Direct from the desk of Dane Williams.
A look at the 3 sources where Anchor yield comes from and what happens when it's not enough to maintain a rate of 20% APY.
Anchor is the popular Terra (LUNA) based savings protocol, offering investors low-volatile yields on Terra stablecoin deposits
The 20% yield for simply staking your algorithmically pegged UST stablecoin is unrivalled across the crypto and legacy banking industry.
If you’ve heard enough and would like to immediately get involved, then head over to my simple tutorial on how to stake UST on Anchor.
But with a rate that high, many investors like yourself may be asking where does the Anchor yield actually come from?
This blog discusses the 3 sources that Anchor yield comes from and takes a look at whether these yields can be sustained over the long term.
Where does Anchor Protocol yield come from?
Most DeFi platforms use simply supply/demand forces mixed with their own token’s inflation pattern to determine where yield comes from.
Anchor on the other hand, offers a fixed 20% APY on all UST deposits locked into the protocol.
This is one of the best stablecoin savings options available in the entire crypto space and as a result, extremely enticing to investors.
So let’s get into the 3 sources of Anchor Protocol yield.
The 3 sources of Anchor yield
The three sources of Anchor yield are as follows.
1. Interest charged to borrowers
The first source of yield is fairly straight forward.
When borrowers take out a loan, they pay for the privilege via interest.
2. Staking rewards earned from borrowers’ collateral
The second source of yield is a little more in-depth.
When UST is staked, the protocol actually re-invests that capital using methods like the liquid staking of proof-of-stake assets from other major blockchains.
Some popular examples would be taking advantage of bonded LUNA (bLUNA) and bonded ETH (bETH).
3. Liquidation fees
The third and final source of yield comes from DeFi liquidation fees.
DeFi liquidation is the process by which the protocol sells crypto assets provided as collateral to cover the debt if the loan cannot be repaid.
Is this enough for Anchor to maintain a yield of 20%?
Under normal market conditions, the 3 sources described above is more than enough to maintain an APY of 20% for stakers.
Realised yield is often greater than the 20% rate and the excess is moved aside into a UST denominated reserve fund called the Anchor Yield Reserve.
But if there is an imbalance between loan demand and deposits or the overall crypto market makes a deep correction, then it may not be.
In a scenario where the realised yield becomes less than the Anchor rate of 20%, the protocol is forced to tap into this Anchor Yield Reserve.
Final thoughts on Staking UST on Anchor
With the wider crypto market including LUNA, recently taking a dive, Anchor has actually now been forced to dip into these reserves to maintain its industry leading APY of 20%.
Investors are understandably nervous and tomorrow’s blog will pick up on the topic of whether these extremely high Anchor yields can be maintained over the long term, or whether they’re going to be forced to drop back.
All I’m going to say is strap yourself in.
This one is going to have some serious ramifications for the entire stablecoin scene.
Best of probabilities to you.