Anchor has been the star DeFi protocol of 2021. Not many understand the cash flows between deposits, borrowings, and staking yield. Here is a quick explanation guide.The World’s 1st Crypto & Bitcoin Traffic Solution…

In 60 Seconds Flat

100% Done-For-You CRYPTOCURRENCY Affiliate Sites With FREE Buyer Traffic From 100 MILLION VISITORS!

ZERO Tech Skills, Upfront Costs Or Experience Required

Just Pay $17 Once And Use Forever

GET INSTANT ACCESS

As a starter, Anchor protocol has been a massive success. It currently attracts ~$10.5BN Total Value Locked across deposits and collateral value. This ranks it in the top 10 DeFi protocols by TVL according to https://defillama.com/. Nothing short of amazing if you consider that the protocol is barely a year old.

This success was due to a combination of superior architecture: UST, LUNA, ANC form a well-rounded ensemble albeit slightly incestuous, as one supports the other and vice versa. It is also due to the attractiveness of superior deposit yields. Finally, it can’t be separated to the growing interest by developers for the protocol, which creates permanent buzz and creativity.

As may ponders the success of Anchor, how does it currently work?

At a high level, depositors in UST stablecoin are attracted by Anchor’s boosted ~19.5% yield. This yield is above market average as it is subsidized partly by ANC tokens. This is the protocol main uses.

Sources of cash flows come primarily from borrowers. First, they pay interest rate on their loan at 14.72%, and pledge collateral (bLUNA or bETH), which returns staking yield at a blended 6.5% rate.

Here is how it translates in numbers

Expressed in % of deposits, the total sources represent 11.3% compared to total uses on deposits of 19.5%, which creates an annualized shortfall of about 8.2%.

Besides, the protocol promises to compensate borrowers by an equivalent value of ANC tokens, which we call “ANC reward” here. At current rates, this incentive package represents 4.8%. Not really cash flows per se, but contributing toward to overall shortfall.

In combination, the total cost of offering deposits are 19.5% (albeit fluctuating) is $668M/year, which has to be plugged by either the yield reserve, currently at $60M, or by additional ANC token issuance. The latter could be either staked, for additional yield, or sold in the market for UST creating downward pressure on ANC tokens.

Here is for a primer, feel free to submit questions and comments.

About 360 Advisory LLC — RIA based in Boston, MA specialized in asset management across securities and crypto. Here to follow.

Sources: