Luna Foundation Adds $450M to DeFi Protocol’s Reserves

February 20, 2022 5:01 pm Comments

The Luna Foundation has recently announced that it will add a total of $450 million to the Anchor yield reserve which will support the network’s DeFi lending and borrowing protocol.

The Luna Foundation Guard (LFG) was founded in order to stabilize Terra’s stable coin UST and it plans to utilize this $450 million in order to maintain the high rates offered to depositors.

Right now, 19%-20% is offered for the next year which is much higher than industry interest rate standards of 0%-8%.

The Anchor yield reserve is critical for the Terra (LUNA) economy and this new injection of cash is allowing investors of LUNA and UST to stay optimistic.

BeInCrypto reports:

Anchor is at the heart of the Terra (LUNA) economy, with $10.07 billion in total value locked.

However, the protocol’s yield reserve, a form of a savings account, has dropped sharply since December due to a lack of borrowing appetite, threatening to shutter the Terra ecosystem.

The DeFi lender pays about 20% interest on deposits of UST, the U.S. dollar-pegged stablecoin native to Terra. Known as “anchor rate”, the rate is fixed, and significantly higher compared to rates of between 0% to 8.5% currently offered by industry competitors.

Anchor is able to pay this high rate from interest charged on loans, liquidation fees, and yield earned from borrowers’ collateral. But with the crypto market downturn, borrowers have been in short supply, forcing the protocol to dip into its reserves in order to sustain its “anchor rate,” built to become an industry benchmark.

With that being said, this new cash injection is meant to only be a short-term solution until there is a sustainable model.

The plan is to come up with a solution that encourages users to borrow more from the ecosystem and to continue to grow Anchor so that it one day achieves mass adoption.

Retrograde Money, a Terra community participant, had also proposed a new idea that would essentially provide higher rewards to borrowers who lock their tokens in Anchor for a longer period of time.

The plan is to incentive borrowers and avoid over-reliance on the capital reserves.

If this plan does go through, it would mean big things for both the LUNA token as well as Terra’s stable coin UST.

CryptoNewz reports:

By incentivizing borrowers, Retrograde hopes to maintain the balance between deposits and loans, and prevent a situation that compels Anchor to dip into its yield reserve to the extent that it risks depletion.

Under Retrograde’s proposal, the ve tokens cannot be transferred, though this may happen at a later stage, when they can be converted into a non-fungible token (NFT).

The plan has so far drawn mixed reactions from the Terra community, with DeFi investor David Koh suggesting the vote escrow token model might not work for Anchor because “it is not directly applicable” to the protocol.

The proposal will be put to a vote.

At the time of writing, Terra’s UST is one of the most popular stable coins ranked below Tether and USDC and currently has a total market cap of $12 billion.

LUNA, the native token of the Terra ecosystem, is the 10th largest blockchain by market cap according to CoinMarketCap.

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