Read on Twitter
A brief look at @anchor_protocol, an upcoming savings protocol offering stable interest rates powered by yields on the blockchain.
0/
Disclaimer: this is purely my personal understanding based on the released whitepaper, and may very well be completely off mark.
https://anchorprotocol.com/docs/anchor-v1.1.pdf
Disclaimer: this is purely my personal understanding based on the released whitepaper, and may very well be completely off mark.
https://anchorprotocol.com/docs/anchor-v1.1.pdf
1/
Anchor Protocol aims help bring mass adoption to #DeFi through becoming "reference interest rate across the universe of blockchains", or the " @stripe for savings"
Their main offerings are:
- principal protection
- no deposit lockups
- stable interest rate
Anchor Protocol aims help bring mass adoption to #DeFi through becoming "reference interest rate across the universe of blockchains", or the " @stripe for savings"
Their main offerings are:
- principal protection
- no deposit lockups
- stable interest rate
2/
The premise behind Anchor is that DeFi currently has yet to produce a savings product simple and safe enough to gain mass adoption, due to the massive volatility in price and the market in general
The premise behind Anchor is that DeFi currently has yet to produce a savings product simple and safe enough to gain mass adoption, due to the massive volatility in price and the market in general
3/
In addition, the cyclical nature of interest rates, specifically stablecoin lending, in protocols like @MakerDAO and @AaveAave makes it too complicated for "normal households" looking for a place to earn stable yield on their...well stables to use
In addition, the cyclical nature of interest rates, specifically stablecoin lending, in protocols like @MakerDAO and @AaveAave makes it too complicated for "normal households" looking for a place to earn stable yield on their...well stables to use
4/
Anchor aims to solve this by offering a saving protocol, built on the @terra_money blockchain, that offers yield originating from PoS blockchains.
Anchor aims to solve this by offering a saving protocol, built on the @terra_money blockchain, that offers yield originating from PoS blockchains.
5/
Let's now take a look at the components and mechanisms behind the protocol. There are 5 main parts
- bAssets
- Money Market
- Interest Rates
- Anchor Rate
- Principal Protection
Let's now take a look at the components and mechanisms behind the protocol. There are 5 main parts
- bAssets
- Money Market
- Interest Rates
- Anchor Rate
- Principal Protection
6/ bAssets
bAssets are tokens that represent ownership of a staked PoS assets. And, like the underlying assets, bAsset pays the holder block rewards.
bAssets are tokens that represent ownership of a staked PoS assets. And, like the underlying assets, bAsset pays the holder block rewards.
7/
However, unlike the staked assets, bAssets retains their transferability and fungibility.
A deeper look into bAssets coming soon
However, unlike the staked assets, bAssets retains their transferability and fungibility.
A deeper look into bAssets coming soon
8/ The Money Market
The money market is a pool of Terra deposits (e.g. $UST) that earns interest from borrowers. Those borrowers put down PoS assets as collateral in order to borrow Terra stablecoins
The money market is a pool of Terra deposits (e.g. $UST) that earns interest from borrowers. Those borrowers put down PoS assets as collateral in order to borrow Terra stablecoins
9/
The borrowing and lending interest rates are then determined algorithmically as a function of supply and demand.
The borrowing and lending interest rates are then determined algorithmically as a function of supply and demand.
10/ Interest Rates
There are two main interest rates that we will be working with
- deposit rate: the interest rate earned by lenders/depositors
- borrow rate: the interest paid by borrowers
There are two main interest rates that we will be working with
- deposit rate: the interest rate earned by lenders/depositors
- borrow rate: the interest paid by borrowers
11/
The paper proposes that the usual algorithm for calculating the interest rates has one short-coming, one that is shared by other lending protocols such as Compound:
both rates are functions of the utilization ratio, and thus are sensitive to market cycles.
The paper proposes that the usual algorithm for calculating the interest rates has one short-coming, one that is shared by other lending protocols such as Compound:
both rates are functions of the utilization ratio, and thus are sensitive to market cycles.
12/
One pattern in particular the paper suggests is that the utilization ratio on stablecoins are highly correlated with $ETH price movement.
One pattern in particular the paper suggests is that the utilization ratio on stablecoins are highly correlated with $ETH price movement.
13/
Upswings in $ETH: increased demand for leveraged long positions -> increased stablecoin borrowing.
Downswing: decrease in leverage demand + liquidations of
ETH debt positions -> less stablecoin borrowing
This brings us to to the Anchor Rate and interest rate stabilization
Upswings in $ETH: increased demand for leveraged long positions -> increased stablecoin borrowing.
Downswing: decrease in leverage demand + liquidations of
ETH debt positions -> less stablecoin borrowing
This brings us to to the Anchor Rate and interest rate stabilization
14/ Anchor Rate
The Anchor protocol aims to converge the deposit rate earned by depositors onto a relatively stable value, called the Anchor Rate.
The Anchor protocol aims to converge the deposit rate earned by depositors onto a relatively stable value, called the Anchor Rate.
15/
The Rate aims to reflect the market's preferred source of yield on the blockchain, and is derived from the block rewards rates across multiple blockchains
The Rate aims to reflect the market's preferred source of yield on the blockchain, and is derived from the block rewards rates across multiple blockchains
16/
The advantage of this approach is that as the market's preference on the reward-accruing tokens change, the compositions of the assets being used as collateral in Anchor would change as well.
The advantage of this approach is that as the market's preference on the reward-accruing tokens change, the compositions of the assets being used as collateral in Anchor would change as well.
17/
Thus, the composition of assets that makes up the Rate is dynamic, and the Rate would correlate with the best yield possible on the chains
Thus, the composition of assets that makes up the Rate is dynamic, and the Rate would correlate with the best yield possible on the chains
18/
This means that the Rate has the potential to be more stable than any individual yield or any fixed collection of yields
But how do we stabilize this rate?
This means that the Rate has the potential to be more stable than any individual yield or any fixed collection of yields
But how do we stabilize this rate?
19/ Interest Rate Stabilization
With this target in mind, the goal of the protocol is now to adjust the deposit rate as to get it as close to the Anchor Rate as possible.
With this target in mind, the goal of the protocol is now to adjust the deposit rate as to get it as close to the Anchor Rate as possible.
20/
To see how, we need to first understand that the deposit rates is an aggregate of two individual rates
- the borrow interest rate paid by the borrower
- a fraction of the yield farming rate from the collateral bAsset
To see how, we need to first understand that the deposit rates is an aggregate of two individual rates
- the borrow interest rate paid by the borrower
- a fraction of the yield farming rate from the collateral bAsset
21/
The 2nd part is where the magic happens. Anchor dynamically distributing the block rewards from the collateral bAssets between borrowers and lenders.
The distribution ratio between the two parties is then what help fine-tune and stabilize the deposit rate to the Anchor Rate
The 2nd part is where the magic happens. Anchor dynamically distributing the block rewards from the collateral bAssets between borrowers and lenders.
The distribution ratio between the two parties is then what help fine-tune and stabilize the deposit rate to the Anchor Rate
22/
For example, assume that the current deposit rate is undershooting the Anchor Rate. In this case, the block rewards distribution would shift in such a way that more of the yields goes towards the depositors.
For example, assume that the current deposit rate is undershooting the Anchor Rate. In this case, the block rewards distribution would shift in such a way that more of the yields goes towards the depositors.
23/
Similarly, if the deposit rate overshoots the Anchor rate, the distribution ratio would shift to the borrowers, thus bringing the deposit rate down.
Similarly, if the deposit rate overshoots the Anchor rate, the distribution ratio would shift to the borrowers, thus bringing the deposit rate down.
24/
In short, block rewards is distributed more to the depositors when the deposit rate lags the Anchor Rate.
Inversely, when the deposit rate exceeds the Rate, the yield distributes more towards the borrowers to reduce the contribution of block rewards to the deposit rate
In short, block rewards is distributed more to the depositors when the deposit rate lags the Anchor Rate.
Inversely, when the deposit rate exceeds the Rate, the yield distributes more towards the borrowers to reduce the contribution of block rewards to the deposit rate
25/ Principal Protection
Anchor implements a liquidation protocol to gaurantee the principal of depositors. I'll explain the liquidation protocol itself another time, but here we'll focus on the big picture.
Anchor implements a liquidation protocol to gaurantee the principal of depositors. I'll explain the liquidation protocol itself another time, but here we'll focus on the big picture.
26/
The task of the liquidation protocol is to pay off any debts that are at risk of violating collateral requirements. These are done using what are known as "liquidation contracts"
The task of the liquidation protocol is to pay off any debts that are at risk of violating collateral requirements. These are done using what are known as "liquidation contracts"
27/
The contract undertakes the task of paying back the debt at risk, in exchange for the collateral plus a liquidation fee
The contract undertakes the task of paying back the debt at risk, in exchange for the collateral plus a liquidation fee
28/
These contracts can be written by anyone, are aggregated, and subsequently tapped when a loan needs to be liquidated in ascending order of liquidation fee
These contracts can be written by anyone, are aggregated, and subsequently tapped when a loan needs to be liquidated in ascending order of liquidation fee
29/ Applications
Anchor's market are designed to support more financial applications than just savings.
Anchor's market are designed to support more financial applications than just savings.
30/
Some that are proposed in the paper are
- Price and staking yield leverage (putting assets as collateral to borrow stablecoins and buy more of the same asset)
- Participating in the liquidation pool
Some that are proposed in the paper are
- Price and staking yield leverage (putting assets as collateral to borrow stablecoins and buy more of the same asset)
- Participating in the liquidation pool
