Layer 1 tokens have been in the spotlight lately, with AVAX on a tear while LUNA and SOL hit all time highs. As seen in the chart below, LUNA’s price appreciation has helped propel Terra’s TVL higher, making it the 3rd largest blockchain by this metric after Ethereum and Binance Smart Chain. Among all the protocols live on Terra, Anchor Protocol accounts for the majority of TVL. In this report, we’ll explore Anchor’s growth drivers and underlying mechanics to see what the future holds in store for the protocol.
DISCLOSURE: DELPHI VENTURES AND MEMBERS OF OUR TEAM HAVE INVESTED IN LUNA & ANC. THIS STATEMENT IS INTENDED TO DISCLOSE ANY CONFLICT OF INTEREST AND SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE ANY TOKEN. THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY, AND YOU SHOULD NOT MAKE DECISIONS BASED SOLELY ON IT. THIS IS NOT INVESTMENT ADVICE.
LUNA hit its all time high price today ($34.25), simultaneously lifting Terra’s TVL upward along with it. Terra is now the 3rd largest L1 according to this metric, behind Ethereum & BSC. Within the Terra ecosystem, Anchor is the largest application by TVL, with current levels at ~$2.7b.
After the market crash in May, Anchor’s UST utilization ratio cut in half as borrowers deleveraged, reducing the total amount of interest borrowers had been paying into Anchor. This, coupled with a disproportionately high amount of UST deposits to support, forced Anchor to eat into its Yield Reserve to maintain the stable rate of 20% offered to lenders.
The Yield Reserve was running a deficit after the event and went as low as $1.2m on July 13th. Terraform Labs (“TFL”) intervened and boosted the yield reserve with a capital injection of $70m UST.
The reserve deficit continued until the recent introduction of bETH as collateral which reversed the trend. This is partly because the addition of bETH led to an uptick in the UST utilization ratio, with current levels at ~60%. For context, the low reached in May was ~20%.
The beneficial impact that bETH had on Anchor hints that the future additions of bATOM, bSOL and bDOT should be positive catalysts for the protocol. Any increase to the amount of bAssets posted as collateral, or their PoS yield, directly benefits ANC because 10% of the generated yield is used to buyback the token.
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