While most banks are paying less than 1% annual interest on a savings account, in the world of decentralized finance (DeFi), Anchor Protocol is paying a massive 19.5% interest on deposits. While this may seem too good to be true, Anchor has maintained this high interest rate, even as over $15 billion in deposits have entered the platform.
But how is this possible?
We’ve reviewed the details of Anchor Protocol to find out, and will break down how Anchor works, how the interest rate remains so high, what risks are associated with investing with Anchor, and what the future may hold for this crypto savings account.
Anchor Protocol Explained
Anchor Protocol is a borrowing and lending decentralized finance (DeFi) platform built on the Terra blockchain and using its TerraUSD (UST) stablecoin tokens. It pays out nearly 20% APY on deposited UST cryptocurrency. Anchor Protocol is designed to help users earn much higher interest rates on their stablecoin holdings than most other platforms.
Anchor works by allowing users to deposit UST stablecoins onto the platform, and those tokens are lent out to borrowers who pay interest. The interest paid goes to users who have deposited their UST coins, effectively turning you into the bank for these crypto loans.
Anchor is a permissionless application, meaning all of the functionality is managed automatically via smart contracts. Loans are approved instantly, and interest is paid out automatically.
Anchor is also decentralized, meaning there is no board of directors or centralized authority that makes decisions. Rather, Anchor Protocol (ANC) token holders can make proposals and vote on protocol updates.
Overall, Anchor is a DeFi application that offers an automated way to earn interest and borrow funds with cryptocurrency.
Key Features of Anchor Protocol
Earn (Savings Accounts)
Anchor Protocol is best known for its Earn accounts that allow users to deposit the TerraUSD stablecoin (UST) in order to earn over 19.50% APY interest. This is one of the highest rates for stablecoins deposits in the industry, making Anchor one of the most popular platforms for crypto savings accounts in DeFi for passive income.
Note: Anchor Protocol will be lowering interest rates monthly until it is no longer burning through reserves. This means that the 19.5% interest rates on deposit accounts will go to 18% as of May 2022.
To deposit coins, you will first need to purchase Tether (USDT) tokens, then trade the USDT for UST tokens. Kucoin is one of the only centralized exchanges that supports the Terra network version of UST, so it is recommended to use that platform for purchasing UST.
Once you have purchased UST, you will need to transfer it to a digital wallet that supports the Terra platform (such as the Terra Station Wallet). Once the UST is in your digital wallet, you can connect your wallet to the Terra Station and deposit your tokens to begin earning rewards.
Yes, these are quite a few hoops to jump through, but the 20% rewards have enticed enough users to deposit over $19 billion dollars worth of UST to the platform so far.
Borrow (Crypto Loans)
Anchor Protocol allows users to deposit cryptocurrency and borrow UST against their holdings, paying interest on the borrowed funds. This allows them to keep ownership of their crypto while using it as collateral for a loan (similar to a line of credit).
The only supported assets to borrow against right now are LUNA (Terra network’s native token), Ethereum (ETH), Cosmos (ATOM), and Avalanche (AVAX). To deposit these coins as collateral, you will need to transfer them to your digital wallet, deposit them to the Anchor platform, and then convert them using the Anchor bAsset tool.
Note: Once you want to withdraw your crypto, you can convert them back to their original form.
Once converted, you can deposit these digital assets onto the Anchor Borrow platform, and borrow up to 70% of the value as a collateralized loan. The loan is paid out in UST, and will need to be repaid in UST as well.
As a bonus for borrowing, Anchor pays out Anchor Protocol (ANC) token rewards of up to 7.0% of the total borrowed amount. This incentive makes the high loan interest rates (about 11% APR) more manageable.
A more advanced method of earning interest on Anchor Protocol is known as “staking,” where a user locks up certain tokens to earn interest. This is done by depositing an equal amount of ANC and UST tokens into a “liquidity pool” on Anchor. The tokens are used to provide exchange liquidity, allowing for trading and exchanging of these tokens, and protecting the overall platform.
To deposit AND and UST tokens, you need to hold them in your digital wallet and navigate to the “Govern” tab. On this page, you can select the ANC-UST LP option, and choose how many tokens you want to deposit. The deposit form will automatically calculate the amount of each token to be deposited, ensuring a 50/50 split between the value of the tokens.
Once deposited, you will receive an LP token to equal the value of the crypto you just deposited. You will also accumulate ANC rewards on the platform, which you can withdraw to your digital wallet.
Note: Providing crypto liquidity is an advanced method and should only be performed by experienced crypto users.
Advantages of Anchor Protocol
Anchor Protocol allows users on the Terra platform to earn high interest rates or borrow against their crypto holdings. Here are a few ways using Anchor is an advantage to crypto investors.
- (Almost) 20% APY Interest Rates. Anchor Protocol is the current king of DeFi, offering nearly 20% APY rates on depositing UST balances. This interest rate is orders of magnitude higher than regular bank savings accounts, and well above most other crypto savings accounts. Even with the rate dropping to 18% in May 2022, the rate is fantastic.
- Borrow Against Crypto Holdings. If you want to access your crypto value without selling the underlying asset, Anchor allows you to borrow against your crypto balance. You can borrow UST stablecoins and keep your crypto safe on the platform in the meantime.
- Decentralized (Governed by Committee). Anchor Protocol is not controlled by a centralized board or company, but rather by ANC token holders. This governance model is truly decentralized, allowing holders to vote on important protocol updates to help shape the future of Anchor.
Disadvantages of Anchor Protocol
Anchor Protocol may seem too good to be true, and it probably is when looking at a longer time frame. Although the interest rates are great right now, there are far too many deposits and not enough borrowers and other income-producing activities on the network to continue paying such high rates.
Couple that with the high interest rates on crypto-backed loans, and Anchor may not be a great long-term solution. Here are a few disadvantages to using Anchor Protocol:
- High Loan Rates. Although depositing UST onto Anchor will net you a very high interest rate on your savings, borrowing UST from the platform will cost a decent amount. Currently, Anchor charges about 11% APR on crypto-backed loans. What’s more, these loans come with the risk of liquidation if your deposited collateral drops too much in price.
- Savings Rates are Unsustainable. The eye-popping 20% APY rates on Anchor savings accounts cannot last due to the huge disparity between the amount of UST deposited and the amount lent out to borrowers. A large portion of the 20% interest is collected from UST borrowers, but as of April 2022, there are nearly five times more deposits than borrowed funds. A recent proposal that passed in March 2022 states that rates will drop at 1.5% per month (starting in May) until the reserves are no longer being burned through to pay interest.
- Complicated to Use (Not for Beginners). For crypto newbies, signing up for a crypto exchange and buying crypto is hard enough. But the multiple steps needed to deposit funds into Anchor Protocol are a nonstarter for new crypto enthusiasts. Anchor Protocol may pay high rates, but crypto beginners will have a tough time using this platform.
How Anchor Protocol Stacks Up
Anchor Protocol has over $19 billion in deposits, making it one of the most popular DeFi savings apps available today. But it is not the only DeFi lending platform out there.
Both Anchor Protocol and Compound allow users to deposit cryptocurrency to earn interest. Both also allow users to borrow against their crypto holdings, offering collateralized crypto loans. Both are also decentralized, meaning there is no central authority in charge of the application and protocol.
But while Compound offers reasonable interest rates of up to 3.0%, Anchor offers an eye-watering 19.50% on deposited UST. For those who want to borrow against their crypto holdings, however, Anchor Protocol only supports four assets, while Compound supports more than 15.
Here’s how Anchor Protocol and Compound compare:
|Savings Interest Rates||Up to 19.50%||Up to 3.0%|
|Borrowing Rates||About 11.7%||1.1% to 11.1%|
|Fees||Terra network fees ($0.25)||Ethereum network fees ($50 to $100 or more)|
|Supports Crypto Assets||4||18|
Anchor Protocol’s 20% interest rates seem too good to be true…because they are. The rates are lowering to 18% starting in May 2022, and may decline further if reserves continue to be depleted.
That being said, even if rates drop to half of the current rates, 10% interest rates on a U.S. dollar-pegged stablecoin is nothing to sneeze at. With interest rates on checking accounts hovering around 0.01%, and savings accounts not much better, people are looking for better yield on their savings.
Anchor Protocol is definitely not for beginners, and crypto newbies will have their head spinning trying to jump through all the hoops to simply deposit funds on the platform. There is also significant risk in all DeFi applications.
There is no FDIC insurance on your deposits, the value of your coins can fluctuate wildly — yes, even stablecoins can vary — and there is little regulatory governance in this space to protect consumers. Anchor Protocol is a speculative investment, like all cryptocurrency, and comes with the risk of total loss.