Earn 20% on USD on Terra’s Anchor Protocol — Benefits & Risks
Forget Banks — Enter the Era of Stablecoin Passive Income?
Edit: See my walkthrough on YouTube here.
Stablecoins play an integral role in the cryptocurrency market.
They provide crucial liquidity in exchanges and serve as a risk-off safe-haven asset for investors and traders.
Recently, Terra’s LUNA token exploded into the Top 10 List, boasting a formidable $40 billion+ market cap that rivals competing blockchains like the Binance Smart Chain (BNB), Cardano (ADA) and Solana (SOL).
Wait — what does Terra LUNA have to do with stablecoins?!
Everything!
The purpose of LUNA is to stabilise the price of Terra’s stablecoins. In fact, Terra is a network of decentralised algorithmic stablecoins.
Terra’s USD stablecoin — called TerraUSD (UST) — has become legendary among investors for returning a stable 20% per year on Terra’s Anchor Protocol.
Want to save money but can’t endure the stomach-churning volatility of real cryptocurrencies like BTC & ETH? UST may just be your dream proposition. However, one must also be educated about the risks.
Join Medium here and gain unlimited access to the best crypto & investing articles on the internet.
In this article, I’ll explain:
- Why stablecoins are crucial for the cryptocurrency market
- Why stablecoins appeal to risk-averse investors AND new DeFi users
- How TerraUSD (UST) works and how to start investing
Are you a fan of passive income?
Get $25 free BTC on Nexo with $100 deposit (link) and $50 free BTC on Celsius with a $400 deposit (link).
Nexo and Celsius pays you 5–6% annual interest on BTC. Perfect for HODLers.
Why Stablecoins Matter
Stablecoins serve several important functions in the crypto markets.
Firstly, they provide liquidity on exchanges. Trading between fiat and cryptocurrencies is inherently fraught with issues, since fiat currencies are typically managed by traditional banks.
Solution? Create a blockchain version of your fiat money. Enter stablecoins!
That’s why bitcoin trading on exchanges is typically done with a BTC/USDT or BTC/USDC pair, and not BTC/USD.
Secondly, investors and traders typically escape to fiat as a ‘risk-off’ asset during times of market uncertainty. Having cryptocurrencies that are pegged to fiat currencies therefore play a crucial safe-haven role in the crypto market.
Thirdly, stablecoins allow investors to stay in the crypto markets for a prolonged period of time.
Is the market about to tank? Escape to stablecoins without having to exit back to fiat USD.
In a bear market? Why not stake or lend out your stablecoins for some great returns. This brings me to the next section.
Good for Simple Investors & DeFi Newbies?
Why is saving money terrible financial advice?
Inflation outpaces the minuscule returns you get in a bank account by an order of magnitude. Term deposits don’t keep up either.
In short, the real value of your hard-earned money depreciates by the year, eaten away by government monetary policy. Namely the infinite money glitch.
To keep pace, one can invest in the stock market or real estate. The S&P 500 provides an average historical return of around 9–11%, which outpaces inflation and actually grows your wealth. Woohoo!
Alternatively, you can convert your USD into USDT/USDC stablecoins and get between 7–12% returns on fintech platforms like Crypto.com, Celsius and Nexo — and on decentralised platforms (DeFi) platforms.
As a result, stablecoins provide investors a relatively riskless way to get their toes wet into DeFi.
No need to buy real cryptocurrencies like bitcoin and ethereum. Newbies can stick to the safety and stability of fiat currencies by investing their stablecoin equivalents, like USDT and USDC, for some nice returns.
Speaking of returns, it gets a whole lot better — albeit not without risks.
The TerraUSD stablecoin (UST)
Fiat currencies are highly centralised money.
Issued by central banks like the US Federal Reserve that can inflate away the value of its USD at a whim, fiat currencies provide governments economic power over its citizens. That’s a main reason why people love bitcoin.
Stablecoins are blockchain versions of fiat currencies. However, to maintain their tight peg to fiat currencies, stablecoins tend to be intrinsically centralised as well.
When you buy $1 worth of Tether (USDT), its owner Bitfinex mints $1 worth of it. When you sell it, Bitfinex destroys it. A centralised company needs to provide enough liquidity while keeping their books balanced.
This creates problems of trustworthiness. Many people don’t trust the folks at Tether, who has been fined by US regulators for lying about the state of their finances.
Enter decentralised algorithmic stablecoins, such as Terra’s offerings.
When you buy $1 worth of TerraUSD (UST), $1 worth of LUNA is burnt. When you sell $1 worth of UST, $1 worth of LUNA is minted.
Terra’s native blockchain token LUNA absorbs the price volatility of their stablecoins. And crucially, this ingenious system does away with the need for a centralised company to manage and maintain the peg.
As users mint new Terra by burning LUNA, the price of LUNA goes up as Terra’s adoption increases. This has been key to LUNA’s explosion in price during the second half of 2021.
But why has Terra become so popular?
A major part of it are the lucrative DeFi opportunities, such as the terrific 20% return on its Terra USD stablecoin (UST) on Terra’s own Anchor Protocol. This is almost twice the average S&P 500 return, and 1–2 magnitudes better than saving your money in a bank account. Awesome right?
Yes, but please be aware of the risks too.
Algorithmic stablecoins are not market cycle battle-tested. In essence, the majority of algo stablecoins implementations so far have failed, with Terra USD left standing. Terra founder Do Kwon has gotten UST to work, but it has not been tested under a black swan-like event.
Not financial advice, but I would not put all my eggs in one basket.
Staking UST on Terra’s Anchor Protocol
Alright, you now have some understanding of the technology, benefits and risks of UST — what are the next steps to start investing?
In short, you’ll need to:
- Open a Terra Station wallet. This is Terra’s official Web 3 wallet and it takes 2 minutes to create an account. Make sure to store your private keys safe!
- Buy some UST on an exchange such as Binance and transfer it to your Terra Station wallet. Once the funds have arrived, click on the Anchor Earn button and make a deposit.
That’s it. Super simple and quite a gentle introduction to DeFi.
See my detailed end-to-end walkthrough on YouTube here.
Wait, aren’t we supposed to use Terra’s Anchor Protocol? But all we did was click Earn in our wallet?
Yes, staking on Anchor is easier than it usually is. One generally interacts with a DeFi protocol on its dedicated website. You’re supposed to go to Anchor’s website, connect your wallet and then deposit.
However the nice folks at Terra integrated Anchor’s functionality straight into the Terra Station wallet in 2021, saving users hassle. Gotta love simplification!
Overall, Terra is a great blockchain with amazing UX. Big things appear to lie ahead for the network, its native token LUNA and its suite of decentralised algorithmic stablecoins.
It remains to be seen the sustainability of the 20% yields. As they say, when things are too good to be true…
Have a great day.
Follow me on Twitter & YouTube for regular analyses and guides.
My Crypto Articles
- Unlock unlimited access to Medium by joining here.
- When Will the Bear Market End? Macro 101 for Crypto Investors
- A Review of the Cryptocurrency Market in 2022
- Web3 Gaming — What do Crypto, NFTs & Metaverse offer?
- FTX’s Collapse & Solana’s Long-term Impact
- Polygon & Solana — 6 Killer Crypto/NFT Use Cases
- A Brief History of NFT Marketplaces
- Compound Interest is the 7th Wonder of the World
- How to Generate Passive Income with Crypto
- Crypto Passive Income on BNB Chain
- Move & Earn Crypto — 6 Month Review of STEPN
- PancakeSwap’s High APY Pools — What’s the Catch?
- Cardano, Avalanche, Solana Staking Guides (2022)
- Cardano, Avalanche, Solana Price Predictions (Bull Market)
- How to Make Crypto Price Predictions
- Top 3 Price Prediction Mistakes
- Crypto VISA Cards — Cashbacks for Every Purchase?
- How to Build Wealth like Smart Money
- Is Crypto.com’s Earn Program Worth It?
- Understanding Terra’s Anchor Protocol
- How to Participate in Initial DEX Offerings
- Memecoin Speculation — Is It Worth It?
- Why SHIB Can Never Reach $1 (or even close)
- Want to Retire Early? Buy Bitcoin
- Democrats vs Republicans — Which Party Better for Markets?
