Anchor Protocol is Great But Its 20% APY Is Unsustainable.
The Anchor Protocol is a high yield savings account offered on the Terra stablecoin UST that currently offers a 19.5% APY. We discuss a little bit about financial theory and the Terra ecosystem before digging into the numbers and show that the Anchor Protocol is being heavily subsidized for adoption and that the high rate will run out in less than a year after nearly $500,000,000 in subsidies was added in February 2022.
Proposal 20 passed in March 2022 which means that the interest rate will drop 1.5% per month until the equilibrium is reached once they implement it. No word on when the proposal will take effect.
The figures in the tables in this article are constantly changing due to the massive growth of the Anchor Protocol. I will try to keep these tables updated frequently.
Magic Internet Money.
People have a way of believing in magic internet money. I like to call it the Alchemy of DeFi that gets people to believe that the traditional rules of finance just don’t apply, apparently, only because "there’s no middle man."
Anchor pays 20%, because there is no middle man, that’s the power of DeFi! Random Internet User.
Understandably, crypto can be confusing and requires a lot of financial gymnastics to acquire it, convert it, stake it and store it and a lot of people get lost in the details. In all reality, people just want to believe that unusually high returns are sustainable based on magical thinking. They don’t understand why and instead are just willing to believe someone smart invented something amazing and האם אפליקציית binance בטוחה that it "just works." Unfortunately some things are just too good to be true.
If any of these claimants ever bothered to look at a statement of income on a standardized 10-Q/K for any major bank, they’d quickly realize that CEOs and binanyň teňňesine syn employees being paid is not the reason why they aren’t earning 20-40%+ interest rates on their money. Certainly there would be some savings, on the order of 30% by removing those cost centers, but it’s really not the reason. Furthermore, about half of bank revenues are fees for services that don’t even involve loans and Binance在印度合法嗎
can’t be replicated by DeFi products, such as overdraft fees or ATM charges. So where do the magic internet money believers think their DeFi interest comes from?
What Determines a Savings Account Rate In Traditional Finance?
Ultimately the rate you receive on a standard savings account is roughly determined by financial gerrymandering by central bankers. They set the rate that banks can borrow money at from other banks through the Federal Reserve rate and that rate has been basically nil for als binance begann the last ten years at around 0.25%. Why are banks going to pay you more than 0.25% when they can borrow at that rate? (a few banks do pay higher, like 0.61% at Axos)
Frankly, there are more deposits than banks know what to do with and only lend out about 70% of their deposits, so they aren’t even maximizing the amount of collateral they can loan out which is why the largest banks only pay a 0.01% APR. They don’t need any more of your money and certainly aren’t going to pay more than they have to.
Why aren’t banks lending? Banks took some sizeable historical charge-offs during the Great Recession, so perhaps they haven’t wanted to take as much risk since then. Or maybe the question is why aren’t borrowers borrowing? Up until the economic collapse, the ratio of debt-to-income was increasing, but has dropped and stabilized since. The personal savings rate has also been growing. Ultimately the answer to the question of why banks don’t loan more is outside the scope of this article, but it is a relevant point to realize because the Anchor Protocol only lends out a portion of its deposits as well.
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Read more about modern banking and the effects of quantitative easing here.
The Terra Luna Ecosystem.
One of the reasons why I like the Terra Luna ecosystem is its emphasis on stablecoin economics. Bitcoin has failed to be used as a medium of transfer because the volatility of the asset and the transaction fees make it impossible for that purpose. People buy Bitcoin now as an investment, with sort of a digital gold with limited supply argument.
Various other competitors have come along to joust for the title of value transfer coin, including Ripple, Stellar, Monero, Z-cash, Nano and others. While they have all improved on the transaction fees, they still suffer from the same problem of a lack of a peg, and go up and down with the waves of the crypto market.
If you have a contract, revisão de visto binance you want to know what the value is going to be worth at the end of that contract in your own currency. If you want to save some money or load a payment app to use on groceries later, you don’t want to put on market risk before you get to the grocery store. Stability and low fees is what will drive cryptocurrency to mainstream adoption beyond simple speculation which drives most of it now.
Right now there is $162 billion in stablecoins and it has been growing along with the general crypto market, but it is still a drop in the bucket of nearly $3 trillion in total cryptocurrency valuation.
Terra USD (UST)
One of the major problems of stablecoins for decentralized finance (DeFi), is that most of them are issued by centralized authorities. USDT is controlled by the Bitfinex exchange, USDC is issued by the Circle foundation, BUSD is issued by the Binance exchange, and GUSD is issued by the Gemini exchange.
This is a problem because these centralized authorities have the power to invalidate any of the stablecoins they have issued, based on whatever criteria they decide. Maybe a government wants to seize the assets, or a hacker’s bounty is to be invalidated, but money is freedom and centralized authorities could use their power to censor opponents or serve their own interests, such as printing more coins than they have backing for as is claimed about Tether.
Herein lies one the advantage of the Terra USD (UST) stable coin. It is decentralized and its value is determined algorithmically through its relationship to its sister coin, LUNA.
When a cryptocurrency buyer trades another crypto for UST, that transaction forces up the value of UST a little bit based on supply and demand. If there are enough buyers of UST relative to sellers, the price of UST will start to deviate from its peg and become larger than $1. At that point, UST holders can swap 1 unit of UST for LUNA and get that extra value. Similarly, if UST is trading less than $1, LUNA holders can burn $1 of LUNA value for 1 unit of UST, getting a slight discount. Arbitrage forces the UST to track $1.
Terra Anchor Protocol.
The second major advantage of the Terra Luna ecosystem is their savings account protocol. Since its inception in early 2021, it has been paying around 20% APY interest.
Some people refer to this as "Anchor Protocol staking," but staking is not the proper term here as you are loaning your UST.
Because you are being paid in stablecoin, you aren’t taking crypto market risk and your savings and are binance fees high interest doesn’t require an ever increasing number of buyers to prop up the token price, unlike the Hex token scam. We will talk about the risks of the Anchor protocol and why the current interest rate is not sustainable in a later section.
Anchor is literally the anchor (hence the name!