At Talk between Staking Rewards and Do Kwon, the Founder of Terra Blockchain, and the recently announced Anchor Protocol.
Anchor is a protocol that provides an attractive and low-volatile yield on stablecoin deposits. The yield is powered by block rewards and transaction fees of multiple Proof of Stake Blockchains.
At Staking Rewards we firmly believe that reliable passive income on crypto assets will be one of the main drivers for mass adoption. We are glad to talk with Do Kwon about the essence of Anchor Protocol and what are his plans and challenges for building a sustainable and reliable passive income product for the masses.
SR: Can you tell us a little bit about your background, crypto career, and what led you to start Terra and Anchor?
Do: Hey everyone, my name is Do Kwon and I’m the co-founder and CEO of Terraform Labs. Two years ago we started Terra with the simple idea to build stable cryptocurrencies designed for mass adoption. Last year we launched a payment gateway built on top of our Terra blockchain, which has now grown to 1.6 million unique users representing 3% of the Korean population. We’re excited about Anchor because it represents a unique opportunity to go after an even bigger market.
SR: How would you describe Anchor to someone who doesn’t know much about crypto and blockchain?
Do: Anchor takes stablecoin (Terra) deposits, and uses a portion of those deposits to acquire staking positions on multiple Proof of Stake blockchains. The block rewards resulting from said staking positions are used to fund passive income for depositors. Anchor’s economic model is analogous to that of the commercial bank: both keep a reserve to facilitate withdrawals and put the rest of capital to work (in Anchor’s case, stakes across the universe of blockchains).
- Principal protection: Anchor acquires stakes by offering stablecoin loans overcollateralized by liquid staking derivatives. When the value of the collateral falls below some threshold, the collateral is liquidated to protect the deposit.
- Instant withdrawals: Anchor facilitates fast withdrawals through liquidations of staking positions. No lockup is required.
- Steady APR: Anchor yield is powered by block rewards on major blockchains instead of short term speculative demand for underlying tokens.
SR: What makes Anchor special and superior compared to other crypto savings accounts?
Do: Yields on Dai Savings Rate (DSR), Compound, and other DeFi protocols are driven by short term speculative demand for underlying tokens. When speculative interest dies down, the APR collapses, making it impossible for users to project future cash flows with respect to opportunity costs of capital. Anchor yield is powered by block rewards by the entire universe of PoS chains, most of which have steady block rewards via transaction fees and inflation, leading to a much more dependable APR.
SR: When Bob takes out a loan via Anchor, he is depositing his collateral and gets stablecoins from Sally. Sally receives interest generated by Bob’s collateral. Since Bob’s collateral is yield-bearing itself, he does not have to pay any borrowing fees to Sally. So is the loan via Anchor always zero-fee for borrowers or are there scenarios where Bob might still have to pay for the loan?
Do: The Anchor protocol is designed so that Sally is able to withdraw her stablecoin whenever she wants. If too many stablecoins are borrowed from the money market, the interest in borrowing goes up which would disincentivize more people from borrowing. To answer your question, it’s possible that Bob would have to pay fees on top of staking rewards, but the opportunity cost of borrowing stablecoins should self-correct the market making such a scenario pretty rare.
The Source of Passive Income
SR: Are the underlying PoS protocols for anchor yield limited to Terra, Cosmos, Polkadot, and Ethereum? Are there gonna be more “Yield-Sources”/ Collateral Options? And which factors do you take into account for evaluating underlying PoS protocols for Anchor? What qualifies a Blockchain to serve as a passive income source for Anchor?
Do: As the reference interest rate across the universe of blockchain, Anchor will reflect the macroeconomics of the entire PoS ecosystem. We’re already in discussions with many other core teams to add even more assets to Anchor. While the criteria for which assets to be added will be decided by the Interchain Assets Association, our goal is to eventually decentralize governance to the community.
SR: Most of the current DeFi applications are deployed on the Ethereum Blockchain. Yield farming is very attractive due to the composability of these apps. Where do you position the Anchor Protocol in regard to the Ethereum DeFi ecosystem? And are there plans to make it interoperable?
Do: Anchor will include Ethereum once it transitions to Proof-of-Stake.
SR: Which noteworthy challenges do you see that DeFi has to overcome before mass adoption can and will happen? How do you tackle these challenges with Anchor & Terra?
Do: DeFi needs two components to become widely useful and used: reliable savings and ubiquitous payments. DeFi is not suitable for everyday savings today as the interest rates are too volatile. Average users need dependable passive income to cross over to crypto from Wells Fargo. Ubiquitous payments is also an important piece of the puzzle, because if a user is able to buy and spend his attractive interest earnings with any merchant & vendor, he starts to realize there’s no reason for her to hold any fiat at all…
SR: How do you assess or quantify the risks that are involved with using your platform? Security of Funds etc..
Do: Anchor is an interchain protocol, so it is vulnerable to failures of affiliated chains & assets. If the consensus for one of the chains breaks, then Anchor loans will be proportionately undercollateralized. Strong governance to correctly assess risks and set appropriate economic parameters (e.g. loan-to-value ratio of each asset) is crucial to minimize the costs of failures. As with everything in crypto, a lot depends on building the right community. And as with everything in life, it all depends on exceptional execution.
Marketing & Mass Adoption
SR: Nowadays prices are mainly driven by speculation and therefore only attract speculators. What are your plans to make Anchor & Terra known beyond speculator groups? Do you have any specific marketing plans?
Do: Higher returns market themselves 😉 But just to push things along, Anchor will be supported with regulated fiat transfer rails & onramps in 6 fiat currencies & widely integrated with many financial services where there happens to be user balances. Chai itself will be the first to socialize anchor to its 1.7 million users, and we expect many others to follow.
SR: Can you share a bit of the Terra & Anchor roadmap for the coming year? Anything exciting we can look forward to?
Do: We aim to launch Anchor by Q4 of 2020. We have many partnerships under the pipeline, so without disclosing much, we expect Anchor to be far more ubiquitous than you might imagine.
Listen to the presentation talk of Anchor Protocol here: