The ANC token is the governance token of the Anchor protocol, which is one of the leading DeFi applications on the Terra blockchain. Rising rapidly in the ranks, the Terra blockchain is currently the second-biggest chain in terms of Total Value Locked just after Ethereum, and overtaking other chains like Binance Smart Chain, Avax, Fantom, and Solana.
What is the Anchor Protocol?
Anchor Protocol is a savings product that aims to provide a fixed income solution in the DeFi space. While there are many other protocols that offer a steady interest rate for deposited or staked assets, Anchor promises a stable yet high savings rate by using PoS block rewards. The Anchor Protocol has quickly gained huge traction, with just under $9 billion UST committed to the platform, supported by three key value propositions: high and stable yield, instant withdrawals, and principle protection.
The protocol can best be understood as a money market between borrowers and lenders. In order to borrow, users need to stake collateral (bonded assets: bAssets) which provides access to liquidity and maintains exposure to price gains of the original assets. Lenders receive a high and stable yield of about 20% when they deposit UST, and they can withdraw their deposits at any time. Smart contracts coordinate the borrowing and lending activities, collecting revenue from borrowers’ paid interest and staking rewards, which are then distributed to the lenders as earned interest.
Acting as a supply of extra yield, Anchor’s Yield Reserve is responsible for covering the costs of paying out the interest to lenders when revenue generated from borrowers is insufficient. When revenue generated from borrowers is higher than the cost of paying lenders, the surplus is simply stored in the Reserve for use at a later point in time. This mechanism is what allows the protocol to offer a stable interest rate during all types of market conditions.
About the Terra blockchain and UST
The Terra blockchain was created by South Korean blockchain firm Terraform Labs, established in 2018 by Daniel Shin and Do Kwon. The public blockchain protocol aims to provide a more scalable experience for the DeFi economy with its interchain and interest-bearing stablecoin UST, powered by the native LUNA token, and pegged to the US dollar.
There are three types of stablecoins: algorithmic, fiat-backed, and crypto-backed. Fiat-backed stablecoins are cryptocurrencies that are collateralized 1:1 with a fiat currency. Crypto-backed stablecoins are backed with a specific cryptocurrency. Algorithmic coins use complex smart contracts to match the price to another asset.
As an algorithmic stablecoin, UST uses LUNA as the asset that absorbs the short-term volatility of the stablecoin peg. The pegging mechanism is designed to ensure that the cost of minting UST will always be equal to the face value of the minted stablecoin. To mint one UST, only $1 worth of LUNA needs to be burned. When UST falls below or rises above the $1 mark, LUNA holders can exchange their tokens for the equivalent dollar amount in UST which creates arbitrage opportunities that in turn keep the price of UST in check.
UST currently ranks 4th in terms of market cap within the stablecoins category, preceded by USDT, USDC, and BUSD. It has been instrumental to the success of Anchor Protocol.
What is the ANC token?
The Anchor Protocol is governed by its native token, ANC, which captures a portion of Anchor’s yield, allowing its value to scale linearly with Anchor’s assets under management. Anchor distributes protocol fees to ANC stakers, benefitting stakers as adoption of Anchor increases. ANC holders can participate in governance activities such as proposing, discussing, and voting for proposals that improve the protocol.
The value of ANC is under positive price pressure as adoption increases. For example, ANC captures a portion of rewards from deposited bAsset collaterals that are used to purchase ANC, with the remainder used to replenish the yield reserve. The ratio of bAsset rewards used for ANC purchases can be adjusted through governance if the yield reserve’s inventory rises to a sufficient level. Deposit yields in excess of the target deposit rate are accumulated to the yield reserve, with a portion used to purchase ANC. Purchased ANC tokens are then redistributed to ANC stakers. And whenever a loan is liquidated, 1% of the liquidated collateral value is sent to the yield reserve, a portion of which is used to purchase ANC.
Another way for users to gain ANC rewards is by staking LP tokens of the ANC/UST trading pair. If you have both ANC and UST available in your TerraStation Wallet, go to ”Govern” tab on Anchor Protocol, tap on the LP menu to enter the amount of ANC and UST you want to add to the LP Token Pair, and click on the ”Add Liquidity” button to create the ANC/UST LP Token. After you have created your ANC/UST LP token, you can stake them to earn extra returns at about 50% APR as per the time of writing.