Anchor’s New Variable

Market Meditations | March 25, 2022

Anchor is a protocol in the Terra-Luna ecosystem that describes itself as a crypto savings account. Anchor made a name for itself in the defi space by consistently offering yields of 19.5% on UST deposits. The sustainability of the 19.5% yield has long been questioned, after all, in defi, a high yield usually means high risk. A recent proposal to the protocol has answered the question, the yields are not sustainable.

  • Governance proposal #20 has passed.
  • The protocol will implement semi-dynamic rates based on the change in yield reserve over a specified period of time, but there will be a minimum of 1.5% change per month.
  • If the yield reserve goes to 0, there will be a switch to market rates.
  • If there is a switch to market rates, it should land somewhere between 5-15%. Of course, this is dependent on market conditions, the growth rate of UST, staking rewards, collateral bonded for borrowing, etc.

Although the proposal did pass, there are some skeptics. Some fear this is the beginning of the end of Anchor or that UST may lose its peg, while others realize that this model will allow the protocol to remain sustainable.

The original mission of Anchor was to create adoption for UST, which it has accomplished. According to CoinGecko the market cap of UST was only 2.5 billion in Nov 2021 and has risen to +16 billion. With Anchor’s dropping yield in mind, we can only wonder how that double or nothing bet Do Kwon made will turn out.