Do Kwon, the founder of Terraform Labs, which is responsible for the Terra Luna (LUNA) and Terra USD (UST) stablecoin ecosystems, announced the injection of 450 million UST ($450 million) into the Anchor protocol’s reserves in a tweet posted early Friday. On Feb. 10, the Luna Foundation Guard voted to approve the idea. Anchor is the Terra ecosystem’s main savings protocol, providing users with up to 20% annual income on their UST deposits, which are funded by borrowers.
Because there wasn’t enough borrowing demand to keep up with an influx of lenders, the protocol’s reserves have lately dropped to as low as $6.56 million. When this happens, the protocol will have to go into its reserves to pay lenders the guaranteed yield. Anchor’s reserve funds declined by around $35 million from the beginning of December to the end of January.
This disparity is still widening at the time of publication. Total deposited money has climbed by about $480 million in the last two weeks. While borrowed funds have increased by about $180 million. Terra, on the other hand, stakes borrowers’ collateral in order to generate yields in addition to interest payments in order to recompense lenders. Therefore the two amounts do not have to be equal to achieve equilibrium.
Such yields, In the short run, are unsustainable
In the short run, such yields, Terra’s developer admitted, are unsustainable. Terraform Labs intends to use compound liquid staking derivatives as collateral in Anchor v2. In order to overcome the problem in the long run. Liquid staking entails people “double-dipping” with their crypto assets, i.e., staking their crypto in one pool and using their staked assets to farm yields in another. Theoretically, as users borrow funds, their collateral appreciates, inviting more borrowers to join the Anchor protocol to restore balance.