Anchor: the gold standard for passive income on the blockchain

Anchor is a savings protocol built on the Terra blockchain, aiming to provide a fully decentralized fixed income solution. Despite the high volatility typically seen throughout the DeFi and blockchain space, the Anchor protocol has managed to establish a stable yet high savings rate through utilizing Proof-of-Stake (PoS) block rewards. Anchor has gained immense traction in the DeFi universe, achieving $750M+ in TVL just one month after launching.

Now the protocol stands at over $10B in TVL and $5B in total collateral value, having demonstrated impressive growth over a short timeframe. Supporting this growth are the three core features of the protocol: high and stable deposit yields, instant withdrawals, and principal protection. So what problems does Anchor help solve and how do they differentiate themselves in doing so?

What is Anchor?

Anchor is a savings protocol built on the Terra blockchain, providing its users with low-volatility yields of 20%. The platform was built by South Korean blockchain firm, Terraform Labs, and launched back in March 2021. The protocol is governed by its native token, ANC, which contributes to capturing a portion of the generated yield in order to scale linearly with the value of all of Anchor’s assets under management. It is the first ever interchain dApp to pool emissions from a PoS blockchain (in this case, Terra), stabilize it, then pass it on as fixed high-yield interest to its depositors.

When the protocol launched, yields were only available for UST deposits (Terra’s USD-pegged stablecoin), which played a large role in increasing demand for the stablecoin. This is no longer the case with the introduction of EthAnchor, allowing deposits of Ethereum-based stablecoins such as USDT, USDC, BUSD and DAI. Currently, yield for UST deposits stand at ~20% and for other stablecoins at ~16%. Future plans for Anchor include integrating other PoS assets such as SOL, DOT and ATOM.

How does Anchor Work?

The Anchor protocol can be explained as a money market between borrowers and lenders of stablecoins. As simple as it sounds, this doesn’t capture the big picture of why Anchor stands out amongst all savings solutions. Anchor can be better explained through the four key entities involved in running the system:

• Lenders are those wanting to access high yield for their savings through depositing & lending stablecoins — upon depositing UST, lenders can start earning interest of ~20% per annum.
• Borrowers are those that want access to stablecoin capital — they do so by borrowing from the platform in exchange for providing stakeable assets as collateral (also known as bAssets). These bonded assets allow borrowers to access liquidity whilst maintaining price exposure to their original assets.
• The Anchor Protocol is responsible for the operations behind the borrow & lend mechanism — running on a set of smart contracts, the protocol collects revenue from borrowers’ paid interest and staking rewards, which is then distributed across different lenders as earned interest.
• Anchor’s Yield Reserve is one of the features which makes Anchor special — acting as a supply of extra yield, any extra revenue generated from borrowers is stored here. The yield reserve is responsible for covering the costs of paying out the interest to lenders when revenue generated from borrowers is insufficient to pay them. The reserve is in surplus when revenue generated from borrowers is higher than cost of paying lenders, and vice versa for depletion.

A Step Closer to Mass Adoption

Backing the protocol’s growing success is its ability to tackle two fundamental problems in today’s economy: the high volatility and unpredictability of cryptocurrencies, and the deterioration of interest rates within traditional financial markets.

While there are already various savings solutions available, the high volatility of cryptocurrencies is an obstacle for “crypto newbies” to enter the DeFi universe. Despite the sudden surge of DeFi since the launch of Bitcoin, Ethereum and thousands of other projects to date, the high risk associated with investing in the space is a consideration for many mainstream users or risk-averse institutional investors. However, against the backdrop of the current macroeconomic conditions with bank deposit rates at near zero for example, the appetite to generate stable yield through some sort of fixed income solution is certainly present in both the retail and institutional space.

So how does Anchor prove itself as a solution to these challenges? By providing a stable and reliable yet high yield savings rate, it offers all types of investors a secure and profitable platform. Through setting the “gold standard for passive income on the Blockchain”, Anchor hopes to prove itself as a gateway to mass adoption.

With the launch of new features and assets such as EthAnchor (allowing Ethereum based stablecoins) and bETH (bonded ETH), Anchor is continuously growing into a powerhouse facilitating the mass adoption of DeFi. Their most recent addition, the onboarding feature, allows direct purchases of UST from the platform, shortening the whole process of saving on Anchor. Their team has stated their vision is to eventually be integrated across various retail-facing savings and payment applications, allowing seamless integration of dApps and high accessibility for all types of individuals.

Things are looking bright for Anchor — for mass adoption to take place, we must not neglect those outside the DeFi space. Anchor is increasingly becoming easier to use across different platforms, and already our customers can access the protocol from the safety of their Hex Safe accounts. As put by Do Kwon, CEO of Terraform Labs, “stable, attractive yields denominated in the dollar and composable in smart contracts is the holy grail in cryptocurrency. It will allow more households to move their savings onto Anchor’s smart contracts, moving DeFi from the fringe to the mainstream”.