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    Anchor Protocol to adjust Interest Rate

    By Ammar Mukhtar

    Mar 25,2022

    4:16 AM UTC

    Following a community vote on Thursday, the Anchor protocol, a decentralized money market built on the Terra blockchain, will dynamically adjust interest rates each month.

    Payout rates would rise by 1.5 percent if yield reserves rose by 5 percent, and fall by 1.5 percent if yield reserves fell by 5 percent under the new proposal. The payout rate change will be capped at 1.5 percent, which means that they will only be able to increase or decrease by that amount.

    The move is intended to make Anchor more long-term sustainable. The anchor used to pay out up to 20% of deposits made in UST, Terra’s dollar-pegged stablecoin.

    The amount of capital held on Terra to sustain its current 19.5 percent yield rate is referred to as yield reserves. According to tracking data, Anchor holds over $14.76 billion in tokens and is the largest lending tool on Terra.

    Anchor’s interest rates are generated through staking rewards from major proof-of-stake blockchains and are thus more stable than money market interest rates.

    Meanwhile, on the proposal’s official discussion forum, some Anchor users criticized the development. Anchor has a competitive advantage in the form of a STABLE deposit rate. We lose that advantage if we switch to a dynamic rate, wrote pseudonymous user ‘fulltimecrypto.’ Other users, on the other hand, were more upbeat. We’ve grown up enough. According to DefiantProtocol, it’s time to mature a little and realize that 20% on stables is excessive. Cutting the interest rate in half would not result in a significant flight of capital.

    Rates are currently set to fall by 1.5 percent due to a drop in yield reserves last month. Anchor’s native ANC token fell as much as 5% in the 24 hours following the development and is currently trading at $2.56 at the time of writing.

    Anchor stated in a tweet that with the passage of Prop 20, they will now implement a more sustainable semi-dynamic Earn rate. In its most basic form, this proposal involves two Earn parameters.

    1. Frequency – How often the rate can change.
    2. Cap on Rate Adjustments – How large the rate changes can be.

    The addition of a semi-dynamic Earn rate will contribute to Anchor’s long-term sustainability and will benefit protocol users by allowing yield reserve growth while maintaining an attractive yield on UST.

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