Is Anchor a Ponzi scheme? How to maintain a stablecoin interest rate of up to 20% in the long term

Written by: 0x76, Rhythm Research Institute

Terra can be said to be the most complex public chain in the cryptocurrency industry in terms of financial architecture design. The issuance and anchoring model of its native stablecoin UST has also sparked many intense controversies. In this section, we will not discuss whether Terra is a Ponzi scheme, but rather focus on two important interest rates in its ecosystem: the PoS staking rate of Luna and the UST deposit rate of Anchor.

Who represents the risk-free rate on Terra?

Since Terra's main goal is not simply to establish a smart contract platform, but to issue the stablecoin UST and promote its adoption, its economic model is clearly different from other smart contract public chains. The native token Luna is not only used to pay for public chain gas fees and participate in governance, but also needs to be burned to issue the stablecoin UST.

Therefore, for Terra, it seems that there are inherently two monetary systems in its ecosystem, and these two tokens each have relatively independent interest rate systems. One is the Luna rate determined by Terra's PoS staking yield, and the other is the UST stablecoin deposit rate provided by the well-known deposit application Anchor.

Currently, the Luna rate is about 7%, while the deposit rate for UST in Anchor is as high as 19.4% (see the image below).

So, who can represent the risk-free rate of the Terra ecosystem?

Based on the previous analysis, the PoS staking yield backed by the minting authority can be considered risk-free. Therefore, the Luna that can be staked in Terra and its yield are obviously more suitable as the risk-free rate of Terra.

The next question is whether the high UST deposit rate of 19.4% provided by Anchor can also be regarded as a risk-free rate? Or, is the rate provided by Anchor also backed by the minting authority, or is it derived from the normal operating profits of the protocol? Is there even another possibility that Anchor is merely a Ponzi scheme that borrows new to pay old?

Is Anchor a Ponzi scheme?

Maintaining a stablecoin yield close to 20% for depositors for a long time is clearly unsustainable, even in the cryptocurrency industry. So, what mechanism does Anchor rely on to maintain this distorted yield level? To answer this question, we first need an appropriate analytical framework.

Currently, mainstream crypto-economic systems can be divided into two categories: one is a system where the protocol directly holds the minting authority of the native currency, and the tokens minted are used as the main means of payment in the economic system, such as public chains, blockchain games, etc. These economic systems involve the issuance and recovery of currency, making them very similar to national economies in the real world, thus requiring a more complex macroeconomic analysis framework.

The other type of economic system includes applications like Anchor or Lido, whose basic business model is to absorb external resources, manage and add value to them to obtain profits. These economic systems do not hold the authority to issue and recover the settlement currency within the system, making them more similar to traditional profit-driven companies. Therefore, if we want to analyze such applications, we can directly apply the classic financial analysis framework, describing them through balance sheets and income statements.

Of course, some may argue that the Anchor protocol has also issued its own native token ANC and possesses the authority to issue currency. Indeed, but these tokens do not participate in the main business operated by Anchor, which is the asset management of UST, nor are they used as the main payment settlement intermediary by any economic entity. Therefore, these tokens essentially resemble company stocks that capture value through profits or governance rights, rather than currency circulating in a virtual economic system.

From another perspective, if there were no participation of the ANC token, Anchor's UST lending and deposit business would not be substantively affected and could continue to operate according to the current business logic. Therefore, ANC is not an organic and indispensable part of Anchor's business, but merely an external certificate for capturing profits or distributing governance rights.

The significance of ANC's existence is more about discounting the future profit expectations of the protocol and subsidizing users during the early cold-start phase of the project. This is very similar to the subsidy wars in the early internet industry, except that the distributed red envelopes have changed from cash to company stocks.

Now, let’s directly analyze the composition of Anchor's deposit income through a traditional income statement.

1. Anchor's Costs

Anchor's largest and only cost is the interest paid to depositors. Here, we take the data from March 31 as an example for calculation. Currently, the deposit scale of UST in Anchor is about 12 billion UST, with a deposit rate of 19.4%, so Anchor's daily cost expenditure is about 6.4 million UST.

2. Anchor's Income

Anchor's income consists of two parts, one of which is the interest collected from loans issued by Anchor.

From the screenshot above, we can see that borrowing UST from Anchor requires paying an interest rate of 12.69% to Anchor. Of course, since borrowers will receive ANC tokens, their actual loan cost is only 4.45%. However, these subsidies only reduce the user's cost and do not have a direct impact on Anchor's protocol income. Therefore, Anchor's daily interest income remains at 32.1 billion UST * 12.69% / 365, approximately equal to 1.118 million UST.

Another part of Anchor's income comes from the collateral pledged by borrowers to the Anchor protocol, which is the income generated during the collateral period from liquid staking certificates like bLuna.

Based on the data from the Anchor dashboard, we estimate that the daily income from the three types of collateral is approximately (4.87 billion * 6.9% + 1.68 billion * 4% + 0.017 billion * 7.2%) / 365, which is about 1.1 million UST.

Additionally, from this data, we can see that as the main source of income for Anchor, the interest rates generated by the three types of collateral currently supported by Anchor do not exceed 10%. This means that even if the scale of collateral increases to twice the total deposit scale, the income generated cannot cover the cost of interest expenses. Therefore, under any market conditions, Anchor's current business structure cannot rely on itself to achieve profitability.

After the above statistics, we can conclude that Anchor's daily net operating profit is 1.118 million + 1.1 million - 6.4 million, approximately equal to -4.18 million UST. In other words, Anchor is currently losing over 4 million U.S. dollars daily to maintain normal operations.

The next question is, where does this money come from? It should be noted that Anchor itself does not have the minting authority for UST. If it cannot collect minting taxes from the entire system through printing money, then the only way to cover the losses is to borrow new to pay old and obtain subsidies from external sources, which is also a key aspect that determines the fundamental nature of Anchor.

Fortunately, Anchor has chosen the latter approach, which is to establish a subsidy reserve pool to cover daily operating losses.

This subsidy reserve pool was established last year with an initial fund of about 70 million UST. After this portion of funds is exhausted, the Terra official (Luna Foundation Guard) injected a second round of approximately 500 million UST into it this February. As of now, the account balance is only 360 million UST. At the current rate of burning money, it can only support operations for about three more months.

Therefore, currently, of the 19.4% interest received by Anchor deposit users, only about 6.7% comes from the income generated by Anchor's lending business, while the remaining 12.7% of the yield comes entirely from the subsidy fund pool established by the Terra treasury through transfer payments. Thus, for Anchor's savings users, this is a financial game that reduces the circulation of UST in exchange for Terra's fiscal subsidies.

Readers can monitor the daily consumption of subsidies more intuitively through this website.

Finally, let’s take a moment to answer the essential difference between the UST rate provided by Anchor and the rate of Luna.

In simple terms, Anchor's rate derives from business profits and subsidies, resembling large state-owned enterprises that voluntarily incur losses to undertake national strategic tasks and maintain operations through continuous funding from the treasury. Therefore, Anchor's rate essentially belongs to commercial credit plus the implicit guarantee from the public chain's treasury. In contrast, Luna's yield is entirely backed by the minting authority, reflecting the sovereign credit of the Terra public chain. (Commercial credit is backed by business profits, while sovereign credit is backed by minting authority.)

Thus, regarding the initial question of this article, we can now provide a clear answer: Anchor is not a simple Ponzi scheme, but its current business model is clearly unsustainable.

What is the endgame for Anchor?

Anchor's current model is clearly unsustainable, but where Anchor's future will lead is not something Anchor can decide. As mentioned earlier, the main significance of Anchor's existence at this stage is to assist the Terra team in achieving strategic goals.

And this strategic goal is to prepare UST as a reservoir before finding its true main use case. If the subsequent promotion of UST goes smoothly, Anchor can gradually reduce subsidies, lower deposit rates, and gradually release UST liquidity into the market.

However, if the promotion of UST does not go well, Anchor must continue to adopt high subsidies to recover liquidity to prevent the issuance of UST and the price of Luna from entering a death spiral, which is also the main reason why many people question Terra as a Ponzi innovation.

Therefore, from the current stage of development, Terra has clearly adopted a strategy of exchanging space for time to gradually promote the use of UST. It must be said that this is a very cleverly designed and quite bold strategic choice. However, during the limited time obtained through Anchor, whether Terra can find truly suitable use cases for UST will be the core proposition that tests the Terra team in the coming period. The way to answer this key proposition will ultimately determine whether Terra will become a great financial innovation or another blockchain scam that will eventually collapse.

Although we still do not dare to easily predict the outcome of Terra, based on the current rate of consumption of Anchor's reserves, we are likely to witness the moment of resolution for this financial game this year.