first things first. I’m fairly new to the crypto scene as well as to reddit as a network to have a discussion on. So please excuse my clumsy choice of words, if I’m using wrong terms in the following.
I recently stumbled over the anchor protocol of the terra network, which offers various ways to invest money. Even so I’m very impressed with the project’s idea, the names of the team and the amount of people already involved, I still have some doubts about how safe it is, to put my money there.
So as one of various options to stake your money (I will only talk about this one for now), the anchor protocol claims to guarantee 20 APR on the amount of UST that is being deposited. This sound like a crazy good deal regarding the APRs you would currently receive at a bank (at least here in Germany) which would be around 0.5 to 1.0 APR. So the question that springs to mind is, how is that even possible? Are there any catches?
So I tried to do a little digging (reddit, YouTube, google etc.). Sadly, none of what I found truly explained where the value was created in order to guarantee this 20 APR. Most of the posts took the 20% as good given or explained it with oversimplified examples that would just relocate the question about the creation of value to another part of the example.
To be fair, I was overstrained reading the white papers, since I m not familiar with IT-terms, as I never got in touch with programming too much. So maybe everything is laid out there and I’m just too stupid to understand it.
Anyhow, the little bit if research I did today as well as the examples posted gave me the impression that the 20 APR is only working as long as the network is growing and we are moving in a bulls market. As I said before, I don’t want to imply anything here, I just really hope, someone can give me a little deeply insight to understand the system.
So here is the given example that supposedly explains, how 20 APR can be maintained:
First of all, its presumed that stacked UST can generate a yield of 10-12 APR (even tho I have no idea if that is realistic, I just assume its true since I see how stacking generates value by verifying transactions)
1. Leo deposits 100 $, expects 20 APR = 20 $ for the year
2. Bob wants to borrow 100 $, so he puts down 300 $ dollar as collateral in order to take Leo’s 100 $ as a loan
3. the anchor protocol stakes Bob#s 300 $ collateral to gain 30 $ ( 10 APR on 300 $)
4. From this staking earning (30 $), 20 $ go into Leo’s pocket for providing the 100 $ loan, the other 10 $ go into some type of pool of the network
So why would you lock up 300 $ as collateral in order to borrow 100 $. Why not work with 100 $ of the 300 $ of your own in the first place? Since the collateral deposited is locked in stacking, you don’t get the 100 $ on top of your 300 $ to work with but instead.
Since this doesn’t make sense, I tried to figure out why people would loan from the depositors of UST. So apparently if you post bLuna as collateral, you get rewarded with anchor token with insane APR up to 250% (the YouTube video was from march this year). On top of that, you can loan money as states in the example before in order to add it to the collateral value already put down, leading to a bigger amount rewarded with the 250 APR.
to amplify the example before:
5. Bob gets 250 APR in anchor tokens for his 300 $ put down in collateral.
6. He also get 250 APR on the 100 $ loaned from Leo. Therefore he does not mind to pay 30% interest on the 100 $ loaned (10% stacking reward on the 300 $ put down as collateral) since he is still making good profit with 220 APR on the loaned money.
This leads to the next and even more urgent question. Are these 250% legit?
Apparently the APR on the collateral value is flexibel, depending on the amount of collateral value as well as the demand for it.
So right now the value of an anchor token sits at around 2.1 dollars. If the prices stays the same, even with more and more value being put down as collateral, the APR in put down collateral value will dip but not go anywhere near 30 APR in the foreseeable future. If demand for the anchor token goes up, the APR might even rise. So for those scenarios, system keeps going.
Question is: What happens if the value of anchor token goes down? Since the generated anchor token reward is self compounding and therefor put down as collateral value right away in order to general more anchor token, the “value” never really leaves the eco-system of the terra-network. I see the temptation of just putting all the profit right back in the collateral value, since 250% is simply too good to not throw all spare money you have at it.
But what happens if people actually started to cash out? I assume the price of anchor token would drop due to a drop in demand, the APR for collateral value would drop, therefore more people would get out, the value of anchor would drop even more, collateral loaned will be liquidated which all will eventually lead to a downward spiral.
It looks like the whole thing could go south pretty quickly, once rolling.
So this leads me to the final question where I want to leave it for now and see if anyone has some more information on this topic.
What is the actual value of anchor and how stable is its value?
Since its supposed to carry interest at 250 APR, is there any more value to it, other than being automatically reinvested as collateral value in order to general even more anchor? It seem that other the staking for interest you can also stake anchor tokens in order to participate in votes of the terra network community.
So this does not quite cut it for me in order to put my money here. The vote option aside. I don’t see any value in anchor other than that it might be stacked in order to get more value. The whole system stops working, once the price of anchor drops and people cash out. Everyone not fast enough will lose money or even get liquidated. Since we’re in a bull market and the “auto compounding” is very convenient, I don’t see this happening anytime soon, but I guess it will eventually happen.
I don’t know if I’m making any mistakes here, if I’m giving in to any misconception or if everyone else is just blinded by the $$-signs. As I said before. The network and community itself seems so vivid that I really want to participate. But at the same time, most communication stops at a rather superficial level while everything for the team itself is the hard to understand with any IT-background.