Thread by @shivsakhuja

I've written a few guides on how to earn high interest on your stablecoins using #DeFi.

By far, the easiest and most passive (but also high yield) way is @anchor_protocol, which currently pays out ~19.5% APY in UST.

Let's see how that works. 🧶 🪡 👇

1/ For reference, here's the step-by-step guide I had written about how to use @anchor_protocol to earn 19.5% APY on your stablecoins:

https://twitter.com/shivsakhuja/status/1467550237036187650?s=20

2/ @anchor_protocol facilitates decentralized lending and borrowing.

With this protocol:
- Lenders are earning 19.5%
- Borrowers are paying 18.65%

Wait a minute -- borrowers are paying less than lenders are earning?!

Yes, and it's not a ponzi -- here's how it works...

3/ There are 2 key things going on here:

1. The loans are over-collateralized. (can only borrow < 60% of collateral value)

So, if you have $100 of $LUNA as collateral, you will be able to borrow up to $60 of $UST stablecoin.

4/ 2. Collateral is staked for interest

This is where most of the money is being generated.

Let's run through the numbers.

5/ Currently, @anchor_protocol has around:

~$ 4.8B in deposits (earning interest)

~$ 2B being borrowed (paying interest)

~$ 6.3B in collateral (staked)

6/ At 19.5% APY paid out to depositors, @anchor_protocol needs to earn 19.5% * 4.8B = $936M in a year.

Now let's understand how @anchor_protocol earns that money..

7/ Borrowers are paying 18.65% on the $2B.

This generates 373M of revenue.

The 6.3B in collateral (mostly $LUNA) is being staked to earn interest. On $LUNA, that is currently ~9%.

This generates 567M of revenue.

8/ So @anchor_protocol will bring in 567+373 = 940M of revenue at these rates.

But they only need to pay out $936M in interest to the lenders.

The extra 4M is added to the Yield Reserve. 💰

9/ Currently, the Yield Reserve has ~$73M, which is used to cover any temporary shortfalls in the borrowing + staking revenue.

Now let's answer some questions you might have:

10/ What happens when borrowers collateral value falls? (Ex: if price of $LUNA falls)

The Loan-to-Value or LTV ratio must be < 60%.

If the LTV goes above 60%, borrowers are liquidated. 🏴‍☠️

I wrote about this here (and how to profit from this):

https://twitter.com/shivsakhuja/status/1468635649473331206?s=20

11/ Why would someone borrow money if they have collateral? 🤔

There are many reasons:

- Selling collateral is a taxable event, borrowing against it is not.

- If you sell your crypto, you lose out on potential gains. When you borrow stables, you maintain your crypto exposure.

12/ Why would someone pay such high interest rates on the borrowing?

If you expect crypto to go up 2x,3x,5x, etc then paying 18% to borrow against it isn't crazy.

Also... I lied about one thing.

13/ @anchor_protocol incentivizes borrowing by issuing $ANC tokens to borrowers.

They issue 19.35% in $ANC tokens to anyone who borrows, meaning
meaning you are getting PAID 0.7% to borrow.

Yes, seriously.

14/ This won't go on forever though..

40% of the $ANC token supply will be used to provide borrower incentives over 4 years.

Also important to note that the rates (borrowing, distribution, staking) fluctuate regularly.

15/ Another important note: roughly 7% of collateral is actually in $ETH not $LUNA.

$ETH has lower staking yield than LUNA (~5%). According to my math, Anchor is currently paying out slightly more than they are earning.

16/ They could increase the borrow rate or decrease the earn rate to make it sustainable if that continues.

A lot of this will fluctuate based on borrowing demand, market sentiment, token prices, etc.

The numbers above are primarily to illustrate the general mechanism. 🛠

17/ Hope this thread was useful to understand the mechanics of @anchor_protocol.

Don't forget the risks when you use any #DeFi protocol! 💀

Here are some resources you can use to do more research into Anchor 👇

18/ Anchor's App: The dashboard has a lot of information about the current numbers in the protocol.

app.anchorprotocol.com

19/ Anchor's official docs:
docs.anchorprotocol.com

This has all the juicy details of how it works described in depth.

20/ Yield Labs (@YieldLabs) has a great explainer video on how this works, if you prefer videos:

21/ One of my favorite DeFi YouTubers @phtevenstrong (The Calculator Guy) made an in-depth video going over the numbers and sustainability:

22/ I post threads about #crypto and #DeFi nearly daily.

Let me know what protocol /strategy you're interested in learning about next!

Like / RT / Follow - help a farmer out! 👨‍🌾

#WAGMI