33. Anchor Collateral Ratio

    Let us explore Anchor protocol's Collateral Ratio

    Anchor's Collateral - bLUNA

    Borrowers in Anchor use their liquid staking derivative (bLuna) to lock up as collateral in order to borrow TerraUSD (UST). Because the bLuna earns staking rewards and is being used as collateral by borrowers, Anchor protocol is able to liquidate the collateral’s rewards being earned on bLuna by borrowers into UST for depositors.

    Conclusion

    We explored how collateralized loans are life blood of defi lending ecosystem as well as the major Anchor governance proposal that reduced the collateralization ration from 200% to 166% on July 21st. Here are few observations of this change

    • 3x more bLuna tokens compared to previous day were deposited as collateral on July 19th, the date on which the governance proposal 4 was introduced for voting.
    • On July 18th & 19th amount of repaid exceeded the amount of money borrowed. This could be due to reclaim the bLuna collateral for improving capital efficiency post implementation of Governance proposal 4.
    • All those repaid loans right before Governance Proposal 4 and got bLuna, borrowed money on July 22nd to take advantage of reduced collateralization ratio. We see a huge spike of borrowing activity, 50 Million UST.
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    On July 19th Anchor Governance proposal #4 was introduced to reduce collaterization ratio from 200% to 166% . It was voted for around 3 days and around 18.08% of ANC token holders voted on the proposal. On Jul 21st the proposal was agreed with overwhelming majority ( 17.91% Yes vs 0.16% NO).

    Lets us explore how this proposal impacted Anchor's ecosystem.

    Anchor's Collaterlization Ratio Decreased from 200% to 166% on Jul 21, 2021

    This means that in order to take out the loan, the value of the collateral will exceed the value of the loan. To expand on this, if you are looking to take out a loan of 100 Dai on MakerDAO, you would have to collateralize your loan with at least $150 in Ether. In this scenario borrowers are required to collateralize their loan, at minimum, of 150% of the loan value.

    Given that DeFi empowers open, pseudo-anonymous finance, no one has a credit score or any sort of formal identity associated with the loan they are taking out. Therefore, similar to mortgages, most DeFi lending applications will require borrowers to collateralize their loan as an incentive to hold them accountable for repaying the debt. However, the key difference between traditional collateralization and DeFi collateralization (as it stands today), is that collateralizing a loan on Anchor or Compound will require the borrower to over-collateralize the loan.

    When it comes to Decentralized Finance (DeFi), lending is likely the first thing that comes to mind. The lending market currently comprises of 82% of total value locked in Defi ecosystem, according to DeFi Pulse.

    What is a Collateralized Loan and Collateral Ratio?

    Built by the team at blockchain platform Terra, Anchor is a savings protocol that provides crypto natives, fintech companies, and regular investors a stable, high-yield interest rate for DeFi. Yields on Anchor around 20% and they are mostly stable, unlike the highly volatile yields we see on similar platforms like Compound, Aave.

    In this dashboard, let us explore how Anchor Protocol's Collateral Ratio has changed over the past 2 weeks.