How does Anchor work and what is the Yield Reserve?

Anchor is able to provide such high a high APY through a quite simple mechanism. In order to pay out such an APY, Anchor has to have some sort of income. This income comes from the Borrow side of Anchor. Here, users are able to borrow UST by putting down collateral. Anchor generates income using two methods:

• Staking rewards from the staked collateral.

• The interest users have to pay in order to borrow UST.

This income is then used to provide a yield to users who lend out their UST on Anchor. The income can be quite volatile, however. The amount that is borrowed can change at any time due to users repaying their loans. In order to still be able to provide a stable yield to users who lend out their UST, Anchor uses the Yield Reserve to keep the yield stable. Right now, the APY (also called Anchor Rate) is set to 20%. Therefore, if the income Anchor generates from the Borrow side is not high enough to be able to pay out this 20%, the Yield Reserve is used. This means that when the Yield Reserve is 0, the Yield Reserve cannot be used to make the Anchor Rate 20% and the APY will be equal to the income Anchor is able to generate from the Borrow side. In this dashboard, we will try to estimate this APY by estimating the current income of Anchor.

Estimating the income

As explained above, the APY without the Yield Reserve would be equal to the income Anchor generates from the Borrow part. This income is equal to the staking rewards from staking the collateral and the interest users have to pay to borrow the UST. Let's first look at the income from staking the collateral.

Next, let's look at the income from the Borrow side. To estimate the income from Borrow, we look at the APR that users have to pay from the total amount borrowed on Anchor. As can be seen below, the Total Collateral Value on Anchor is about 3.4B. Anchor allows users to borrow up to 40% of their collateral before being liquidated if the borrowed value reaches 50% of the collateral value.

In order to know how much income is coming from staking, we first need to know the total collateral value of each asset that can be collateralised. In this case bLUNA and bETH. This total collateral value can be calculated for each day by using the following formula: (total deposited - total withdrawn - total liquidated) * avg daily price of asset

For staking rewards, we will be using 8.82% for bLUNA (current staking reward in Terra Station) and 4.6% from Lido Finance for bETH.

Multiplying the total collateral value of bLUNA and bETH by their respective staking yield gives the total yearly staking income from collateralized assets:

Below we can see that a total of $1.29B is borrowed, meaning that the average user borrows about 38% of their collateral value. Next to that, we can see the current borrow APR. This means that 11.69% of this $1.29B is the income Anchor gets from its Borrow side. This is about $150M

Adding the yearly income from staking bLUNA, staking bETH and the income for the Borrow APR together gives us the total annual income for Anchor on 2022-2-2:

What would the Anchor APR be?

We calculate the Anchor APR by dividing the Total Yearly income of Anchor by the total amount of UST that is deposited to Anchor Earn:

How does this compare to other stable coin yields?

How does 9.31% APR compare to other stablecoin yields across DeFi and CeFi?

Centralized options offers quite a high yield:

• 12% on Cypto.com

• 7% on Binance

• 8.5% on Celcius

Very safe DeFi options:

• 2%-4% on Yearn Finance

• 1%-2% on AAVE

• 2%-5% on Curve

More risky DeFi options:

This Reddit post lists a few places to get extremely high stable coin yields (15%-50%). The post is about 3 months old however, so things could have changed.

Conclusion

In this dashboard, we examined what the Anchor APR would be if the yield reserve were to be 0. It turns out that with the number today (2022-2-2) the yield would be about 9.31%. When we compare this to other stable coin yields across crypto, we can see that Anchor does not really stand out anymore. The yield would be lower than most centralized exchanges but a lot higher than the safest options in DeFi like AAVE and Curve.