One of the biggest Lending protocols in the DeFi space Anchor recently suffered a major blow to its reserves in the last 2 months which has led to the protocol looking at a contribution from Terra’s foundation to escape the ensuing losses.
LFG to Anchor’s Rescue
The proposal has been put forth in order to maintain the protocol’s industry-high annual percentage yield (APY) of 19-20% on deposits.
This APY known to be one of the highest among the top protocols led to the depletion of reserves. As the market crashed in December and January, lending on the protocol came down.
However, deposits continued at the same rate, and as a result, most of the capital inflow which was the result of Anchor’s high-interest rate reduced leading to a higher outflow.
This led to the reserves losing between $1 million to $1.6 million every single day since December. At the moment, the same reserve stands at $12.6 million.
Using this boost of $450 million from the LFG, Anchor aims on maintaining the yield reserves long enough to cancel out the payout with the revenues.
As described by the announcement, Anchor plans on extending the $450 million reserves for the next 47 weeks, with projections indicating a return to their earlier structure of higher revenue over payouts by January 5, 2023.
Anchor also intends on improving its mechanics in the future by introducing its new v2 borrowing model. In addition to the same, the spokesperson stated:
“This refinement process takes time and we believe having a sufficient yield reserve to continue scaling UST’s growth to newcomers and inspire existing users’ confidence will benefit all stakeholders”
The Effect of LFG on Terra
Launched less than a month ago the Luna Foundation Guard basically acts as a non-profit organization mandated to build reserves for the $UST peg amid volatile market conditions.
The organization is said to be governed independently by an international council of leaders and experts to maintain transparency.
However, despite the positive announcement broader market took down both LUNA and Anchor by 20.18% and 28.17% respectively. Ongoing market recovery did manage to push them back up by 30-40% and with a bullish development as such, this recovery could continue for a while.
This article was originally posted on FX Empire