Anchor: introduction to the savings protocol | project on Terra blockchain
The rapid growth of DeFi has given rise to a number of financial applications, including mortgages, Uniswap, and Augur. Despite the success in areas such as DeFi and the influx of talent and capital into the DeFi space, no team has yet developed a convenient savings product in the DeFi space.
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So to address this urgent need, Cosmos, Polkadot, Terra, and Solana have launched Anchor, a savings protocol on the Terra blockchain, with the first release coming in October. Anchor will provide a stable currency savings product with principal protection, which can accept Terra deposit and pay stable interest. In order to generate income, Anchor can lend deposits, and the borrower needs to use the easy-to-liquidate PoS assets on the main block chain as collateral. Therefore, the revenue of Anchor is mainly driven by the block reward of PoS block chain. The ultimate vision of Anchor development team is to make Anchor become the gold standard of passive income on the block chain and provide reliable interest rate for stable currency deposits.
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What are the advantages of Anchor savings agreement?
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1. Principal protection
Anchor executes a settlement agreement, in which the borrower's collateral is liquidated every time a loan is at risk, protecting the depositors' principal.
2. Withdraw money at any time
Terra's deposits do not need to be locked up and can be withdrawn at any time.
3. Stable interest rates
Anchor distributes the variable part of block reward to savers, thus stabilizing deposit interest rate.
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Why does Anchor's development team choose to develop savings products?
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They argue that the large-scale adoption of decentralized finance can only be achieved through savings accounts.
The first reason is the size of the market. In the United States alone, savings accounts hold about $13 trillion, and the total value of all stability COINS is far less than 0.1 percent of the American savings market.
The second reason is that decentralised finance is better for retail investors, who are already familiar with ways to protect their principal.
The third reason is that other investment products, based on savings accounts, are more acceptable to users.
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Compared with other savings products on the market, what are the differences of Anchor?
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The development team believes that a necessary feature of a widely attractive savings product would be a stable interest rate. The key reason why DeFi protocols with savings capabilities (e.g., Compound, Aave, Maker) are not widely understood is thatTheir stabilisation rates are highly cyclical. Anchor solves this problem by using the block reward accumulated into the mortgage assets to stabilize the deposit interest rate.
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In addition to providing returns with low volatility, Anchor also tries to provide a single reliable return rate for ordinary investors on all block chains. Anchor is committed to setting the benchmark interest rate of the blockchain economy by integrating the blockchain rewards of all major PoS blockchains.
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Token mortgage (bAssets)
BAsset (bond asset) is one of the core of Anchor, which is the token mortgage on the PoS block chain. BAsset is a token that represents the ownership of a secured PoS asset. Like the underlying collateral, bAsset also offers a block award to the holder. The difference is that bAsset is transferable and interchangeable. As a result, users can trade with bAsset as easily as using the underlying PoS assets. BAsset is widely available and can be generated on any PoS blockchain that supports smart contracts. BAssets play a key role in providing stable interest rates for Terra deposits.
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Terra Money market
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Terra Money Market is a smart Contract of Web Assembly on The Terra blockchain, which facilitates the deposit and borrowing of Terra stable currency (such as TerraUSD). It is a key component of Anchor deposit agreement. The money market is defined as a pool of Terra deposits that earn interest from borrowers. The borrower borrowed Terra from the pool using digital assets as collateral. The interest rate is determined as a function of borrowing demand and supply, encoded by the pool's utilization (the proportion of Terra borrowed in the pool).
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Borrowing from Terra's money markets is as simple as locking up collateral for a loan. Each account has the ability to borrow, depending on the amount and quality of the collateral frozen. Anchor defines a loan-to-value ratio (LTV) for each type of collateral, which represents the percentage of the collateral value that can be lent out. The ability to borrow determines the maximum amount of debt an account can accumulate.
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Anchor's interest rate and interest rate stabilization
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There are too many investment and savings products out there, each with its own risk/return and each with an interest rate that fluctuates over time. Given all these options, what interest rate would the average investor care about? Anchor hopes to find out by deducing DeFi's benchmark interest rate through block rewards across the blockchain.
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Using Anchor, the depositor can predict his income through the function of income on the borrower chain. Anchor money market is a unique promoter to carry out "yield transfer" from borrower to depositor by accepting bAssets as collateral. The interest rate of Anchor is defined as the average yield rate obtained by the borrower, and weighted by the collateral value supporting each yield rate.
For example, if bLuna and bAtom valued at 3 mm UST and 1 mm UST are the collateral of the money market of UST with yields of 15% and 10% respectively, then the Anchor interest rate will be 13.75%. The resulting diversified income, or anchored interest rate, reflects the market's preferred source of income on the blockchain. Therefore, the interest rate of Anchor may be more stable than any single yield rate or any fixed yield set.
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Anchor's interest rate is the interest rate target of Terra deposits and plays a fundamental role in Anchor's agreement. Anchor Smart contract dynamically assigns block incentives to the bAssets of collateral between the borrower and the depositor to achieve the target interest rate. The key here is to allocate the block reward according to whether the deposit interest rate of Terra lags behind or exceeds the Anchor interest rate, so as to raise or lower the deposit interest rate of Terra. Therefore, this stabilization algorithm can ensure that the interest rate of Terra deposit follows Anchor's interest rate. Since the deposit interest is paid by Terra, Anchor will use the settlement agreement to settle the non-Terra block award.
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The principal protection
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The liquidation protocol executed by Anchor is designed to guarantee the principal of depositors. Deposits are safe as long as all their liabilities are overcollateralized. The function of Anchor settlement agreement is to maintain the security of deposits by paying off debts that may violate the mortgage requirements. The agreement USES liquidation contracts that assume the task of repaying debts to repay risky loans in exchange for collateral and liquidation fees. The contract also charges a passive premium to the borrower, which is calibrated to ensure full coverage of outstanding loans. A liquidation contract can be written by anyone and used as needed when the loan needs to be liquidated.
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Compared with the traditional keeper system, the inherent structure and incentive measures of clearing contracts enable it to provide higher stability and solvency guarantee. Keeper systems rely on arbitrageurs to fund clearing at their discretion, which can cause a liquidity squeeze when markets are highly volatile and lead to huge losses for borrowers. Clearing contracts, by contrast, are fully guaranteed and enforce a long exit period, so they remain stable in the face of temporary shocks.
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conclusion
Anchor is a savings agreement on the Terra block chain, which provides a break-even savings product with stable interest rate and the ability to withdraw money at any time. In this agreement, Anchor interest rate is defined as the rate of return of PoS assets with the largest market demand, and will be used as the interest rate benchmark of the blockchain economy. Anchor USES block rewards of bAssets of collateral in The Terra money market to provide savers with stable returns equivalent to Anchor's interest rate. Anchor's simplicity and stability make it a good fit for a cryptocurrency-driven household savings product.
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Team background
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Nicholas Platias | Terraform Labs founder | with a degree in computer science from Stanford university. A number of well-known companies and entrepreneurial experience.
Member of the Eui Joon Lee | c-link research team
Marco Di Maggio | teaches | at harvard business school. He has a bachelor of economics from the university of Naples and a PhD in economics from MIT. He is a core researcher at | Terra Labs
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