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How Anchor Protocol Works

Welcome to this post, where we are going to see how anchor protocol works and how you can get the most out of your Luna.

Anchor is a savings protocol that offers low volatile returns on Terra stablecoin deposits. Anchor’s rate is driven by a diversified stream of staking rewards from major proof-of-stake blockchains, and therefore can be expected to be much more stable than money market interest rates. 

What is Anchor Protocol?

The Anchor protocol defines a money market between a lender, who seeks to obtain stable returns on its stablecoins, and a borrower, who seeks to borrow stablecoins on stable assets. To borrow stablecoins, the borrower locks the bAssets as collateral, and borrows stablecoins below the LTV ratio defined by the protocol. The diversified stream of staking rewards that accumulates in the global collateral pool is converted into stablecoin, and then vested in the lender in the form of stable yield.

To better understand how the protocol works, let’s take a look at some of the investment strategies you can do in anchor with Luna.

Anchor Protocol Fees

The first thing we need to do is to open the anchor protocol application, and connect our terra station wallet. It is very important to have UST before starting to use anchor protocol, as it is the currency used to pay commissions, instead of LUNA as we have seen in terra station. Therefore, I recommend you to have between 3 to 5$ of UST to pay the commissions if you want to use anchor.

Staking UST

First let’s look at the earn part. Here, you can deposit UST, stablecoin for 19% per year at the moment. If you scroll down, you can see the amount you will receive each day, week, month and year with respect to what you have deposited. This way, you can see if you are really getting the rewards you should. To deposit, click on deposit, and indicate the amount of UST. You will see the commission you have, which is usually 0.25 UST. Once you have deposited, if you open your wallet, you will see a cryptocurrency called Aust. Although it’s a bit confusing, this cryptocurrency has a similar value to UST, but not the same, and Aust is where you will receive your rewards. When you want to withdraw your funds, click withdraw and the Aust will be converted into UST.

This type of investment is the safest and most stable, with little risk and getting almost 20% with stableocins. A really high percentage that in few protocols you will find.

Borrow and Collateral

Now let’s go to the one I am using now and it has a medium risk but also a higher reward. Let’s go to borrow, and here we find the borrow part in anchor with bluna. The collateral value is the value that I have as collateral which is the value of bluna. If we go down, we will see the amount of bluna that you have. In borrowed value is the amount you have borrowed in my case 31 UST, and if we go down we see the LTV. Before we look at the APR, let’s look at the LVT. LVT is the ratio of collateral and amount you have borrowed, in my case it is around 40%, which is the maximum you can borrow anchor.

If the LVT reaches 50%, the protocol will liquidate half of your blunas to pay the debt and avoid possible defaults. Therefore, it is recommended to be between 35% of LTV or below. In my case, as it is not a very large amount, I am at almost 40% LTV, but if Luna’s price drops 10%, half of my bluna will be sold to pay the debt I have.

Anchor’s profitability

With that clear, let’s look at the net APR. Anchor, like other protocols, incentivize you to borrow, and they do this by rewarding you with their platform cryptocurrency for borrowing. You see, there’s the % it costs to borrow, like any loan, the person has to pay interest, which is around 15%, and the distribution APR. Where you are going to receive rewards in anchor for borrowing. So, on my 31 UST, I can get the net APR, which is currently around 140%.

So, for borrowing, I’m going to get 155% in anchor reward, and once I want to pay back the debt, I’ll have to pay about 15% as interest.

The main risk is to be liquidated if Luna’s price drops. If we go down, in Price we will see a price below, that is the price that will liquidate our bluna if it reaches that value.

Strategies with bLuna

There are two strategies here, the less risky one is to move your luna to bluna, place your bluna as collateral, and borrow USTs. With the USTs, we go to earn and deposit them to get an extra 19% with the USTs we have borrowed. This is the strategy I am doing now, and that is why in earn I had UST deposited.

The other strategy with more risk, is to buy more Luna with the deposited UST, convert it to bluna and put it as collateral. In this way, to have more bluna and decrease the risk of being liquidated. This strategy has more risk because it depends more on the price of Luna, and if it falls, the loss can be higher, but also higher profit if the price of Luna rises.

How to get bLuna

To get bluna, you have to go to bond. Indicate the amount of luna you want to convert into bluna, select the validator, click on mint and confirm in your wallet. In this simple way you will already have bluna to add as collateral. As you can see, commissions are usually around 0.25 UST, so remember to always have UST to pay for transactions.

To switch from bluna to luna, let’s go to burn. Here there are two options, move from bluna to luna in a 1-1 ratio, but you will have to wait 21 days, as we saw with staking and stop delegating to terra station. This is because of how the terra protocol works, so if you don’t mind waiting 21 days until you have your moons back, this is the best option. The other alternative is instant burn, where the ratio of moon to moon is not 1-1, and you will pay an extra commission to withdraw your moons earlier and get them back in a few minutes.

This depends on whether you need to have the moons now or you can wait the 21 days to have all your moons that you converted to bluna.

Rewards

In govern, you can find anchor staking, and anchor UST with the lp token. Although the most interesting part is downstairs, in rewards. Here, in UST borrow, you can see the amount of anchor you have and have received for borrowing. To collect it, simply click on claim all rewards and you will have the anchor in your wallet. Always keep in mind the 0.25 UST commission, so withdraw your rewards once you have a significant amount of anchor.

With the anchor rewards you can buy more moon and add it as collateral to decrease the risk, staking in the anchor platform itself or create the LP to stak anchor and UST.

Before investing your money, I recommend you to be well informed about the protocol, the risks of liquidation and how it works, to avoid surprises if the market suddenly falls again, and to know the risks to which you expose yourself.

I hope this video has helped you to learn more about the different strategies to make the most of your Luna. Remember that if you don’t have an account with binance, you can create one just below.

Platform: Binance
Min. deposit: $10
License: Cysec

Very low commissions
Exchange with more cryptocurrencies

5/5

2 Comments

  1. Imre

    I dont understand how to put the UST in to the Anchor Earn site wallet… the wallet u connect is Terra Station, which has a terra address .

  2. LaP

    IMRE : From what I have understood so far, a Terra wallet contains different types of tokens at a time, say, some Luna, some UST, etc. You use only one address for this all, the one given by your terra station

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