We do need to understand any form of investment is risky. It’s important that we diversify and properly manage our risk based on the reward. There are many cryptocurrency projects that are highly risky and many of them do fail completely. Always invest in a cryptocurrency that has business fundamentals and has some utility used by real users. Invest slowly and steadily in a well-diversified portfolio and this will mitigate the risk. I am not giving any financial advice here and I am just sharing my experience. I only write articles when I can give them my full understanding and experience.
This article mainly focuses on Anchor protocol and why I feel it’s a low-risk and safe yield investment. Anchor protocol is a popular savings protocol from Terra blockchain and it provides a safe yield between 17 to 20% by depositing UST. UST is a stable coin by terra, and it is pegged to the USD. Once you place your money into Anchor Protocol, you’ll be able to borrow and lend your assets while earning interest.
How does Anchor protocol earn?
Anchor earns income through three main sources: Borrowings, Collateral, and liquidations. Since its inception Anchor has been paying around 20% as interest for depositing UST. Recently UST staking has gone live on Binance and it’s available for all users of Binance. This has added more credibility and trust in the Anchor protocol. As I mentioned, any project comes with risks. Anchor and UST both possess their own unique risks.
De-pegging of currency
UST can get de-pegged and it can bring the value of UST low than USD. The ratio between UST AND USD is maintained as 1:1 and it’s done algorithmically by burning the stable coin LUNA. LUNA is a new network to the market and has had an unfortunate setback in 2020 and 2021 when UST fell low than USD. The opportunity for LUNA/ UST to experience similar difficulties in the future is small, but not impossible.
Security issue
The main risk with decentralized finance is hacking. Hacking something on the Chain or the Protocol could cause digital destruction to an Anchor Terra, which would compromise the protocol and users. This could be a catastrophic event. Hackers are always trying to figure out new ways to beat security. Additionally, with new major security bugs that span the whole Internet coming out all the time, no flaws in the past guarantee there won’t be any bugs in the future.
The Imbalance between borrower and Depositor fund
As you know Anchor protocol’s high savings rate is funded via a combination of borrowers paying interest on UST loans and staking income from their collateral. If there is an imbalance between borrowers and deposits, then there is a considerable risk and it can cause liquidity issues. At the time of writing this article, there is an imbalance between borrowers and deposits.
While these are legitimate concerns, it’s great to see that the Luna Foundation Guard achieved its fundraising goal of $1 billion and created a UST Bitcoin reserve fund. These reserves can be used to support UST. Founder Do Kwon has expressed a future goal of getting the reserves up to $10 billion.
There are so many interesting dApps in Terra but it’s hard to say for sure what will be the most important for cryptocurrency adoption. I still think Anchor Protocol is a powerful and interesting concept that has the ability to bring stability and returns, while Anchor is currently paying just under 18% APY, the rate is scheduled to drop further every month until the reserve ratio is met. This rate of APY is not sustainable and I feel it will come down to a reasonable level but definitely better than keeping the money in the bank idle.
