How much interest are you earning on your fiat dollars in a traditional bank ‘high yield savings account’? It can’t be more than 2%, max? Which means in real terms, your money is going backwards. That’s not financial freedom peeps. But what if i said you could get 10 times that interest rate with a cryptocurrency Stablecoin pegged to the US dollar? Well, you can with Anchor Protocol and a Stablecoin called US Terra.
In this post we explain: how Anchor Protocol will pay you 20% interest on your money, the 4 steps to getting this interest rate, and how to manage risks. We also reveal why Anchor Protocol is set to become the new high yield savings account for millions.
Are you ready to make some passive income?
- What is Anchor Protocol?
- How do you make passive income using Anchor Protocol?
- 4 steps to earning 20% interest on your money
- The risks of using Anchor Protocol and how to manage them
- Why Anchor Protocol will be the new high yield savings account for millions
What is Anchor Protocol?
Anchor Protocol is a smart contract built on the Terra Blockchain.
What is a smart contract?
As we describe in this post The 2021 DeFi Lowdown:
“DeFi loan transactions are executed through what’s called ‘lending protocols’… These protocols use ‘smart contracts’ – code on the blockchain – to execute a financial agreement between two parties when predetermined conditions are met. ‘.. put simply, they’re computer code (program) to execute financial transactions on an immutable public accounting ledger (blockchain), so you no longer need a ‘trusted third party’ like a bank.“
In the case of Anchor, its smart contract automatically executes direct borrowing and lending agreements between protocol users. The smart contract allows automated and direct peer to peer lending and borrowing of certain cryptocurrencies.
The Anchor Protocol smart contract has a $5 billion total value locked. That means there is $5 billion dollars (US pegged) worth of crypto locked in the smart contract as either loans or collateral.
Anchor Protocol aims to pay a steady 20% interest rate to lenders. It uses the yield reserve pool ($73M) to maintain as close to this as possible when tokenomics fluctuate. Given failed tokenomics is a risk inherent to DeFI protocols (more on risks below), this features reduces the tokenomics risks of lending via Anchor.
What is US Terra Stablecoin?
US Terra is an algorithmic stablecoin that is pegged to the US dollar but NOT backed by US dollars (i.e. the Stablecoin issuer does not hold $1 USD for every $1US Terra issued). Instead, UST is backed by LUNA, which is the native token of the Terra Blockchain. You can read more about Terra Blockchain and LUNA is our article on investing in Layer 1 crypto assets here.
Terra uses an algorithm to ensure that US Terra stablecoin maintains its 1:1 peg with USD. Essentially, the algorithm controls the supply of LUNA token and UST on the market to stablise the peg.
There is more than $7 billion worth of UST circulating, representing a doubling of the UST market cap in the month of November alone. This UST is backed by a LUNA market cap of $16.5 billion.
How do you make passive income using Anchor Protocol?
You make passive income by directly lending your money via a smart contract on the Terra blockchain. Here’s how it works:
- You lend your Terra stablecoins into a money market pool governed by the Anchor smart contract (protocol).
- Borrowers can take a loan from the pool, in effect borrowing your stablecoins.
- Borrowers must provide collateral in cryptocurrency – at a ratio of say 1:1.5 – to borrow your stablecoins.
- These borrowers pay you a healthy interest rate to borrow your coins.
4 steps to earning 20% interest on your money
There are a few things you need to set up before you start:
- Terra Station Chrome browser – you’ll need to download Terra Station Chrome browser on your computer. Terra Station allows you to access decentralized applications (DApps) powered by smart contracts on the Terra blockchain.
- A Kucoin or Binance crypto account – Kucoin is one of a few places to buy US Terra, which is the Stablecoin you’ll be lending into the Anchor Protocol. With Binance, you can buy LUNA (native coin of Terra blockchain), send it to Terra Station and then Swap the LUNA for UST inside Terra Station Money.
- Anchor Protocol – have open on your computer the Anchor Protocol smart contract platform where you will lend your US Terra.
- Terra Station Money – the Terra Station desktop client.
Once you have all of these downloaded or opened on your computer, we can get to the juicy bit of making moolah…
Step 1 – Set up Terra Station Wallet
Set up a new Terra Station wallet inside the Terra Station Chrome browser extension you downloaded above. You will use this wallet to hold your US Terra stablecoins and lend them into the Anchor Smart Contract Platform.
Open the Terra Station Browser and click ‘new wallet’. You will need to enter in a wallet name and confirm a new wallet password. The wallet will generate a 24 word seed phrase – you MUST record this somewhere offline. If you don’t and something happens to your wallet, you will not be able to recover your crypto on the Terra blockchain.
Step 2 – Buy US Terra or LUNA
Next you’ll want to buy some US Terra from your Kucoin crypto account or some LUNA from your Binance account.
If you already have USDT (US dollar Tether) in your Kucoin account you can do a USDT -> UST trade. If not, you will first want to deposit some fiat currency into Kucoin and use that to buy USDT. You can then trade from USDT -> UST.
In Binance you can simply trade BTC or USDT for LUNA.
Step 3 – Send your UST or LUNA to your Terra Station wallet
In this step, you’ll want to open up your Terra Station wallet and copy the public wallet address. You’ll use your wallet address in Kucoin or Binance to send your UST or LUNA over to your Terra Station wallet.
Sending UST from Kucoin
If you’re using Kucoin, jump back into your Kucoin account, click ‘Assets’ in the top right of screen, then click ‘Withdraw’. Select the coin you want to withdraw (UST). Paste in your Terra Station Wallet address, and input the amount of UST you want to send to your Terra Station Wallet. Make sure all of the information is correct and double check your Terra Station wallet address. Click Withdraw.
Sending LUNA from Binance
You can only buy LUNA on Binance you can’t buy UST. To send LUNA from Binance to your Terra Station wallet, go through the normal Withdraw process.
Once the LUNA arrives in your Terra Station Wallet, you’ll then need to Swap LUNA for UST using Terra station money.
Terra Station Money is the Terra station desktop client.
Connect your Terra Station wallet to Terra Station Money in the top left of screen. Then go to the ‘Swap’ menu in Terra Station Money on the left hand side. Select ‘from’ as ‘LUNA’ and ‘to’ as ‘UST’. Enter the amount you want to swap and click ‘Next’. Confirm the transactions and check your wallet – you’ll see you now have UST.
Step 4 – connect to Anchor Protocol and deposit UST
This step happens from the Anchor protocol page. Go to the top right of the screen and hit ‘connect wallet’. Choose the Terra Station Extension selection. You will need to confirm the connection in a pop up from Terra Station wallet. Once you have connected, you’ll see your wallet address appear in the top right of the Anchor Protocol platform.
Select the ‘Earn’ menu from the top of screen within the Anchor Protocol. Here, you’ll see a deposit button and the interest rate you’ll earn when depositing your UST. There’s also a calculator at the bottom that shows you your expected interest / passive income in UST, once you have deposited.
Hit the ‘deposit’ button and confirm the deposit of your UST using the Terra Station Wallet (follow the pop-up prompts).
That’s it! Now you have deposited UST into the Anchor Protocol ready for borrowers to borrow.
Heeeelllooo passive income! 🙂
Keep in mind that you can withdraw your UST at any time by hitting the ‘withdraw’ button. There is no lock up period. Reverse the process we’ve step you through here to exchange that UST into USDT or LUNA, and then into Fiat currency (if you plan on living off the income this provides).
The risks of using Anchor Protocol and how to manage them
There are two main risks with using the Anchor Protocol to make passive income:
- USD peg risk – UST is not backed 1:1 by physical dollars like USDC stablecoin. This increases the risk of the investment. There is a risk that the balancing algorithm may fail and UST may lose its USD peg (and lose value).
- Smart contract risk – this a risk present with all DeFi protocols: the protocol may be hacked and pools drained of their (your) coins.
Some of the other risks such as failure in the smart contract code or governance attacks, are laid out below.
One of the coolest things with Anchor Protocol if thought of using it keeps you up at night is that you can buy insurance to protect your invest. With insurance providers like Nexus Mutual you can buy insurance to cover both the USD peg and smart contract risks of using Anchor Protocol. Here are the risks Nexus Mutual will cover:
As a comparison, the current cost of a combined policy with Nexus Mutual competitor Unslashed.Finance is 5.199%/year. So even with insurance, you’ll still receive roughly 14% interest on your UST.
3 reasons Anchor Protocol will be the new high yield savings account for millions
1. A stablecoin APY that crushes your bank
Banks aren’t going to be increasing their savings rates by any meaningful amount let alone to double digits, anytime soon. At 20% or even at 15%, the Anchor savings rate crushes anything a bank can offer you in fiat. Not to mention, that APY is on a STABLE coin pegged to the USD. Holding UST doesn’t expose you to the same price volatility of holding other crypto, which means its a lower risk investment within the crypto ecosystem. You have less risk of your passive income being swallowed up (off set) by a drop in the UST coin price because it’s USD pegged…
2. Zero sign up requirements (no bank accounts or documents required)
Anchor savings has no minimum deposits, no account freezes, and no signup requirements – the smart contract can be used by anyone in the world with access to the internet and some crypto.
This is profound if you think about the world’s 2 billion unbanked population. That’s 2 billion people without access to bank accounts and the associated savings and investing vehicles of traditional finance. 2 billion people without the opportunity of basic financial services to get ahead.
Let’s look at how crypto uptake has been playing out in El Salvador, the first nation on earth to adopt Bitcoin as legal currency. 30% of El Salvadoran adults are unbanked. But 60% of all adults use the internet.
Now that means 60% of adults in El Salvador, many of them without traditional bank accounts, have access to DeFi services like Anchor Protocol that give them 10 times the interest rate that a bank account will offer.
Those lucky El Salvadorans now also have crypto. Following recent laws making Bitcoin legal tender, 49% of El Salvadorans have downloaded a Bitcoin wallet to their mobile phone. More adults in El Salvador now have a Bitcoin wallet on their phone than hold a traditional bank account.
And yes you can buy crypto without a bank account…
The meeting of ‘the worlds unbanked; with DeFI is already playing out amongst large unbanked populations like El Salvador. And that’s huge for DeFi and for protocols like Anchor.
3. Alice wallet will make using Anchor Protocol a breeze
We’re not going to lie to you. It’s more complicated to use DeFi right now than it is to use your bank. User interface is THE biggest hurdle to crypto and DeFi mainstreaming today. Just look at this article as an example. For many people, taking 4 steps to make 20% on their money is a step too far up a steep a learning curve.
But that’s where the new Alice.Finance wallet comes in.
Alice wallet will solve the User Interface hurdles of interacting with Anchor Protocol, allowing anyone to lend their Terra on the Anchor Protocol in just a few easy clicks within the Alice mobile App.
Alice wallet will open the flood gates and help bring Anchor protocol mainstream. It will also catalyze the use of Terra blockchain and its stablecoins, which is good for the price of LUNA.
You can check out our article on investing in Layer 1 blockchains with potential for network effect here. Terra Blockchain is one of our picks.
Remember, none of this is Financial Advice peeps. Until next time, the Fat Stacks are out there. Let’s go get some!