Anchor Leapfrogs Aave as Top DeFi Lending Protocol With $14B TVL

Anchor, a stablecoin yield protocol representing more than 53% of Terra’s Total Value Locked (TVL), has overtaken Aave to become the third-largest dApp in DeFi.

Anchor’s rise through the DeFi ranks comes as Terra has embarked upon an aggressive campaign to buy $10B worth of Bitcoin to back its native stablecoin UST. Anchor offers a fixed return of roughly 20% on UST deposits.

According to DeFi Llama, Anchor now represents a TVL of roughly $14.5B after growing by 48% over just 30 days. The protocol sits behind Curve’s $20B and Lido’s $17B, with Lido also having grown by almost 59% in the past month.

Anchor TVL. Source: DeFi Llama

Anchor has now surpassed almost all of Ethereum’s ‘blue-chip’ DeFi assets, including the lending protocol Aave, Uniswap, and Compound. As for Terra, it now has a TVL of $27B, making it the No. 2 smart contract network, according to DeFi Llama.

Terra’s aggressive Bitcoin buying spree is intended to secure UST’s peg to the U.S. dollar without destabilizing the price of its network token, LUNA.

Death Spiral

UST’s peg was previously maintained by allowing 1 UST to be purchased or sold for $1 worth of LUNA, regardless of where UST was trading in the open market. That meant that if UST dropped below $1, buying pressure from arbitrageurs seeking to purchase the stablecoin and then lock in a profit via LUNA would restore its peg, and vice versa.

Many crypto investors criticized that approach. Detractors warned that it could trigger a death spiral for LUNA should the stablecoin lose its peg. Further, Anchor also caught flak for representing more than half of the network’s TVL by using a reserve to subsidize yields; critics argued that Anchor’s yields are unsustainable.

Call to Reduce Yield Payouts to Save Anchor Protocol Roils Terra Community

Call to Reduce Yield Payouts to Save Anchor Protocol Roils Terra Community

A new proposal to limit yield payouts has divided the Anchor community.

The Defiant

Anchor’s critics were almost proved correct in February when the protocol asked the Luna Foundation Guard (LFG) for $450M to maintain its high yields. Terra community members warned that without the funds, the Anchor Yield Reserve would be depleted by the end of the month, forcing the protocol to reduce its APYs. The LFG obliged, with Anchor predicting it could become self-sufficient by December thanks to its forthcoming v2 iteration.

To mitigate the risks posed to LUNA, Terra’s founder, Do Kwon, has decided to back UST with Bitcoin reserves.

Terra Chain

The LFG raised $1B through private LUNA sales in February, with Kwon announcing earlier this month that Terraform Labs had donated an additional $1.2B after selling UST for Tether. The Tether will be mobilized to purchase Bitcoin, with blockchain sleuths identifying $125M being sent from LFG’s wallet on March 22.

“As UST money supply grows, a portion of the seigniorage will go to build BTC reserves bridged to the Terra chain,” Kwon tweeted on March 23. He said Terra is hoping to build up a reserve of $10B worth in Bitcoin to back UST over time.

“We will keep growing reserves until it becomes mathematically impossible for idiots to claim depeg risk for $UST,” Kwon tweeted on March 11.

Governance Protocol

On March 24, Jump Trading, an algorithmic trading firm that participated in LFG’s February private sale, published a governance proposal outlining how the Bitcoin reserves could be deployed to maintain UST’s peg.

During usual market conditions, retail traders would be able to purchase $1 worth of BTC from the LFG’s reserves in exchange for 1 UST. But in the event of a “crisis,” retail participants would be able to exchange 1 UST for slightly less than $1 worth of BTC. The proposal suggested that 1 UST be tradable for $0.98 BTC should the stablecoin severely lose its peg.