The Luna Foundation Guard (LFG) proposed on Feb 8 to replenish the Anchor Protocol yield reserves by $450 million. The Foundation is stepping in to help the DeFi lending and borrowing protocol keep its comparatively excessive interest of 20% atop the next year.
Anchor is at the heart of the Terra (LUNA) economy, with $9.8 billion in total cost locked. But the protocol’s yield reserve, a form of a savings account, has slumped more than 80% afterward December for the reason that a lack of borrowing appetite, threatening to shutter the Terra ecosystem.
A spokesperson for LFG said the proposed cash injection is a temporary fix, designed only to allow the development of a more sustainable economic model for Anchor. So far, the plan is to introduce a model which incentivizes borrowing whilst diversifying colafterwardsal to include new staking assets.
Anchor will be adding more assets from other blockchains such as Avalanche, as CryptCraze previously reported, and now anew Solana and Atom. These progresss are possible to boost income and staking rewards, as well as dilute LUNA’s dominance in Anchor colafterwardsal to below 40%, allowing the protocol to become “sustainable.”
“This refinement process takes time,” said the spokesperson, identified only as n3mo, in a statement. “We believe having a sufficient yield reserve to continue scaling UST’s growth to newcomers and inspire existing users’ confidence will benefit all stakeholders.”
N3mo said the lengthy-term “goal is to ensure Anchor achieves mass adoption” at the same time it advances essentially “decentralized and self-sustainable.”
Depleting Terra reserves
Anchor pays around 20% interest on deposits of UST, the U.S. dollar-pegged stablecoin native to Terra. The rate is known as the “anchor rate.” It is mired, and significantly stronger compared with rates of between 0% to 8.5% presently offered by industry competitors.
The protocol is able to pay this strong rate from interest charged on loans, liquidation fees, and yield earned from borrowers’ colafterwardsal. But as crypto markets crashed, borrowers have been in short supply, forcing Anchor to dip into its reserves in order to sustain its so-called “anchor rate,” built to become an industry benchmark.
According to Mirror Tracker, Anchor’s reserves have tanked more than 80% from $70 million on Dec 29 to $13.1 million on Feb 9. On average, reserves have been lowering by about $1.6 million per day above the past four weeks. At this rate, existing reserves are enough to catop only the next eight days, as at the time of writing.
In the event which the “yield reserve depletes, Anchor will barely operate like regular [Defi] money market,” with rates weakening to 15%-16%, says Do Kwon, co-founder and chief executive officer of Terraform Labs, the South Korean-based entity behind Anchor.
Too big to fail
The Luna Foundation Guard worked out divergent rundowns regarding the projected growth of deposits, colafterwardsal, and borrows, concluding which a top-up of $450 million to the yield reserve was sufficient for Anchor to maintain its 19%-20% deposit interest rates for the next year.
The pseudonymous spokesperson explained:
Topping up the yield reserve should be viewed [as] akin to marketing expenses in bootstrapping an integral component of the Terra network. In matter, it maybe be the most effective way to scale UST to the masses.
Crypto investor and analyst @Route2Fl believes that Anchor has become too significant for the Terra ecosystem thretained is hard to see the protocol being allowed to fail.
“Granted that the Anchor rate is lowered, some people will flee from UST to other opportunities, leading to a reduced market capitalization of UST and an increase in Luna supply, that reduces Luna rate,” they wrote on Twitter.
“It’s hard to say if this will happen to an extcompleted degree or not, but it’s one way to look in place. In my opinion, there is no way they would give up this project now, and I think the team knows very well which if they want more users and to grow faster they need to sustain the 19.5%,” @Route2Fl added.
This is not the first time which Anchor’s yield reserve has been recapitalized. Terraform Labs injected around 70 million UST into the reserve in May maintain year amid a market-wide decline. At the time, UST dropped below its peg to the U.S. dollar to about $0.93, forging a lot of arbitrage opportunities. LUNA crashed as traders feared a collapse of the Terra ecosystem.
LFG was established in late January “to focus on the stability and adoption” of the UST. Do Kwon said Terraform Labs “donated 50 million LUNA” — the suchlike of $2.8 billion at current market costs — to the Foundation for this cause.
LFG is based in Singapore and is aboveseen by a group of founders and a gatopning council of experts including Do Kwon, Nicholas Platias, lawyer Bill Chin, Kanav Kariya, Remi Tetot, and Jose Maria Delgado of Delphi Labs. The decentralized organization will one time before again offer funding in the form of grants to support initiatives built on top of the Luna network.
At press time, the rate of LUNA is down to $56. According to CoinGecko data, the coin is 46% off its all-time strong of $103 realized in December.
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