The move is intended to keep the stablecoin savings protocol’s lucrative yield of around 20% per year.
Do Kwon, founder of Terraform Labs, the entity developing the Terra Luna (LUNA) and Terra USD (UST) stablecoin ecosystems, announced the injection of 450 million UST ($450 million) into the Anchor protocol’s reserves in a tweet published early Friday. On February 10, the Luna Foundation Guard voted to approve the proposal. Anchor is the Terra ecosystem’s flagship savings protocol, offering users up to 20% interest per year on UST deposits paid for by borrowers.
— Do Kwon 🌕 (@stablekwon) February 18, 2022
The protocol’s reserves had recently fallen to as low as $6.56 million due to a lack of borrowing demand to keep up with an influx of lenders. When such an imbalance occurs, the protocol must draw on its reserves in order to pay the promised yield to lenders. Anchor’s reserve funds fell by about $35 million between the beginning of December and the end of January.
This disparity is still growing as of the time of publication. Total deposited funds have increased by approximately $480 million in the last few weeks, while borrowed funds have increased by approximately $180 million. However, because Terra stakes borrowers’ collateral in order to earn yields in addition to interest payments in order to compensate lenders, the two numbers do not have to equate to achieve equilibrium.
The developer of Terra admitted that such yields are not sustainable in the short term. To address the issue in the long run, Terraform Labs intends to incorporate the use of compound liquid staking derivatives as collateral in Anchor V2. Liquid staking entails users “double-dipping” with their crypto assets, i.e., staking their crypto in one pool and farming yields in a liquidity provider pool. In theory, as users borrow funds, their collateral appreciates over time, enticing more borrowers to join the Anchor protocol to restore equilibrium.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.