Whitepapers Deconstructed: Anchor Protocol

Cameron Welland
4 min readMar 10, 2022


Terras priority of growth has been evident. At the start of 2021 there were only two DApps, and one year later has over 150 ready to launch, all driving demand for UST. With a total value locked (TVL) of almost $23B USD at a $33B market cap, second only to Ethereum in TVL at $114B TVL at a $350B market cap.

Anchor Protocol DApp

Anchor protocol is Terra’s largest DApp by TVL, amassing $14B locked in the protocol, representing almost 50% of the entire ecosystem. Anchor is a decentralised protocol on the Terra blockchain that has two main use cases:

1) Borrowing: Users can stake their staked (bonded) LUNA or ETH, (bLUNA/bETH) as collateral, in order to borrow UST.

When a user borrows UST, they deposit bLUNA or bETH that has a higher value than that of the borrowed UST, this is known as over collateralisation. This results in a loan to value ratio (LTV). Because bonded collateral fluctuates in USD value, the LTV changes accordingly. When the LTV reaches >80%, the users collateral gets sold so the protocol can cover costs, known as a liquidation.

For example, depositing $1000 of LUNA and taking a loan of $500 UST, results in an LTV of 500/1000 = 50%.

  • If LUNA appreciates 10%, the resulting LTV will be 500/1100 = 45.45%.
  • If LUNA depreciates 10%, the resulting LTV will be 500/900 = 55.55%.

If the LTV is exceeding the risk tolerance of the user, users can either reduce their LTV by partially repaying the loan or adding more collateral to the position, to avoid the risk of being liquidated. The interest rate on borrowing is currently 12.79%, however this rate is subsidised with Anchors distribution rate paid in the protocols ANC token. For the protocol to run effectively, there must be roughly equal amounts borrowed and lent, so the ANC distribution fluctuates to make borrowing either more or less attractive.

2) Lending: Users can lend their UST to the protocol, in return for a stable 19–20% APY.

Anchor protocol offers very attractive savings rates on UST. It offers this through revenue generated by staking the collateral with the Lido Finance validator on Terra and Ethereum, interest rates on the borrowed UST and a 1% liquidation fee. However, with such a high savings rate, it must be asked whether this is sustainable.

Calculations done on 9 Mar 2022.

As shown, at the current rate there will be $1.80 B per year paid out to UST lenders, and only $0.70 B per year coming in from borrowers, with an additional $0.455 B UST in reserve. I must conclude that the savings rate of 19.42% is currently unsustainable.

Why is this? Due to the recent bearish sentiment in the market, investors have gone risk-off preferring to earn yield on the UST stablecoin instead of taking loans to invest into the market. This results in the amount deposited far exceeding the amount borrowed.

However, Anchor has a mechanism to counteract this. The distribution APR of ANC tokens (used to subsidise loan interest rate) is currently 13.31%. The borrowing APR is currently 12.79%. This results in a net APR of positive 0.52%, meaning you are being paid to take out loans. This makes it more attractive to deposit collateral and take out loans, and should even out the balance of lenders and borrowers. Whether the 19–20% savings APY can be sustainable with equal borrowers/lenders and improved market conditions remains to be seen.

ANC Tokenomics

ANC is Anchor protocols governance token designed to scale with its assets under management. The protocol uses its revenue generated from swap fees and staked asset yields to buy back ANC tokens on the market. This should mean that the ANC token scales with the fees and assets under management.

The second half of the tokenomics is the supply emission schedule. The ANC token had a genesis on 17 Mar 2021, with an emission schedule as follows:

This is an aggressive emission schedule, with 325M tokens being released in the first year at a 216.67% inflation rate. However, on 17 Mar 2022 this second year rate of emissions will drop. Over the course of the next year, 275M ANC tokens will be released, at a reduced inflation rate of 57.89%, which should ease sell side pressure.