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Paul Veradittakit, partner of Pantera Capital, explained the characteristics of the Anchor Protocol and the reasons for the high returns.
Written by: Paul Veradittakit, Founding Partner of Pantera Capital Translator: Lu Jiangfei
Earlier this year, Pantera Capital participated in a $25 million financing transaction by Terraform Labs. Terra is the only blockchain in the stable currency TerraUSD (UST) protocol. This stable currency is linked to legal tender and is relatively well-known in the industry. In terms of market value, it should be the fifth largest stablecoin. Terra has established a rich application ecosystem, including Chai, which is a Korean payment application with more than 2 million users; in addition, there is Mirror Protocol, which is a synthetic asset protocol on the Terra blockchain. People can Trade the “synthetic shares” of listed companies on this decentralized platform.
Last month, a new project was launched on the Terra blockchain: Anchor, which is an easy-to-use savings platform that is likely to become a “game changer” in the DeFi field.
What is the current state of the DeFi industry?
If you have been following the rapidly growing Decentralized Finance (DeFi) industry, you must have heard of profitable activities such as “Yield Farming” and “Liquidity Mining”. In June 2020, the lending platforms Compound and Aave launched governance tokens, and individual users can get the most substantial benefits by strategically transferring funds between various DeFi protocols. Based on these innovative profit models, the flywheel of DeFi has begun to turn: early adopters only need to provide the required liquidity to the decentralized financial protocol in exchange for generous returns.
Generally speaking, decentralized lending platforms will match depositors, who usually want to lend their funds at a low-risk interest rate. In traditional banking systems, loans are generally based on the customer’s “creditworthiness”, such as using credit scores and other “know your customer” (KYC) compliance measures. On most decentralized financial lending platforms, The borrower is often required to over-collateralize to get the loan funds. In other words, the value of the collateral provided by the borrower must be more than the value of the loaned cryptocurrency, usually 2-3 times. Based on this over-collateralization guarantee, even if they do not trust each other or the borrower and the lender do not know each other at all, they can lend or borrow funds with confidence.
Today, almost a year has passed since the “DeFi boom” last summer, but the pace of continuous innovation in this field has not stopped. We have seen many new DeFi loan agreements appear, trying to provide loans to loan providers and loan recipients. More competitive prices. In this market environment, the total lock-up volume of decentralized lending continues to rise, and is currently close to US$2.8 billion (as shown in the figure below). There is no doubt that this achievement of opening up financial markets is extremely exciting.
Source of the above image: DeFi Pulse
But why has DeFi still not become mainstream?
Recently, NFT has aroused great market attention. In fact, a new technology is now moving from the “edge” to “popularity” faster than ever before. Look at NFT. A few months ago it was a puzzling “acronym”, but now almost everyone is talking about it. In many respects, using DeFi is actually as easy as trading NFTs, and it can achieve more reliable and profitable financial returns. But the question is, why can’t DeFi penetrate the public consciousness in the same way?
There are three main reasons:
Barriers to Entry. For people who have never used cryptocurrency, lending platforms such as Compound and Aave are actually not “friendly”. In addition to clumsy technology (complex browser wallets, unintuitive UX, etc.), if you are “encrypted “Xiaobai” is likely to have a sense of distrust of this DeFi protocol, especially in the absence of understanding of the cryptocurrency industry.
Variable interest rates. The benefits of DeFi lending agreements can sometimes vary widely. This is mainly because the volatility of the underlying collateral will affect the “utilization rate” and the income generated. For investors, this complicates long-term financial planning and makes them indirectly affected by the broader cryptocurrency market volatility.
Source of the above image: DeFi Pulse
High gas fees. The congestion of the Ethereum blockchain network has caused Gas prices to reach new peaks. Because many users do not want to pay such high fees, no one uses decentralized applications. It is undeniable that the higher cost is enough to prevent people from trying to use DeFi.
Source of the above image: CoinMetrics
How does Anchor solve the current dilemma of the DeFi industry?
Anchor is a decentralized savings agreement. Its goal is to increase the annualized rate of return of UST depositors to about 20%. You must know that the current annualized rate of return of traditional bank savings accounts is only 0.07%, which means that Anchor provides The income is more than 200 times the interest on deposits in ordinary bank savings accounts.
The audience target of most decentralized lending service providers is arbitrageurs and traders who seek to maximize revenue, but Anchor’s goal is different. They want to focus on providing savings account services. The white paper describes an ambitious vision:
Despite the endless emergence of financial products, at present, the DeFi industry has not yet launched a simple and safe enough savings product to gain public recognition…Finally, we hope that Anchor can become the gold standard for passive income on the blockchain .
What makes Anchor different? In fact, it mainly has the following three characteristics:
Independent blockchain. Anchor is built on the Terra blockchain, which is part of the Cosmos ecosystem. Although choosing Terra blockchain may limit interoperability with applications on Ethereum, it can significantly reduce costs and is a protocol at the same time Bring greater flexibility. Although not choosing the Ethereum blockchain may cause certain obstacles to popularization and application, these are short-term problems. It is worth mentioning that Terra Bridge has been launched. As a cross-chain bridge solution from Terra blockchain to Ethereum blockchain and Binance Chain, Terra assets can be easily transferred between different blockchains at low cost. Transfer, all these operations can be completed in one interface.
Simple and convenient to use. Using Anchor is easy-as long as the web application is connected to the Terra wallet, users can deposit, borrow, vote, and pledge. The entire operation interface has a clean and intuitive layout. Of course, for those who are accustomed to using centralized financial applications, they may still be a little uncomfortable, but after all, Anchor has taken a very meaningful step in the right direction. Anchor’s application program interface can be easily integrated into fintech platforms, Neobank, cryptocurrency exchanges, and digital wallets. In terms of fintech compatibility positioning, the Anchor team is positioned to be the “Stripe in the field of crypto savings”.
The annualized rate of return is as high as 20%. Anchor provides a low-risk fixed-income financial instrument, and the return is incredible. If the annualized rate of return can continue to stabilize around the 20% level, then saving on the Anchor must be a huge attraction for individuals and capital allocators. We know that the competition in the cryptocurrency front-end application industry is extremely fierce. Anchor, which can provide a fixed annualized rate of return of up to 20%, is obviously more advantageous than other similar protocols, and its revenue will not be affected by changes in cryptocurrency prices. Therefore, it quickly attracted a large number of users-at least until the next bear market, Anchor is still very competitive in the market.
Why is the annualized rate of return of Anchor so high?
Source of the above picture: DeFi Rate
We know that some DeFi agreements can also bring jaw-dropping high returns to users, but compared to a savings product that promises to provide an annualized rate of return of up to 20%, Anchor is obviously more attractive. However, some people feel that it is impossible for Anchor to generate such a high rate of return, so the question now is-how did they do it?
In fact, the “secret” of Anchor lies in its unique loan mortgage method. From a higher level, Anchor is like a decentralized currency market, very similar to Compound. But the difference is that Anchor only accepts liquid pledged derivatives provided by supply-side borrowers as collateral-liquid pledged derivatives are tokenized claims for the cash flow of bond pledge positions on the mainstream equity proof blockchain. These blockchains include Ethereum, Polkadot, Cosmos, Solana, etc. The pledged derivatives on Anchor are called bAssets, and bLUNA is the primary derivative of LUNA, the native asset of the Terra blockchain.
The mortgage income of the borrower will be “passed on” to the depositor. In addition, since the loan needs to be over-collateralized, the pledge return will be further amplified. All these income will be distributed between the borrower and the lender, resulting in a relatively high yield. The rate of return. Terra co-founder and CEO Do Kwon posted a thread on Twitter, in which he intuitively introduced how Anchor achieved an annualized rate of return of up to 20%, and the rate of return was extremely low, almost equivalent to fixed income.
Interestingly, the yields of other DeFi protocols (especially the currency market) fluctuate more frequently. In contrast, pledged derivatives will not be limited by short-term debt cycles and speculative investments in the crypto market. This is because the consensus reached on most major proof-of-stake (PoS) blockchains is based on two aspects:
- The release of native token supply (i.e. network inflation)
- Cross-network transaction fees (will be distributed to pledgers as a reward for protecting network security)
Pledged derivatives enable Anchor to adjust deposit interest rates on the demand side while ensuring that deposit interest rates are stable and not affected by speculative demand cycles. The yield of some DeFi agreements will drop sharply due to the sharp drop in the price of pledged tokens. After all, investment It is unlikely that the creditor will be required to use margin trading to obtain greater returns.
As an unlevered source of income, Anchor’s annualized rate of return of up to 20% can be used as one of the basic elements of DeFi’s emerging yield curve. In fact, most of the “TradFi” interest rates are related to the federal funds rate, because the interest rate is derived from the federal funds rate. The Anchor rate can be regarded as the decentralized federal funds rate (DFR), which is equivalent to The benchmark interest rate for DeFi.
The agreement has set the initial “Anchor Rate” to 20%, but it can be adjusted with Anchor’s governance system in the future. Since the ratio of lenders to borrowers usually changes, this interest rate sometimes fluctuates slightly. In addition, the incentive mechanism for borrowers in the ANC token will also be adjusted according to actual borrowing needs. However, so far, Anchor’s stabilization mechanism has successfully maintained the rate of return at 20%.
How to use it?
The Defiant previously announced an introductory set Anchor on its official account YouTube video , I suggest that you can look at. According to my experience, you can master how to use Anchor in less than 30 minutes. Even if you don’t have a Terra wallet or any UST, just watch this video and study carefully, and you will soon have the opportunity to get 20% annualized income. The high rate of return.
After setting it up, you can use Anchor in various ways:
- Deposit in UST to get 20% annualized rate of return.
- Borrow funds and get incentives higher than interest (the net loan annual interest rate is currently about 110%, and the rewards will be distributed in the form of ANC tokens).
- By purchasing the Anchor governance token ANC, you can benefit from the daily use of the platform, earn pledge rewards, and participate in the future development of the agreement. The residual income of the supply side (borrower) will be used to purchase ANC tokens on the open market, and the proceeds will be distributed to ANC token holders, thereby linearly adjusting the ANC token price according to the agreement’s asset management scale. .
Anchor’s next development direction?
Just two weeks after the launch of the Anchor agreement, more than 160 million US dollars in deposits and 110 million US dollars in loans were obtained, which fully demonstrates that the 20% annualized rate of return is indeed very attractive. More and more people recognize the technical flexibility advantages of Anchor, and There is a high demand for “savings as a service” products on the blockchain.
The vision of the Anchor team is to create a mainstream savings product with the “gold standard” DeFi interest rate in a decentralized world. But can Anchor achieve this ambitious goal? Perhaps only time will tell us the answer, but it is almost certain that Anchor has become an indispensable part of the open financial ecosystem.