The community for Anchor, a Terra-based stablecoin money market protocol, is discussing the project’s future as revenues continue to fall short of the roughly 20% yields it promises depositors.
The fix? Calling on the freshly-launched Luna Foundation Guard to top-up Anchor’s Yield Reserve with $450M while developers scramble to cook up Anchor’s new and improved v2 iteration. That’s according to ‘N3m0’, an Anchor community member and researcher at crypto VC firm Hashed.
Anchor offers depositors a fixed annual return of roughly 20% by redistributing fees from borrowers and rewards from other assets staked in the protocol. However, when the protocol revenues are lower than 20%, funds are mobilized from its Anchor Yield Reserve to pay out investors.
The promise of fixed high-double-digit yields has driven rapid growth for both Anchor and Terra. Anchor has consistently represented half of Terra’s combined total value locked (TVL) as Terra surged to become the second-largest network by DeFi TVL in recent months.
However, with Anchor’s Yield Reserve depleting rapidly as demand for stablecoin yields rises and borrowing activity declines, the sustainability of Anchor’s design appears under threat.
In a Feb. 8 post to Anchor’s governance forum, N3m0 predicts that Anchor’s Yield Reserve can only sustain the protocol until roughly Feb. 20, at which point a top-up of at least $436M will be required to maintain the protocol’s current yields until November.
N3m0 anticipates the protocol’s cash inflows will outpace its outflows come November, allowing yields to be paid from the protocol’s revenues. “Self-sustainability may then be achieved, assuming the [projected] growth rates hold,” they added.
The post highlights the importance of Anchor in the Terra ecosystem, noting that Terra’s TVL has grown to $15B from $540M when Anchor launched in March 2021.
N3m0 adds that Anchor has been “instrumental” in scaling adoption of the Terra-native stablecoin UST, and that “many Dapps are built on top of Anchor… making it an essential building block of the Terra ecosystem.”
Given the dominant share of Terra’s value represented by the Anchor protocol, N3m0 likens the proposed $450M top-up to “marketing expenses in bootstrapping an integral component of the Terra network.” They add note UST’s market cap has increased by more than 460% since the Anchor Yield Reserve last received a $70M top-up in July 2021.
N3m0 adds that the top-up is “a short-term solution to allow sufficient time for growth” while developers work on its v2 iteration “with improved ANC tokenomics and mechanism to incentivize borrows.” They highlight forthcoming multichain functionality, anticipating that support for Solana and Cosmos-native assets will significantly bolster deposits in the future.
The author blames Anchor’s dwindling yields on increased demand for stablecoin returns combined with reduced borrowing activity amid the recent crypto downturn.
A similar Jan. 28 post from N3m0 also offered alternative bearish and bullish outlooks for Terra’s growth during 2022. In the bull scenario, N3m0 predicts a top-up of $120M will be needed, while their bearish case called for an injection of roughly $1B.
N3m0 described their proposal as the culmination of “constant discussions with the gigabrains at my workplace, supported by chats with active community members.”
The proposal has currently received 21 likes and eight comments with the majority of respondents supporting the recommended top-up. However, “Pedro_explore” and “adrianc” have argued that Luna Foundation Guard’s assets should not be used to prop up the protocols yields. Adrianc suggesting the $450M could be issued as a loan, while Pedro_explore argued Anchor should be forced to change how it operates and adapt to existing market conditions.
The Luna Foundation Guard, a Singapore-based non-profit, was formed in mid-January to “facilitat[e] the growth of the Terra ecosystem, and improv[e] the sustainability and stability of Terra’s algorithmic stablecoins.”
Anchor currently represents 54% of Terra’s entire TVL, ranking as the seventh-largest DeFi protocol overall with $8B locked according to DeFi Llama.
CORRECTION @ FEB 8 730PM ET: Corrected the name of the Luna Foundation Guard.