Thread by @Crypto8Fi

Anchor's Yield is changing.

Moving from a stable to a dynamic rate.

Here's what you need to know on everything impacting #Terra , explained simply.

🧵

Part 1: Understanding Anchor

Anchor Protocol is a DeFi protocol that allows users to enjoy a financial system of loans based on stablecoins.

The idea is simple: a lender deposits their $UST in #Anchor and that $UST is used to make collateralized loans for interest accrual.

Changes

#Anchorprotocol, the decentralized money market built on the Terra blockchain, will dynamically adjust interest rates each month following a community vote that passed on Thursday.

https://twitter.com/anchor_protocol/status/1507052921745256449?s=20&t=Mil204V9v8kSWNxFoAhmIw

Proposal impact

With the new proposal, payout rates would increase by 1.5% if yield reserves increase and drop by 1.5% if yield reserves fall by 5%.

The payout rate change will be capped at 1.5%, which means that this is the maximum they can increase or decrease by.

Sustainability

The move is aimed at making #Anchor more sustainable in the longer term.

Anchor used to offer payout rates of up to 20% for depositing $UST, #Terra's dollar-pegged stablecoin.

Now $ANC rates will depend on yield reserves.

What are Yield Reserves

#Terra yield reserves are the amount of capital held on Terra to sustain its current 19.5% yield rate. #Anchor locks over $14.34 billion worth of tokens and is the largest lending tool on Terra, according to tracking data.

defillama.com/protocol/anchor

Rates

#Anchor’s interest rates are generated via staking rewards from major proof-of-stake blockchains and are hence considered more stable than money market interest rates.

In simple terms, 20% is unsustainable in the long term.

Let me present you with an analogy:

Imagine there are 10 sweet shops with finite supply lined up in a row.

You have 100 people all looking to buy different sweets.

But one of those shops is selling their sweets at a significantly lower price than everyone else.

Where are people going to go to buy their sweets?

What happens when the sweet supply runs out?

This is similar to the #yieldreserve and it has been drying out as individuals and institutions flooded into #Anchorprotocol on #Terra.

The yield reserve has had short term injections, not longer term moves.

coinbynews.com/terra-adds-ust…

Community Response

Obviously this gives way for lower rates on loans.

People are not all going to be happy. If there is one thing I have learnt from being on crypto twitter, it is you cannot satisfy everyone.

But will this affect #Terra as it is a massive driver into TVL?

Capital movements

It is unlikely, in fact near impossible that we will see capital movements out of the #Luna ecosystem simply because of a 1.5% drop in rates.

Consistent rates however, that put it on a more level platform with its' competitors will see TVL outflows.

A Time Game

Rates are currently set to drop by 1.5% as the yield reserves fell last month.

It will be something the whole crypto space watches for as TVL starts to adjust to dynamic rates.

Remember-- it works both ways. Rates can increase too.

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