Anchor, the flagship savings protocol of the Terra Luna (LUNA) ecosystem, has seen its reserves drop by 35.7% in the past seven days, according to to Terra.Engineer. Since early December, the amount of Terra USD Stablecoin (UST) held in the “terra1tmnqgvg567ypvsvk6rwsga3srp7e3lg6u0elp8” smart contract has decreased by more than 50%, with only $35.7 million remaining.
As a savings protocol, users deposit their UST assets through their wallets and earn up to 20% return when their capital is lent to borrowers, who pay interest on the loan amount. Borrowers must post collateral to ensure that the lender can recover their money in the event of default. Additionally, Anchor stakes the collateral it receives to generate rewards for depositors.
Whenever there is a shortfall between income generated from borrower interest, posting collateral, and return expenses paid to depositors, Anchor must draw from the aforementioned TerraUSD (UST) reserves to make up the difference. Last July, its creator Terraform Labs injected 70 million UST into the reserve protocol and its value was relatively stable. But in the past 60 days, the total deposit amount has increases from $2.3 billion to $6.1 billion, while the total amount borrowed only increased from $1.2 billion to $1.5 billion.
In bear markets, investors typically shy away from volatile assets in search of stable assets, such as high-yield savings protocols. However, the growing gap between Anchor’s deposits and borrowings has put severe pressure on its reserves. If the trend were to continue, the reserve would be depleted in the coming months and Terraform Labs would have to inject another round of UST to obtain liquidity or lower the interest rate promised by Anchor sharply.
My thoughts on @anchor_protocol and the yield reserve runs out
1/ Just 2 months ago, the yield reserve was increasing every day and today’s problems were not even taken into account. As the adoption of US$ really started to increase and deposits (loans) in pic.twitter.com/fTH4WecPr9
— Yield Labs (@YieldLabs) January 27, 2022