Anchor Protocol: Decentralized Savings platform

In the realm of conventional finance, an interest rate of over 20% is unheard of. However, this is precisely what Anchor Protocol promises users who deposit the crypto stablecoin UST on their decentralized banking software. Anchor protocol is currently the largest DeFi protocol on Terra, with almost 20 billion in total value locked.

What is Anchor Protocol?

Emerging as a breakthrough innovation in the DeFi realm, Anchor is a decentralized money market based on Terra that provides depositors of UST (Terra’s USD-pegged stablecoin) a stable yearly percentage return of 20% (APY). 

Anchor Protocol was established to stimulate demand for Terra’s native stablecoin, UST, by providing lenders with a 20% rate. Additionally, it enables DeFi to be integrated with conventional financial players. Anchor provides an APY via which fintech platforms, exchanges, and business-to-business companies may connect and provide interest-bearing savings accounts. 

Brief History of Anchor Protocol

Terraform Labs (TFL), a South Korean firm, built the Anchor Protocol platform and launched it on March 17, 2021. Its introduction fulfilled TFL’s ambition of merging three fundamental financial primitives on the Terra blockchain (payments through UST, savings via Anchor, and investment via Mirror Protocol). 

In addition to Terra, Anchor protocol is now deployed on Avalanche C-Chain and according to recent publications, Anchor will also be deployed on Acala – The DeFi Hub parachain of Polkadot.

How does Anchor Protocol work?

Anchor Protocol functions as a stablecoin market for lenders and borrowers. Lenders may borrow stablecoins and earn interest on them by depositing them on the platform. Borrowers may then get stablecoins by providing collateral in the form of stakeable assets. These assets are referred to as bonded assets, and the bonded assets that are presently available for use as collateral are bLUNA, bATOM, bETH, and sAVAX. Following that, the bonded assets are locked, and UST is borrowed against them up to the protocol’s borrow limit. 

Furthermore, the Anchor Protocol is based on the concept of liquid staking. Borrowers gain staking incentives on bLUNA, bETH, and sAVAX which the protocol converts into UST for depositors, enabling them to earn up to a 20% yield.

More precisely, bonded assets are assets that are staked to secure the network – Ethereum, Terra, and Avalanche. With the liquid staking method, the liquidity of staked assets is unlocked by providing the stakers with an equivalent amount of bonded assets, that they can use later in DeFi protocols such as Anchor.

Anchor Protocol uses an algorithm to calculate borrowers’ and depositors’ interest rates. This algorithm determines loan interest rates based on current loan availability and demand. Incentives are offered to encourage Terra stablecoin lending on Anchor’s market. 

It does so via the use of an over-collateralized architecture that enables users to borrow, lend, and earn interest on their digital assets. Additionally, the protocol enables quick withdrawals and compensates depositors with a low-volatility rate. It is a very well-known stablecoin. 

Terra stablecoin investments get a low-volatility rate of return via the decentralized savings system. The anchor rates are fuelled by a varied supply of staking rewards from major proof-of-stake (PoS) blockchains. They should be more stable than interest rates on the money markets. 

Overall, the protocol is open to all participants. Anchor is a potentially advantageous financial technique. Additionally, it is a protocol that is decentralized. This implies that it is accessible to everyone, regardless of their location, without requiring them to undergo KYC.

Main Components of Anchor Protocol

It is the first inter-chain DeFi program to pool emission from PoS blockchains, stabilize it, and distribute it to depositors in the form of stable, high-yield interest. Within the ecosystem, the protocol makes use of distinct sorts of participants:

  • Depositor (lender) Provides stable Terra currencies to the Anchor money market, which are pooled and loaned to borrowers, with interest collected proportionately to all depositors. 
  • Borrower Entities that form asset-backed lending positions to borrow Terra stable currencies from the Anchor money market. Borrowing allows users to get liquidity without exposing themselves to the price of their bAsset collateral. Anchor Protocol provides borrowers with Anchor Tokens as a kind of reward. 
  • Liquidator monitors the truthfulness of dangerous loans and, if required, makes demands against liquidated loan collateral. Prior to this, a bid must be sent to the Liquidation Contract, offering to acquire the liquidated collateral in exchange for the liquidators’ Terra stablecoin. 
  • Oracle Feeder Terra account, which is responsible for supplying an accurate and up-to-date price feed for bAsset collateral. They are primarily responsible for establishing the essential infrastructure. 

What is Anchor’s $ANC Utility?

ANC is the governance token for the Anchor Protocol, which is denoted by the $ANC symbol. Depositing ANC tokens allows for the creation of new governance surveys. ANC is intended to capture a fraction of Anchor’s performance, enabling its value to increase linearly with the amount of assets under Anchor’s management.

Overall, Anchor Token holders are responsible for governance. The community governance structure will aid in the platform’s development and enhancement. When a user starts to stake $ANC on the platform, the user gains the ability to vote. 

Voting rights are proportionate to the amount of ANC votes bet. As a result, voters with a greater stake in the ANC have a greater degree of influence over whether or not to execute the governance reforms recommended in a survey. 

Borrowers on the protocol also earn a “borrowers’ incentive” in the form of $ANC tokens to aid in the platform’s growth. One billion $ANC tokens will be distributed over the following.

Functionalities of the Anchor Protocol

Overall, Anchor Protocol fulfills a plethora of enhanced functions:

Safety

The Anchor Protocol employs the collateral liquidation procedure to guarantee that depositors’ principle is always secure and safeguarded. Subsequent deposits are secured to the extent that they are adequately collateralized. This exercise aims to safeguard deposits by repaying any debts that are at risk of failing to fulfill collateral requirements. 

Money-saving tool 

Due to their high volatility, crypto assets may not be the greatest alternative for consumers seeking low-risk passive income. On the other hand, Anchor offers a solution in the form of Terra stablecoin money markets. Terra stablecoin holders will get stablecoins in return, eliminating the major volatility associated with other cryptocurrencies. Additionally, Anchor’s deposit interest rate stability strategy mitigates volatility by assuring constant returns. 

Leveraging price and dividend yields. 

Users may leverage their holdings by pledging their assets as security for stablecoin loans and repurchasing the same asset. Additionally, users may profit from low-cost stablecoin borrowing and investing in bAssets with a larger return than their borrowing cost. In addition, users that desire more stablecoin liquidity may do so with little or no additional interest, since the block rewards on their assets back the deposit interest rate.

How To Buy Anchor (ANC)

If you wish to buy Anchor’s governance token $ANC, you find it listed in many centralized exchanges such as Binance, Kucoin, and Gate.io. Additionally, ANC, at the point of writing, is listed on the two major decentralized exchanges of the Terra Ecosystem, Astroport and Terraswap.

Bottom Line

With its high 20% APY, enhanced security functions, and ingenious mechanisms, Anchor is one of the largest DeFi protocols in the cryptocurrency industry. Its minimalistic and easy-to-use interface, makes it even more attractive, especially to new DeFi users.

Aris Ioannou
Aris Ioannouhttps://coinavalon.io
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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