets, both are then used to fund the Deposit Interest. To go more in-depth into the numbers, we need to take a look specifically at the roles ‘Depositors’ and ‘Borrowers’ play in Anchor.

Depositors (Lenders)

Depositors can also be known as lenders because as they deposit their UST into Anchor Earn, it is being lent out to ‘Borrowers’. As their UST is being lent out, ‘Borrowers’ are being charged interest for borrowing which is then used to fund part of the 20% yield.

Borrowers

For ‘Borrowers’ to borrow UST, they need to put down collateral in order to do so. As mentioned before, Anchor only accepts PoS assets as collateral, which means the staking rewards being generated are used to fund the other part of the 20% yield. Borrowers can then borrow up to a 40% loan-to-value (LTV) to get access to more capital without selling their collateral.

It’s important to note that as borrowers, there is a risk of liquidation while taking out a loan. As of now, the liquidation rate is set at 50% LTV. This means part of your collateral might be sold off to pay back the loan if it reaches that point.

Example:

As you can see in the graphic below, when the revenue being generated (inflow) is greater than the interest being paid out (outflow), excess yield is stored in the ‘yield reserve’ to subsidize future yields when this is not the case.

*Note that staking rewards are at 4% because it does not include airdrops.

In this graphic below, you can see that the inflow is actually less than the outflow, which results in the yield reserve being used to subsidize the remaining yield.

In times like these, Anchor’s yield will also dip to its ‘threshold rate’, meaning this is the lowest Anchor’s rate will go to be subsidized by the yield reserve. Currently the ‘threshold rate’ is set at 19.5%, and can be changed through Anchor governance.

Through these graphics, it’s evident that the revenue generated by Anchor (inflow) needs to be at least balanced with the outflow for Anchor to maintain its 20% yield.

How does Anchor balance the inflow and outflow?

Anchor is able to do this by incentivizing borrowing through the emissions of ANC tokens. This means if users put down collateral and borrow UST, they are rewarded with ANC tokens, or in simpler terms, they get paid for borrowing.

This rate is adjusted by the protocol as it sees fit. If there are not enough borrowers, this rate will be higher which means you will be rewarded more to borrow UST. If there are too many borrowers, this rate will be lower which means there will be fewer rewards for users borrowing UST.

You can think of this borrowing rate as Anchor’s version of the Federal Reserve manipulating interest rates.

Value of ANC tokens

With ANC tokens being used as rewards, you’re probably wondering what the value of ANC is. ANC’s primary purpose is to govern Anchor Protocol, which means if you stake your ANC tokens, you can participate in governance polls that dictate the future of Anchor.

ANC is also designed to capture value in Anchor, giving it inherent value as Anchor Protocol grows. One of the following ways it’s able to do this is by capturing protocol fees. The fees being accrued by Anchor are then used to buy back ANC tokens in the open market (TerraSwap), which are then distributed back to ANC stakers.

This results in constant buying pressure for ANC as Anchor Protocol grows.

ANC’s value flow (Source: Anchor Docs)

With this basic understanding of how Anchor works, let’s take a look at how we can use it.

How to Access Anchor

Before using Anchor, we need to obtain UST. Terra USD (UST) can be obtained in several different ways through centralized exchanges (CEXs) or decentralized exchanges (DEXs).

Centralized Exchanges (CEXs):

  • KuCoin
  • CoinList
  • Gate.io

Decentralized Exchanges (DEXs):

  • Uniswap
  • Curve Finance
  • PancakeSwap

Depending on where you live, restrictions might apply for CEXs. Now that you have UST, you’re ready to start using Anchor.

Anchor Protocol

Anchor Earn can be accessed in several different ways, but the primary way to use Anchor is through its web app.

Link to Anchor’s web app: https://app.anchorprotocol.com/earn

Anchor’s Earn section

Using the earn feature on Anchor is simple, all you need to do is deposit your UST.

After depositing your UST, you will receive aUST in return. aUST acts as a representation of your stake in the deposited UST, and because your deposited UST is gaining in value, aUST becomes more valuable over time compared to UST. This is why you will notice when you deposit UST, you don’t get an equal amount of aUST in return, but rather a little less.

There is also no lock-up period for depositing UST, you are able to withdraw it at any time. Your deposited UST will also accrue interest every few seconds, so if you deposit UST and withdraw it after a week, you will receive back your principal plus interest earned for that week.

Orion Money

Another way to get access to Anchor’s yield is through third-party integrations like Orion Money. Orion is built with Ethereum users in mind, so if you have MetaMask and ethereum stablecoins (USDT, USDC, DAI), you can easily use Orion.

Link to Orion Money: https://app.orion.money/

Orion Money’s main page

You will notice that yields on Orion are a bit lower than the yield on Anchor. This is because Orion is providing the service of bringing Anchor to ethereum stablecoins, so if you want the full yield, it’s best to use Anchor itself.

CoinList

CoinList offers a more traditional experience to get access to Anchor’s yield, but it is just as simple. You simply need to create an account and deposit UST. Because CoinList is a regulated company, some restrictions might apply compared to using Anchor itself. Check out the full details in the link below.

Link to CoinList: https://blog.coinlist.co/deposit-into-anchor-through-coinlist-and-earn-rewards/

Other Ways to Earn on Anchor

There are several other ways to earn on Anchor other than Anchor Earn. These different ways can vary in difficulty but at the same time provide a higher yield than 20%. These include:

  • Anchor Governance
  • ANC-UST LP
  • Borrowing

To learn how to use these different ways to earn on Anchor, check out this article that breaks down each specific method.

Link: https://medium.com/qi-capital/different-ways-to-earn-on-anchor-protocol-e83592f60307

Conclusion

With this overview on Anchor Protocol, hopefully, you now have a better understanding of how Anchor is able to generate its yield. To keep track of how Anchor is doing, you can check out Anchor’s dashboard which provides information such as the ‘Total Deposit’, ‘Total Collateral’, and ‘Yield Reserve’.

Other helpful resources include Anchor’s telegram, Anchor‘s Discord, and Anchor Docs, all of which are listed below.

Anchor’s Dashboard: https://anchorprotocol.com/dashboard

Anchor’s Telegram: https://t.me/anchor_official

Anchor’s Discord: http://discord.gg/9aUYgpKZ9c

Anchor Docs: https://docs.anchorprotocol.com/

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