Despite what’s happening in the markets right now, cryptocurrencies are seeing massive growth in value and awareness. Many projects are being born out different necessities and opportunities in the space that it can be hard to sift out which one actually works.
I Tried Anchor Protocol for 6 Weeks
In the recent months, we’ve seen the rise of Decentralized Finance, or DeFi, and that created so many different ways to generate income passively. Not only can people stake their tokens, a new way called Yield Farming was born.
However, not all people are so risk-tolerant that they would put most of their money in unknown, and even popular, crypto assets to generate passive income. In addition, yield farming programs today are still complicated and confusing to new investors that it becomes a barrier for them.
The Anchor Protocol was designed to address such issues and help people, just like you and me, to have a risk-free way to earn a profitable stream of passive income.
I found Anchor while looking for other DeFi projects that I could invest in back in November. I found Jesse Eckel’s channel and saw a video of him talking about Anchor.
Finding this project was a great break from the usual yield farming programs that I see people promote everywhere. I haven’t seen a project that focused more on creating something close to a high-yield savings account, but even better.
In this article, we’re going to look at what the Anchor Protocol is, what it does, and what were my results after trying it out for 1 month or 6 weeks.
What is Anchor Protocol?
Anchor was created by Seoul-based Terraform Labs in March 2021. According to the documentation,
Anchor is a savings protocol offering low-volatile yields on Terra stablecoin deposits. The Anchor rate is powered by a diversified stream of staking rewards from major proof-of-stake blockchains, and therefore can be expected to be much more stable than money market interest rates.
What does it do and how it helps you?
There are two parties involved in a transaction: a Lender and a Borrower.
A Lender is someone who comes to the protocol to earn a yield on their stablecoins (i.e. UST — TerraUSD).
A Borrower is someone who borrows stablecoin from the Anchor money market. The Borrower would have to deposit Bonded assets (bAssets) as collateral against the loan, and maintain a Loan-to-Value Ratio below the pre-decided value.
At the moment, there are two Bonded assets that you can use as collateral — Bonded ETH (bETH) and Bonded Luna (bLUNA).
The easiest way to understand this is to think about a traditional bank. Whenever you put your money in a savings account, the bank doesn’t just leave it there. They use the money by lending it to borrowers, earn interest on it and give you a small share of that interest.
EARN
Speaking of earning interest, that is the first feature of Anchor — EARN.
Whenever you deposit UST (TerraUSD) to Anchor, it is automatically used by the protocol by lending it out to borrowers. Thus, you automatically earn interest on it.
Currently, the APY that the protocol pays out is around 19%. It had gone as low as 17% to as high as 21%. But it generally hovers around 20%, which is what Anchor Protocol promises.
It’s able to pay out this APY consistently because the protocol earns via different ways.
First is by its lending feature. Borrowers pay around 18-26% as their borrowing APY.
Second is through staking rewards. Rewards are earned on the assets that people deposit on the platform — bLUNA and bETH. We don’t receive these staking rewards, but the platform does.
BORROW and BOND
Like I mentioned earlier, you can borrow UST in Anchor Protocol. You pay the cost to borrow money in the form of interest.
You first bond the assets you own as a collateral for the loan (from LUNA it becomes bLUNA). Then you can borrow UST.
But in Anchor’s case, it incentivizes people to borrow UST by rewarding ANC, Anchor’s native token. Thus, taking care of the interest you owe. You basically earn money in the form ANC tokens by borrowing in the platform.
Pretty interesting, right?
However, this is not the case all the time. If the borrowing APR is higher than the distribution APR, then the rewards you get as ANC is not enough to compensate the interest you owe — aka, you’re not earning by borrowing at all.
GOVERNANCE
By holding ANC tokens, you can participate in its governance. You can submit proposals and vote on proposals that contribute to the Anchor platform.
Holding ANC tokens also allows you to stake and provide liquidity in the platform in exchange for an APR. When you stake your ANC tokens, you can earn 12%. And if you provide liquidity, you can earn 106%.
My Results: 1 month of Anchor Protocol
I started Anchor Protocol on November 16 with $233, and throughout the entire process, I paid around $36 worth of fees — $17 to move from Coinbase to MetaMask, $18 to move from MetaMask to Terra Station, and $1 to deposit my UST from Terra Station to Anchor’s Earn feature.
After 6 weeks in Anchor, my $233 grew to $238. I know that’s not a big amount at all, but if you calculate it, that’s already a 2.15% growth.
That alone is already bigger than the amount I earn in one of my high-yield savings account in Ally, which pays out 0.50% APY.
If I had put more money into it and use Anchor as a savings account, it would totally blow the returns out of the water. And that’s all that I can say about my experience with Anchor Protocol as a savings account.
Conclusions: Pros & Cons of Anchor Protocol
PROS
- Low-volatility and low-risk
- Relatively safe & better place as a savings account
CONS
- ANC and LUNA price movements
- Possibility of UST breaking peg (value going below or above $1)
The Anchor Protocol is a good alternative to a traditional savings account. It offers a better interest rate than your typical bank, who offers less than 1% on your money.
It’s also a good buffer for your investments against the market’s volatility because of your stablecoin deposits. They’re relatively low-volatile and low-risk.
However, we are talking about the cryptocurrency space and the landscape could just change anytime. So do your own research before investing in any platforms, including Anchor Protocol. And only invest money that you are comfortable losing.
I’m going to keep my money in Anchor for the meantime because I believe it’s going to stick around for a long time.
Despite the market being quite choppy and people pulling their money out of projects, Anchor stood the crashes here and there and still paid out its users.
I might put more next year, but we’ll see how everything goes.
TL:DR?
Here’s a video version of this blog for your convenience!
Important Links
Whitepaper
Web App
Documentation