Terra’s Largest DeFi Platform Just Cut Yield Rates, Here’s Why:

Ambar Warrick
May 2, 2022 Updated July 19, 2022
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Anchor Protocol played major role in Terra crash

Anchor Protocol, the largest DeFi platform on Terra, recently reduced its annual yield rates in a bid to improve the platform’s sustainability. The move comes after users approved a proposal in March to introduce dynamic interest rates.

Starting from May 1, the platform now offers a 18% annual return on investments, down from the nearly 20% offered earlier. The 20% yield was pivotal in driving traders into Anchor, and saw its total value (TVL) double this year. TVL now stands at a near record high of $16.6 billion.

But while Anchor’s TVL was unaffected by the rate cut, the platform’s governance token, ANC, slumped as much as 15% in reaction to the cut. The token is now trading near two-month lows, at $1.82.

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Anchor switches to dynamic rates, what does it mean?

In a bid to maintain the protocol’s stability, Anchor will now adopt dynamic interest rates based on the availability of its reserves, the protocol said on Twitter. Rates will be adjusted by up to 1.5% per month, and will move within a limit of 15% to 20%.

Rates will be adjusted based on gains and losses in Anchor’s yield reserve, the liquidity pool from which the protocol pays out yields. Sudden spikes in deposits this year had heavily pressured the reserve, requiring liquidity from Terra’s broader reserve pool.

The spike in deposits also explains why Anchor has adopted dynamic yields. The proposal to reduce lending rates was introduced earlier this year, and voted into effect by Anchor users in March.

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Terra’s DeFi value surges this year

DeFi applications on Terra have seen a surge in inflows over the past few months. The total value of DeFi projects on the blockchain recently hit a record high of $21.8 billion.

A bulk of these flows are driven by Anchor Protocol, which accounts for nearly 78% of Terra’s DeFi value thanks to its 20% yield. The protocol has also helped grow Terra’s UST stablecoin, which can be used to stake on the platform.

Over 70% of all UST supply is locked into Anchor. Still, the token recently became the third-largest stablecoin by market value.

 

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Investment disclaimer: The content reflects the author’s personal views and current market conditions. Please conduct your own research before investing in cryptocurrencies, as neither the author nor the publication is responsible for any financial losses.
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Why Trust CoinGape

CoinGape has covered the cryptocurrency industry since 2017, aiming to provide informative insights Read more…to our readers. Our journal analysts bring years of experience in market analysis and blockchain technology to ensure factual accuracy and balanced reporting. By following our Editorial Policy, our writers verify every source, fact-check each story, rely on reputable sources, and attribute quotes and media correctly. We also follow a rigorous Review Methodology when evaluating exchanges and tools. From emerging blockchain projects and coin launches to industry events and technical developments, we cover all facets of the digital asset space with unwavering commitment to timely, relevant information.

About Author
About Author
With more than five years of experience covering global financial markets, Ambar intends to leverage this knowledge towards the rapidly expanding world of crypto and DeFi. His interest lies chiefly in finding how geopolitical developments can impact crypto markets, and what that could mean for your bitcoin holdings. When he isn't trawling through the web for the latest breaking news, you can find him playing videogames or watching Seinfeld reruns. You can reach him at [email protected]
Investment disclaimer: The content reflects the author’s personal views and current market conditions. Please conduct your own research before investing in cryptocurrencies, as neither the author nor the publication is responsible for any financial losses.
Ad Disclosure: This site may feature sponsored content and affiliate links. All advertisements are clearly labeled, and ad partners have no influence over our editorial content.