With $11.7B in funds locked in, Anchor now has more funds committed to it than it has since the savings application launched on Terra last year, according to DeFiLlama.
This is a turnaround from January, when depositors started leaving because it looked as though it might not be able to meet its roughly 20% fixed yield for those using it to grow their savings. That generous reserve was insured by a yield reserve that covered the difference when cash flows didn’t, a reserve that looked like it could run out as it fell by $2M every day.
In early February, though, the protocol sought a $450M contribution from the Luna Foundation Guard to refill its reserves. Those new reserves were turned over to the Anchor yield reserve on February 18, according to Terra.Engineer. Anchor reserves now sit at $476M (in TerraUSD), as the reserves continue to shrink by the same amount, about $2M per day.
Nevertheless, depositors seem to have been reassured by the new backing. In late January, when the Anchor yield reserve had fallen to about $38M, TVL on Anchor began to drop precipitously. DeFiLlama shows it going from $8.8B on Jan. 27 to $6.83B on Jan. 31.
After that it started to recover, after Terraform Labs co-founder Do Kwon hinted at restoring the reserves. By Feb. 18, after the infusion, it had risen to $8.3B, and then deposits began climbing sharply to its current level.
Anchor is fundamentally a lending platform and it needs to make loans to be sustainable, but borrowing has stayed fairly flat. When The Defiant first reported on Anchor’s reserve crunch in late Jan., borrowers had taken out 1.56B UST. Today, borrowing has risen to 2.47B, a 58% gain, but still only 30% of the total deposits.
There are actually two different types of deposits that happen on Anchor.
The savers deposit UST to get those attractive roughly 20% returns.But Borrowers also deposit. They deposit staking derivatives for LUNA (the Terra governance token) and ETH: bLUNA and bETH. These derivatives generate an interest rate of their own, and depositing them as collateral allows them to borrow savers UST.
So, as Anchor continues to rely on its reserves to meet its commitment to savers, there are noises in the community about making adjustments that will bring Anchor to long term stability.
“What’s really hamstringing the protocol is we’re just not moving fast enough to get new assets on,” BitN8, a researcher with the Terraform Labs team, told The Defiant, “That’s the problem. It’s super easy to deposit UST and it’s not so easy to deposit collateral.”
He said they have been working on technical audits to get bATOM and bSOL usable as collateral for months now.
“We don’t have the ten biggest market cap layer-1s to borrow against,” BitN8 said. “We’re not moving to where the money is.”
In late Jan., BitN8 posted a discussion topic in the Anchor forum to change the way borrowing on Anchor works to reduce that friction for borrowers by making it easier to post collateral.
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Notably, some of the assets seen as attractive as collateral are not native to Terra or even the larger Cosmos ecosystem it is part of. In the original proposal to restore Anchor’s reserves, the author, n3mo, acknowledged that it was a temporary fix. “The yield reserve top-up is a short-term solution to allow Anchor sufficient time for growth,” he wrote. In particular, he expected more cross chain integrations to make the credit available via Anchor more broadly useful throughout DeFi.
Paul Veradittakit, a partner at Pantera Capital, a longtime backer of the Terra stablecoin system, “This is a huge market that I think could help expand borrowing demand and generate more cash inflows via staking, and alleviate some of the reserve depletion pressure,” he said.
Another more basic shift could also make Anchor more sustainable: lowering what it pays savers.
Veradittakit said, “Ultimately, ANC holders will need to lower the ‘Anchor Rate’ via governance for the overall health and longevity of the protocol such that yield is paid out based on sustainable cash flows, rather than the reserve.”
Stable DeFi Rate
To that end, BitN8 opened another discussion on the Anchor forum Tuesday about making the rate paid to savers dynamic, linking it to whether or not the yield reserve is shrinking or growing. “One possibility for creating a semi-dynamic rate,” he wrote, “would be to tie the earn rate to a measurement of change in the yield reserve over a period of time. If the yield reserve is growing, the earn rate could increase; if the yield reserve is falling, the rate could decrease.”
While the community has to decide the specifics, BitN8 is confident the returns to savers will become at least somewhat variable this year.
“The whole idea behind Anchor was like: Let’s get everyone a great stable defi rate, so we’re not going to go completely dynamic because that’s not what people want. But every month it can kind of change slowly,” he said.
The change might be monthly. It might be quarterly.There are a lot of open questions about the parameters that will change it, but something will shift. “It has to pass,” BitN8 said.
At current rates, Anchor has the better part of a year before its fixed return puts it in any danger of failure to meet its larger obligation, and its current depositors largely showed a willingness to stay in to the point that there was much less than a month of reserves left. The proposal by bitn8 seems to try to leave room to maintain high rates when the demand for borrowing is strong, but there tends to be a tension between serving borrowers and depositors, Michael Arrington, of Arrington Capital, another investor in the Terra system, told The Defiant via text message.
Token mechanics could also offer a way out. “Borrowers also get ANC tokens. so if ANC becomes more attractive in whatever way, it would also make borrowing more attractive,” he said.
The yield reserve has the better part of a year to run even losing money at the current rate. The only danger to savers when it does really is that they won’t get their expected returns (since loans are protected by borrowers collateral). Right now, those generous returns have been subsidized by the larger success of the Terra stablecoin, whose supply has grown from $10B to $13B since the start of 2022.
But Anchor has been a key part of that success, and even with a billion-dollar patron at its back, at some point the math has to work or Anchor ultimately won’t. If Anchor doesn’t work, that would be a serious blow to Terra itself.