Analysis of DeFi Savings Protocol Anchor: A Principal-Protected and Stable Interest Rate Stablecoin Savings Method

This article was published on Babit Information, authored by Nicholas Platias, and translated by Kyle.

In recent years, we have witnessed explosive growth in decentralized finance (DeFi). We have seen the launch of numerous financial applications covering a wide range of use cases, including lending (Compound), decentralized exchanges (Uniswap), and prediction markets (Augur). Despite early successes and a significant influx of talent and capital, DeFi has yet to produce a simple and convenient savings product with broad appeal beyond the crypto-native world.

To meet this urgent demand, we introduced the savings protocol Anchor on the Terra blockchain. Anchor offers a principal-protected stablecoin savings product that accepts deposits in Terra and pays a stable interest rate. To generate yield, Anchor lends deposits to borrowers, who use liquid collateralized PoS assets from mainstream blockchains as collateral. Thus, Anchor's yield is powered by block rewards from mainstream PoS blockchains. Ultimately, we envision Anchor becoming the gold standard for passive income on the blockchain.

In this article, we introduce the core concepts behind the Anchor protocol. For the complete content, please read the Anchor whitepaper.

Key Features

Here are the main features of the Anchor savings protocol:

• Principal Protection: Anchor implements a liquidation protocol that liquidates the borrower's collateral in case of loan risk, thereby protecting the principal of depositors.
• Instant Withdrawals: Terra deposits can be withdrawn instantly—no lock-up required.
• Stable Interest Rates: Anchor stabilizes deposit interest rates by passing the variable portion of block rewards from collateral assets to depositors.

Why Have a Savings Account?

We believe that the pathway to mass adoption of decentralized finance is through savings accounts. The first reason is the enormous market size. In the United States alone, the asset size of savings accounts is approximately $13 trillion (we use the difference between M2 and M1 in dollars as a representation). A mere 0.1% market share of the U.S. savings market dwarfs the total market capitalization of all stablecoins. Secondly, we believe that to pave the way for retail investors, there is no more reliable method than products they are already familiar with and that protect their principal. Thirdly, we think that adopting other investment products as extensions of savings accounts is the most straightforward approach.

Why Another Savings Protocol?

We firmly believe that stable interest rates are a necessary feature of a broadly appealing savings product. The key limitation of DeFi protocols with savings functions (such as Compound, Aave, and Maker) is the high cyclicality of stablecoin interest rates. Anchor addresses this issue by stabilizing deposit interest rates through the cumulative rewards of collateral assets. In addition to providing low-volatility yields, Anchor aims to offer a single, reliable return rate across all blockchains for retail investors. By aggregating block rewards from all major PoS blockchains, Anchor hopes to position itself as the benchmark interest rate for the blockchain economy.

Tokenized Collateral (bAssets)

One of the cores of Anchor is bAsset (bonded asset), which is tokenized collateral on PoS blockchains. bAsset is a token representing ownership of collateralized PoS assets. Like the underlying collateral assets, bAssets provide block rewards to their holders. Unlike collateral assets, these assets are transferable and interchangeable. Therefore, users can trade bAssets as easily as the underlying PoS assets. bAssets are widely available—they can be generated on any PoS blockchain that supports smart contracts. bAssets play a crucial role in Anchor, providing stable interest rates for Terra deposits. For an in-depth theory of bAssets, please refer to the bAsset protocol whitepaper.

Terra Money Market

A core component of the Anchor savings protocol is the Terra money market—a Web Assembly smart contract on the Terra blockchain that facilitates the deposit and borrowing of Terra stablecoins (e.g., TerraUSD). The money market is defined by the Terra deposit pool, which earns interest from borrowers. Borrowers put up digital assets as collateral to borrow Terra from the asset pool. Interest rates are determined algorithmically and are a function of borrowing demand and supply, encoded by the pool's utilization rate (the portion of Terra borrowed from the pool).

Borrowing from the Terra money market is as simple as locking collateral in exchange for a loan. Each account has a borrowing capacity that depends on the quantity and quality of the locked collateral. Anchor defines the loan-to-value ratio (LTV) for each type of collateral, indicating the portion of the collateral value that can be borrowed. Borrowing capacity determines the maximum amount of debt an account can incur.

Anchor Interest Rates and Rate Stability

With a plethora of collateral and savings products, each with its own risk/return characteristics, which interest rate should the average investor track? Anchor aims to answer this question by deriving the benchmark interest rate for DeFi using block rewards on the blockchain.

With Anchor, the expected return for depositors is a function of the on-chain income of borrowers. The Anchor money market uniquely facilitates a "yield transfer" from borrowers to depositors by accepting bAssets as collateral. The definition of the Anchor interest rate is the average yield earned by borrowers, weighted by the collateral value of each yield. For example, if bLuna valued at 3mm UST and bAtom valued at 1mm UST are used as collateral in the UST money market, with yields of 15% and 10% respectively, the Anchor interest rate would be 13.75%. The resulting diversified yield (Anchor interest rate) reflects the market's preferred yield source on the blockchain. Therefore, the Anchor interest rate may be more stable than any individual yield or any fixed yield collection.

The Anchor interest rate plays a foundational role in the Anchor protocol: it is the target interest rate for Terra deposits. The Anchor smart contract dynamically allocates block rewards from collateral assets between borrowers and depositors to achieve the target interest rate. The key idea here is that block rewards can be used to raise or suppress deposit rates depending on whether they lag behind or exceed the Anchor interest rate. Thus, this stabilization algorithm ensures that deposit interest rates closely track the Anchor interest rate. Given that deposit interest is paid in Terra, Anchor uses a liquidation protocol to liquidate non-Terra block rewards.

Principal Protection

Anchor implements a liquidation protocol designed to guarantee the principal of depositors. Deposits are secure because all debts against them remain over-collateralized. The function of the Anchor liquidation protocol is to maintain the safety of deposits by repaying debts that may violate collateral requirements. The protocol uses liquidation contracts to repay "at-risk" loans, with liquidation contracts taking on the task of repaying debts in exchange for collateral and fees ("liquidation fees"). The contracts also charge borrowers a passive premium, calibrated to ensure full coverage of outstanding loans. Anyone can write a liquidation contract and use it "on-demand" when a loan needs to be liquidated.

Compared to traditional "keeper" systems, the built-in structure and incentive mechanisms of liquidation contracts allow them to provide higher stability and solvency guarantees. Keeper systems rely on arbitrageurs to fund liquidations at their discretion, which can lead to liquidity crunches during severe market fluctuations, causing significant losses for borrowers (see the recent Maker Vault incident). In contrast, liquidation contracts are fully collateralized and enforce longer withdrawal periods to provide stability in the face of temporary shocks. For an in-depth understanding of the Anchor liquidation protocol, please refer to the liquidation protocol whitepaper.

Conclusion

In this article, we introduced Anchor, a savings protocol on the Terra blockchain that offers principal-protected savings products with instant withdrawals and stable interest rates. The protocol defines the Anchor interest rate as the benchmark interest rate for the blockchain economy, derived from the yields of the most in-demand PoS assets. Anchor utilizes block rewards from collateral assets in the Terra money market to provide depositors with stable returns equal to the Anchor interest rate. We believe that the simplicity and robustness of Anchor make it a suitable answer for those seeking household savings products backed by cryptocurrencies.

Source link:

https://www.8btc.com/article/619914