In my previous post on Terra Luna, I mentioned about the upcoming new release of Anchor protocol. It was launched last week and I managed to grab some ANC tokens at the opening. This article will be diving deep down into what is Anchor protocol, what is ANC token and why you should look at it.
On a high level, there are 3 participants within the Anchor protocol. One is the savers or depositors. The second is the borrower who wants to take out a loan and the last is ANC shareholders. Those who own ANC tokens own a share of the Anchor protocol and can participate in governance and earn dividends from it.
1. Anchor Savings Account – 20% Interest Rate
Let’s start with the savers. Anchor is paying a fixed interest rate of 20%, principal-guaranteed. You deposit 1,000 USD into Anchor, you earn $200 interest annually. The interest amount is paid in USD and not some other tokens. No terms and conditions, no opening of accounts, no document verification and no capital lock-up. Anyone in the world can participate in this easily by creating a Terra wallet. You just need the internet.
They have completely spoiled the market and distort the standards of savings rates disproportionately high. Banks pay you 0.05% interest. Fixed deposits pay you 1-2% interest rates locking up your capital for x number of years. Insurance endowment plans pay you 3-5% with a booklet of jargons and fine prints. And here you have Anchor paying 20x to 400x more of what you are earning now.
But wait… that sounds too good to be true isin’t it? What’s the catch? How can interest rates be 20% high? Is this a ponzi? Is this a scam?
We have been conditioned to think about what is the norm and we blindly accept it. It seems that 0.05% savings rate is the standard for banks but do you know the national savings rate used to be at least 10-15% before the gold standard was removed in 1971?
Ever since fiat can be printed indefinitely without any backing of hard assets. Fed manipulates rates to print even more money further devaluing the currency. Hence, you see near-zero rates now amongst the banks and clearly, the benefits are not skewed towards you.
Anchor has deisgned this exit door to save you by beating the inflation if you still aren’t aware you are in one now.
2. How does Anchor Protocol Works?
The most common question is this. How does Anchor afford to pay 20% to depositors/savers? How does it work?
On one hand, you have savers, on the other side of this equation is borrowers.
Borrowers have to put down collateral to take a loan. These collaterals are cashflow assets. So the cash flow from the collaterals is used to pay the interest rates of the depositors.
At the moment these collaterals are minted Luna or bLuna. Luna is a cashflow asset that earns stablecoin fees from real-world usage of their CHAI app. In the future, Anchor would add more staking tokens such as ETH, Cosmos, Polkadot, Solana and etc. to be used as collaterals.
Okay, but what if there are more savers than borrowers? Can this be sustainable? Does Anchor have sufficient cash flows from the pooled collateral to pay depositors?
Anchor has a mechanism called the utilization ratio. Basically it is the ratio of borrowers to savers. Low number means more savers than borrowers. High number means more borrowers than savers.
When the utilization ratio is high, the borrowing rate increases. This is to lower down the leverage and restore market liquidity by encouraging repayments. Likewise, when the utilization ratio is low (more savers > borrowers), the borrowing rate falls to incentivize more lending and collaterals to pay savers.
Interest rate auto-adjusts based on the ratio of borrower and savers. The rates would then incentivize behaviours of market participants driving it towards equilibrium. It is the same as how the fed controls rate to influence the money supply, except one is based on mathematical code while the latter is greed.
3. How to Borrow a Loan on Anchor?
But why would you borrow? Isin’t it risky? Becuase you are being PAID to borrow on Anchor now.
The borrowing rate as of writing is about 30% and the distribution APR is about 206%. What is this distribution APR? Basically, you earn Anchor tokens (ANC) for borrowing. This is to incentivize people to borrow and participate in the ecosystem. And this ANC token has a value that can be bought or sold immediately to USD.
Hence, net APR % is just the difference of your dividend yield – borrowing rate. As of now, you are paid 176% in annualized yield for borrowing assuming ANC price remains the same. The APR is not fixed and it fluctuates based on the demand of borrowers and ANC price.
Here is how you can borrow on Anchor in 3 simple steps. 1 minute is all you need, zero verification required.
First, you need to have Luna token. Next, go to the “Bond” tab of the dashboard and mint your Luna to bLuna. bLuna is the asset that will be used as collateral.
Second, provide your bLuna under the “Borrow” tab of the dashboard and finally click borrow.
3.1 Risks of Borrowing on Anchor
The most important thing to note when borrowing is the risk ratio. Your borrow limit is only 50% of your collateral value max. That means if you put in $500 worth of LUNA tokens as collateral, you can only borrow a maximum of $250.
Risk ratio is defined as the ratio of your loan (liability) to your borrow limit. It can be no more than 1 or the system would automatically liquidate your collateral to repay back your loans. You will then keep the remaining 50% of the collateral value in USD after your collateral assets are sold off and the loans are cleared.
The recommended buffer is 35%. That means if I put in $1000 worth of collateral, I should take out a loan of no more than $350. Though you can borrow more up to $500. Just that when luna price crash, your chances of getting liquidated is higher. But from my own personal experience, I would recommend 25% as the crypto price is volatile.
To calculate what price should luna be before you get liquidated, you can use the formula above to find price.
Liability = How much loan you borrowed
Borrow limit = Qty bLuna * Luna price * 50%
Luna liquidation price = liability (loan amount) * 2 / qty bluna
You can see that as luna price dips, I am closer to the liquidation trigger (13% away). If you don’t want that to happen, there are 2 things you can do. Either buy UST and repay back a portion of the loan or buy more luna and put it down as collateral to increase the buffer.
3.2 Rewards of Borrowing on Anchor
What about the rewards?
As mentioned earlier, you are being paid ANC tokens to borrow. The APR as of today is about 206%. In my case, I took out a total loan of $585 (including accrued interest) and I have already collected 4.2 ANC tokens in rewards. Using the ANC price today of $5.30, that is about US$22. Assuming the price fluctuates around this range, you are paid roughly about US$100+/month for a $585 loan amount.
The more you borrow, the more ANC rewards you earn. But do also keep in mind the risk ratio when you are borrowing. So do it safely. You never know when BTC will crash as the price of Luna is pegged to a volatile asset.
On the reverse, when luna price pumps, your risk ratio decreases and you can borrow even more without having to do anything.
Finally, note that you are being charged an interest rate in USD and that is about 30% now. Although you are paid in ANC tokens of 200%+ yields, the price of ANC can also crash. You are being paid to borrow for as long as your ANC rewards in US dollar is > interest rate of borrowing.
3.3 Anchor Shareholders
If you think the Anchor protocol is cool and you see the value of ANC tokens in the future, you can become a part of Anchor by buying ANC tokens.
Similar to all other staking governance tokens, 1 staked ANC represents 1 vote. As a shareholder, you participate and vote on polls, proposals similar to what you will do at a Annual general meeting (AGM).
This ANC token also accrues value. The protocol earns fees from transactions on Anchor protocol. Whether it is a saver depositing/withdrawal money, a borrower taking up/repaying a loan, a small transaction fee is incurred. The collected fees are then pooled together to buy ANC tokens and redistribute them back to ANC stakeholders.
The value of ANC is linear with the AUM on anchor protocol. The more deposits, loans you have, the higher your AUM and thus the more fees you collect that would eventually be redistributed back to ANC shareholders.
Now that we have briefly talk about what you can do on Anchor and the type of participants in this ecosystem, let’s move on to the exciting part. Yield farming.
There is a massive massive dividend play here and this is how it works.
4. Yield Farming on Anchor Protocol
I have drawn up a good overview for beginners to get started.
Earlier we mentioned that you earn ANC rewards from borrowing (100-200% yields). Now the next question is what do we do with the loan? You can earn even more dividends on top of your borrowing. There are a couple of routes (see flowchart) you can choose from depending on your goal and risk tolerance. But here are the most common ones.
4.1 Low-Risk Play
If you want the lowest risk, just deposit the borrowed UST into Anchor savings account and earn a stable 20% interest rate. It is principal-guaranteed and you can withdraw out anytime you want should a need arise to repay the loan.
Alternatively, if you are bullish on the price of ANC, you can buy ANC tokens and stake them under ANC governance for about 1-2% yields at the moment. Again, this staked ANC can be withdrawn anytime you want and you can sell it for UST instantly to repay the loan when your collateral is at risk of liquidation.
The first method means you are earning about a net 100-200% APR for borrowing and an additional fixed 20% interest rate. The second method is you are earning about a net 100-200% APR + 1-2% for staking ANC token and you gain/lose from ANC price action.
4.2 High-Yield Play
If you want to earn even more yields on top of the borrowing rewards, you can also become a liquidity provider. This is a complex topic that requires a new post on its own. Probably will write about one if there is enough interest.
Being a liquidity provider means you provide the ANC-UST pairing to a pool. When people make trades to buy/sell ANC from that pool, they pay a fee. These fees are pooled together and redistribute back to liquidity providers depending on the proportion of stake you have in that pool.
The APR for becoming an LP is about 217% now. So far I have earned about 6.34 ANC tokens which is worth about US$33. This is just over the span of a week.
However, it is extremely important that you learn about impermanent loss first before going this route. This is because you could lose more than what you could have earned should you have HODL and did nothing. So do keep track of your initial ANC tokens and UST that you deposited to compare that against your LP position.
Also, note that you might not get back the initial amount of ANC tokens you put into the liquidity pool. It could be more, it could be less, depending on the ANC price.
If ANC is pumping, that means a lot of people are swapping UST for ANC. So the pool would have less ANC and more UST. Likewise, if ANC is dumping, you would end up with more ANC and less UST when you withdraw out your LP.
As long as your Anchor rewards from providing LP is > impermanent loss, it makes sense to do LP. However if your impermanent loss is > than ANC rewards, you are better off just HODL-ing than providing LP.
4.3 Luna Play
This path is for those who are very bullish on Luna and only want Luna tokens.
You can use your new borrowed UST to buy more Luna, mint it to bLuna and borrow even more. This is for those who want to increase their loan size and ANC rewards. Sort of like an additional booster leverage. You either gain more or lose more by doing this.
For those who want to HODL Luna long-term, you could use your borrowed UST to buy more Luna then stake them with a validator on Terra station and collect stablecoin rewards + airdrops. The estimated yield should be about 12% now and you also gain/lose from Luna price action.
The downside to this is your staked luna is now locked-up for 21 days. In the event when luna price crash and your loan is at risk, you can’t withdraw liquidity immediately as compared to other methods.
4.4 Mirror Play
Finally, this path is for those who are interested in Mirror, the decentralized stock exchange. Since Mirror v2 is launching, there is going to be some interest here soon. Couple of things you can do.
- Buy MIR tokens > Stake MIR as Governance and earn MIR
- Buy MIR tokens > Provide MIR-UST LP and earn MIR
- Invest in stocks (FB, APPL, TSLA, MSFT, BABA and etc.) Buy low, sell high.
- Invest in stocks, provide liquidity pools on them and earn MIR
The possibilities with what you can do with your loan are endless. First, you get paid for borrowing, then you get paid more again depending on what you do with your loan.
Do note that the APR yields you see here are highly volatile. As more people participate in this ecosystem the APR would fall, but you can be assured that it will still be extremely high relative to traditional markets.
The only rate that will not change is the fixed interest rate for depositors.
5. Future Outlook on Anchor Protocol
In less than 2 weeks, Anchor already has received deposits of $123 million and borrowed out $86 million. To give a bit of context, Mirror hit $1 billion TVL just 3 months after its launch. So what’s next?
Anchor is aiming to be the “Stripes for Savings”. This means creating 7 lines of code allowing for composability. They are going to create a simple Anchor API that will be integrated into all the fintech companies, mobile apps, wallets, exchanges. There are already multiple entities that are committed to doing so. Stay tuned and wait for announcements.
You can imagine Binance having a tab for savings on the front-end where users can deposit their money and earned a fixed 20% rate. Under this agreement, they take a 2% cut while the other 18% goes to the users. On the back-end, it is all using Anchor protocol and UST.
Personally, I have deposited 1000 USD yesterday. Earned US$0.50 interest overnight which would otherwise have been the annual interest I would receive in a year should I have put it in a bank.
20% interest rate on your savings! Who would not want it?
Honestly, people are still sleeping on this. This is known as the post–earnings-announcement drift or PEAD in accounting. People are finding it too good to be true and are still digesting the news. But eventually, everyone will come to their senses and that is where the momentum will spiral.
I think Anchor would follow the same trajectory as mirror, or perhaps even faster since more people are interested in savings and investments. This is still super early as Anchor is < a month old only.
6. How to Buy Anchor Tokens (ANC)?
Since ANC just launched, they are not listed on tier-1 exchanges like Binance.
There are 2 ways you can buy ANC tokens. One is to buy it directly from an exchange that only Okex has at the moment. Or second is to buy ANC tokens with Terra USD (UST) on the Terra station itself. This is what I did.
UST is also not easily available as there are only listed on 7 exchanges, despite showing massive growth over the past few weeks. In time, more exchange listing will come. But UST is currently only available on Kucoin and Bittrex exchange. Just sign up for an account there in <10 minutes. (I used Kucoin)
If you are in Singapore, there are a couple of ways you can do it. One is to buy LTC or ZIL on Coinhako, withdraw out directly to Kucoin. Sell them for ETH at market and sell your ETH to UST at market. But you take on the price risk during the transfer period as the price might crash when it arrives at Kucoin.
The second way (safer route) which I do is to buy DAI from Gemini, send DAI to Kucoin. Then sell DAI to USDT at market, sell USDT to UST at market. Everything is stablecoin at US$1, so you do not have to worry about a price drop during the transfer period.
Though Gemini charges a commission fee of about 1.5%, they have zero withdrawal charges. Try withdrawing USDT from Coinhako and that would cost you US$40. If you need a referral link, do use mine here. Both you and I get US$10 worth of bitcoins when you make a trade above US$100.
Once you got UST on Kucoin, simply send them to Your Terra wallet and you can buy ANC tokens directly from there. If you need guidance in on anything related to Luna/Anchor/Mirror or crypto in general, do join our telegram group chat.
If you need a bit of validation and trust on Anchor. Look at the whales (VCs) who are in. Mike Novogratz is in. Mark Cuban is also following Luna, Mirror and Anchor protocol all closely. Terra is a Coinbase and Binance Ventures project. Just follow the billionaires’ money.
Finally, Quoting’s Do’s words, “Do not bet against the moon.”