How Anchor Protocol Works

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 interest rates you might find in a money market. 

The Anchor protocol defines a money market between a lender, which seeks to earn stable returns on its stablecoins, and a borrower, which 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.

Anchor currently has Luna, Eth and Avax available for use as collateral and borrowing. By depositing cryptocurrencies such as Luna, Eth or Avax with Anchor as collateral, the platform stacks them on its network, and this is the way it manages to make a profit in order to pay for UST staking. You can find a more detailed explanation of how the protocol works here. 

If you want to understand Anchor’s mechanisms, how it generates income and pays the annual %, as well as aspects such as security and risks, I recommend you to see the detailed explanation just above.

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 Commissions

The first thing we have 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, since it is the currency used to pay the 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 in exchange for 19.55% per annum at the moment. If you scroll down, you can see the amount you are going to 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 may seem a bit confusing, this cryptocurrency has a similar value to UST, but not the same, and the aUST token is where you are going to receive your rewards, as aUST appreciates relative to UST over time. That appreciation is the annual % of staking.

Don’t worry if you don’t get any rewards or don’t see where to claim the annual % of staking as it usually happens. Since the annual % is inside aUST, and not on any token you will receive. You can see below the price of aUST in the last months.

When you want to withdraw your funds, click on withdraw and the aust will be converted into UST. You will see that you will receive more UST than you deposited, since aUST appreciates in value every day with respect to UST. So, if we suppose that you have placed 1.000 UST, and you have received 1.000 aUST, if the annual rate of 19% is maintained, after one year when you change your 1.000 aUST, you will receive 1.190 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 you will find in few protocols.

Borrow and Collateral

Now let’s see the strategy where Luna is used. Let’s go to borrow, and here we find the part of borrowing 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, you can see the amount of bluna that you have. In borrowed value is the amount you have borrowed, and if we scroll down we see the LTV (Loan to Value). 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%, the maximum you can borrow anchor currently is 95%, but the platform itself recommends 75%.

If the LTV reaches 100%, the protocol will liquidate your blunas to pay the debt and avoid possible non-payments. Therefore, it is recommended to be between 50%-75% LTV or below. If there is a very large price fluctuation and you find yourself with a very high LTV, your position may be liquidated.

For example, if you have an LTV of 80%, if the price of Luna drops more than 20% and you do not place more collateral or pay a part of your loan to decrease the LTV, the platform itself will sell your bLuna to pay the debt. Since with Luna dropping more than 20%, your LTV would be placed above 100%.

Although you will still have the USTs you have borrowed, and you may think that then if Luna has fallen 20% or more, you can use the USTs to buy Luna and have the same amount, this is not always true. Since many times the market drops and then corrects, so it may have been for a few minutes or even seconds where the price of Luna has dropped more than 20%, and then recovers to a 10% drop. So even if you have the USTs from the loan, you won’t be able to buy the same amount of Luna. This is why it is so important to maintain a healthy LTV or collateral value.

Anchor’s profitability

Previously, Anchor paid you for borrowing more than the % you had to pay for it. This is no longer the case today, so even though we will receive the ANC token for borrowing, you should look at the Net APR. At the moment, it is -5.26%. Where we will be paid 7.85% on the Anchor token for borrowing, but we will have to pay 13.11% for borrowing. These %’s vary and I recommend that you look at it to calculate the profitability. This makes that the strategies that were used before are no longer so profitable, as you can see below, the rewards that Anchor gave.  

Anchor, like other protocols, incentivizes 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 every loan, the person has to pay an 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 used to be around 140%.

So, for borrowing, you used to get 155% in anchor reward, and once you wanted to pay back the debt, you had to pay around 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

Here there are two strategies, the less risky one is to pass 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 most used strategy to get a good return on your Luna without a high risk. 

The profitability of this strategy will depend on the LTV you want to use with respect to your Luna. Let’s say you have $1,000 of Luna, and you borrow 500 UST, an LTV of 50%, which is quite conservative and safe, since it is very difficult for the price of Luna to fall 50% in one day.

With the 500 UST we place it in earn to get 19.55% and subtract the 5.26% we have to pay for borrowing. This leaves us with approximately 14% per annum of the 500 UST. If we look at the total value of Luna, since we are actually using $1,000 of Luna to use this strategy, we would be getting 7% per year with this strategy. Although it depends a lot on the % you have to pay for borrowing. If on the other hand, you are more aggressive and use 75% LTV borrowing 750 UST, the total annual % goes up to 10%. Although always taking into account that you have a higher risk of being liquidated.

The other strategy with more risk, is to buy more Luna with the deposited UST, convert it to bluna and put it as collateral. Thus, having more bluna and decreasing 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 Luna back, this is the best option.

The other alternative, is instant burn, where the ratio of bluna to luna is not 1-1, and you will pay an extra commission to withdraw your Lunas earlier and be able to have them back in a few minutes. You can also go to a DEX like astroport and change your bluna to luna, but usually there is a 1-3% difference between bluna and luna, since you are not waiting for the 21 days of unbond. 

With anchor rewards you can buy more luna and add it as collateral to lower the risk, staking on the anchor platform itself or create the LP to do anchor staking and UST.

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

Rewards

In my page, if we go down we find the rewards. Here, we find 3 interesting options.

Anchor Protocol Staking

In ANC Governance you will be able to staking your ANC tokens, the platform’s native token, and receive the annual % that you can see in APR, currently 8.73%. In addition, being a governance token, it allows you to vote on new protocol proposals in proportion to the amount of tokens you have in staking.

Although at the moment it has no other uses, there is speculation about the future use that ANC may have, and if it can serve to achieve a better profitability in the UST staking. Where the UST staking will have a lower annual %, but if you have sakeado an amount of ANC, you will be able to get a better annual % in the UST staking. Although at the moment this has not been implemented and there is no proposal for this to happen in voting.

To place your ANC in staking, it is as simple as going to actions, more, stake and indicate the amount. Click on stake and confirm in your wallet the transaction. And you will have your ANC staked in Anchor.

LP ANC-UST

The next thing we found is the farming of the ANC-UST LP token, where you can get a nice return for staking these two tokens here. At the moment, at 50.28% per annual. Although you always have to take into account the impermament loss. If you don’t know what impermament loss is, you can find a guide on our site, and I recommend you to inform yourself before placing your money in an LP without knowing how they work.

This option gives liquidity to the protocol and you can provide your LP by going to actions, more, provide. Here, indicate the same amount of ANC and UST equivalent in dollars. If ANC is worth 3$, then if you put 100 ANC, you should put 300 UST, to balance the LP. Click on add liquidity and confirm in your wallet.

With the LP created, go to the top right in stake, enter the amount and click on stake. Confirm in your wallet and you are done. Now you will have the LP created staked and generating the annual % that you can see in rewards.

UST Borrow

One of the most interesting part is down, in rewards. Here, in UST borrow, you will be able to 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 Luna and add it as collateral to reduce the risk, staking in the anchor platform itself or create the LP to stak anchor and UST.

Before investing your money, I recommend that you get well informed about the protocol, the risks of liquidation and how it works, to avoid surprises if the market suddenly goes down again, and know the risks you expose yourself to. Get a better understanding of how Anchor works here.

I hope this post 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.