Revisiting the Catastrophic Downfall of LUNA - Part 2: The Failing Anchor Protocol (May 21, 17:00 UTC+8)

Anchor’s 19.5% high yield staking was nearly unheard-of.

As a lending protocol, Anchor sits between UST depositors and borrowers. To maintain the lucrative staking reward, a UST reserve fund was set aside in the case of shortfall. The idea goes as if the bank continued to pay you high yield interest despite losing money so you would keep depositing.

The protocol was soon met with worries and doubts about its sustainability. After all, the lending protocol would collapse completely if the reserve fund were to be depleted.

Recalling from Part 1, at the time before Terra’s collapse, more than 75% of UST supply was staked in the protocol. The Anchor Protocol was essentially deemed “Too Big to Fail”.

The transparency afforded by decentralised blockchain was seen by many investors as the last line of defense to mitigate Anchor’s unsustainability. But later this same belief turns out to be ironic when a key event impacted the protocol in May 2022 that ultimately led to the demise of Terra Ecosystem.