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- Anchor Protocol’s interest rates have become unsustainable due to the lack of borrowers.
- A significant increase was seen in the deposit amount in comparison to the borrowed amount.
- The protocol might have to lower the interest rates or inject new UST for liquidity.
The flagship savings protocol of the Terra Luna(LUNA) ecosystem, Anchor, has witnessed a decline in its reserves in the past seven days by 35.7%. The amount of Terra USD Stablecoin(UST), which is held in the smart contract, has declined by 50%, with only $35.7 million remaining in the reserves.
How the Anchor Protocol works
Users deposit their UST assets in the savings protocol through their wallets. They can earn up to 20% yields as the principal amount is lent out to borrowers who pay interest on the loan amount. These borrowers have to deposit collateral to make sure the lender can get back their money in case of default. Anchor also stakes this collateral to generate rewards for the depositors.
Anchor has to use the TerraUSD(UST) reserves to make up for the deficit when there’s a shortage between the income generated through the borrower’s interest, collateral staking and yield expenses paid out to the depositors.
In July last year, Terraform Labs introduced 70 million UST into the Anchor protocol, and the value was more or less stable. But if we talk about the last 60 days, there came an increase in the total deposit amount from $2.3 billion to $6.1 billion. However, the total borrowed amount has an increase of only $1.2 billion to $1.5 billion.
The inconsistency and variation between the deposits and borrowings of the Anchor’s protocol have increased the pressure on its reserves. And if this continues, apparently, Terraform Labs will have to introduce a new round of UST for liquidity, or it will have to lessen its promised interest rates.
The discrepancy between the deposits and borrowings is of a major amount. It is to look forward to what the Anchor protocol will witness in the near future, whether it will take down its interest rates or increase the liquidity.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
