Background

The Anchor Yield Reserve is a pool of funds allocated to the Anchor Protocol to act as a buffer in stabilizing the 20% interest rate. While most decentralized platforms allow demand and supply forces to determine lending and borrowing rates, Anchor maintains the benchmark annualized product yield (APY) of 20% for lenders kind courtesy of the yield reserve.

Anchor finances the high deposit rate from three income sources, namely, the interest charged to borrowers, staking yield from borrowers' collateral and liquidation fees. If the realized yield from these income sources is greater than the Anchor rate, the excess is pushed to the yield reserve. On the other hand when the realized yield is less than the Anchor rate, the protocol taps into the yield to make sure that depositors are paid as promised.

The yield reserve seems to be running a deficit for some weeks now due to more deposits than borrows, as such, it is predicted that the reserve would reach zero in 20 days. Terra founder, Do Kwon, has quelled fears surrounding the ability of Anchor to still give investors a competitive interest rate after the yield runs to zero.

Do Kwon is quoted stating, "If we were to get to this hypothetical situation, Anchor will still offer the highest return on stablecoins. By far. It will be fine."

A number of solutions have been proposed to quell the yield deficit problem but the purpose of this investigation, as researchers are to assess what the APY on Anchor Earn will be if the hypothetical situation is to happen.

The Anchor Rate

Without the yield reserve to stabilize and push borrow rates towards the benchmark rates, depositors will be paid the Anchor Rate.

The Anchor Rate is the average of the rolling yields of all bAssets used as collateral for borrowing the stablecoin, weighted by the aggregate (Terra-denominated) collateral value of each asset.

Assumptions

To determine the Anchor rate at what we call the hypothetical situation, we need to make some assumptions per the variables we will need to calculate the rate.

The Anchor rate will be calculated based on bLUNA staking yield and ANC incentives.

bLUNA Staking Yield

Let's take a look at the bLUNA staking return. We shall assume that the staking return will be the same when the yield reserve runs to zero. This chart is taken from the Terra Station wallet dashboard.

Now let's take a look at how much collateral has been supplied currently.

Total Collateral value = $3,133,000,000

ANC Incentives

As mentioned earlier, borrowers pay lenders interest on their loans. This is what we will refer to as ANC incentives. Currently, the borrowing rate is at 12%. Total amount borrowed stands at $1,280,521,248 at the point of writing.

Conclusion

Here are the things we learned during the investigation:

1. Anchor will still be able to serve users when the yield reserve is depleted.
2. The predicted Anchor Earn APY will be about 9.52%.
3. The predicted rate is competitive in comparison with other DeFi platforms in the crypto ecosystem at the time of writing.

Predicted Deposit APY

Using the Anchor Rate model as specified in the whitepaper, we can predict the APY using the annualized staking return rate and the borrowing rate.

We have 3.1 billion worth of UST from staking returns and 1.2 billion UST worth of borrows both earning yields of 8.56% and 12% respectively.

Taking the weighted average of both we get a result of 9.52%

Stablecoin Yields from Other Protocols

Comparing the predicted yield likely to fluctuate between 8.56% and 12% to stablecoin yields from other protocols, we can see that it is still competitive. According to defirate.com, the highest lending rate for DAI and USDC from other DeFi protocols is 8.5%.