Deposits of about $5 billion, or more than a third of the total, disappeared from Anchor, the Terra blockchain-based yield protocol, in recent days, amounting to a crypto-like bank run on one of the blockchain industry's most popular projects.
- Deposits on Anchor, which offered up to a 19.5% yield on deposits, plunged to $8.7 billion on Monday from $14 billion on Friday, according to data from the protocol's dashboard.
- Deposits into the blockchain-based protocol are largely in Terra's stablecoin, terraUSD (UST), which is pegged to the dollar.
- In recent days, the stablecoin has repeatedly lost its dollar peg, which appears to be causing a crisis of confidence among some traders and investors.
- "There were some pretty wild things happening in the Terra ecosystem last night, particularly related to the removal of the dollar peg," said David Shuttleworth, DeFi Economist at ConsenSys, in an email to CoinDesk. "This caused some market panic and prompted users to withdraw from Anchor."
- Terra's stablecoin and the financial system built around it are under pressure as UST has lost its dollar peg twice in just three days. UST is the largest algorithmic stablecoin, a type of dollar-pegged cryptocurrency that is not backed by assets and maintains its price by creating and destroying supply through an exchange with another token, in this case Luna (LUNA).
- Investors flocked to the Anchor Protocol to benefit from double-digit returns, catapulting the circulating supply of UST from $2 billion to a high of $18.5 billion in one year as investors needed UST for deposits. Critics described the high yield of the protocol as unsustainable because interest income from the bonds did not cover the yield distributions and an external source was needed to replenish reserves. Mirror Tracker shows that the Anchor Yield Reserve will be depleted in as little as one month and has dropped from $323 million to $176 million in the last 30 days.
- Ryan Clements, a professor at the University of Calgary, said algorithmic stablecoins are inherently vulnerable to losing their lock on the downside and entering a death spiral as investors lose confidence in price stability.
- To address the fears, Terraform Labs, a Terra development company, and other investors created a foreign exchange reserve called Luna Foundation Guard (LFG) to hedge UST in the event of market fluctuations. The LFG reserves amounted to about $3.5 billion after it acquired $1.5 billion in bitcoin (BTC) on Friday.
- After UST fell to $0.98 over the weekend, LFG announced it would borrow $1.5 billion in BTC and UST to defend its algorithmic stablecoin's peg to the U.S. dollar.
- ANC, the Anchor Protocol governance token that offers a percentage of protocol revenue, fell 35% in 24 hours and is down 87% from its all-time high reached on March 19, 2021, according to CoinGecko.