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Anchor Protocol and the promise of a “sustainable” 20% yield on stablecoins

Is it impossible to maintain, a Ponzi, the work of the devil… or is it a map for the future of finance? Let’s find out

Harry Hamburg
Harry Hamburg
18 min read
Anchor Protocol and the promise of a “sustainable” 20% yield on stablecoins

Update: As you probably know by now, we finally got an answer to my biggest question in this deep dive, "how safe and sustainable is Anchor, really?" My conclusion was, "who the hell knows?". But a few months after I wrote this piece, we got a conclusive answer. I covered it all here: I declare bankrupcy!

You know crypto is going mainstream when I’m happy to use the word stablecoin in a headline.

But with both the UK, US and just about every other government in the world publicly discussing stablecoins right now, I think it’s fair to assume most of you know what they are.

And if not, well, stablecoins are just a crypto token pegged to a particular currency, usually the US Dollar. So their price remains stable. Hence, stablecoin.

Today, we’re going to be looking at Anchor Protocol, which promises a “sustainable” 20% yield on Terra’s UST stablecoin. UST is a decentralised stablecoin pegged to the US dollar.

When people see the promise of a 20% yield they usually have one of two reactions:

  1. If they’re a “DeFi degen” (Decentralised Finance degenerate) – basically someone who spends their life chasing triple-digit yields with DeFi – they’ll probably roll their eyes.
  2. If they’re a regular person, they’ll think it’s impossible to maintain, a Ponzi scheme, the work of the devil, etc.

Personally, I fall somewhere in the middle… which completely disproves the “two categories” scenario I’ve just laid out.

Anyway, my point is, within the world of DeFi, a 20% yield is seen as run of the mill. But to the rest of us, it is absolutely bonkers.

I spent a lot of time talking about how being able to earn a steady 10% yield would change most people’s lives in this article.

And I would definitely recommend reading that as a primer on this.

But to sum up:

  • Savings accounts no longer keep up with inflation.
  • So people invest their money in the stockmarket instead.
  • Over time, the stockmarket tends to go up at 7%-10% per year.
  • But it doesn’t do that in a straight line. Some years it’s down, some it’s up. Just look at what’s happened over the last few weeks.
  • Taking into account this volatility, some smart people have worked out that you can probably withdraw 4% of your investments every year for the rest of your life.
  • This is called the safe withdrawal rate (SWR).
  • And that figure also takes into account average inflation over a long timeframe (all of this is proven and sourced in that article).
  • If someone could earn a safe and stable yield of 10%, then that 4% SWR would become 6%.
  • Which would make a profound difference to people’s lives.

As I said in that article:

With a 6% rule, instead of multiplying what you’d like to live off by 25 [as you do for the 4% rule], you’d only need to multiply it by 16.67.
With a 6% rule…
To “earn” the UK average wage of £29,900 a year, you’d need £747,500 £498,433.
To “earn” £50,000 a year, you’d need £1.25 million £833,000.
And to “earn” £100,000 a year, you’d need £2.5 million £1.67 million.
That’s a massive difference.
It would make financial freedom much more attainable for the average person.
And let’s not forget, they would get there a lot faster, too, because their savings would be compounding at a much faster rate.
In short, like I said at the beginning, being able to get a safe, reliable interest rate of 10% would be a gamechanger for most people’s lives.

Can you imagine how much difference a “sustainable” 20% yield would make to that equation?

Let’s find out.

So with a “sustainable” 20% yield, the 4% rule would become the 16% rule.

Which would mean that instead of multiplying what you’d like to live off by 25, you’d only need to multiply it by 6.25.

With a 16% rule…

To “earn” the UK average wage of £29,900 a year, you’d need £747,500 £186,875.

To “earn” £50,000 a year, you’d need £1.25 million £312,500.

And to “earn” £100,000 a year, you’d need £2.5 million £625,000.

That is an absolutely incredible difference.

And just as an aside, it’s also worth pointing out that since I wrote the original article some things have changed.

Inflation is partying at 1970s levels: CPIH (which takes into account housing costs) is currently 4.8%. And RPI (which is what they use to set council tax and rail fare increases, among other things) is 7.5%. Wow.

Also, the Office for National Statistics (ONS) reports that the median weekly income of full-time workers in 2021 was £611 per week, which works out to £31,772 per year.

You’d expect that over time inflation will revert back to the mean of around 3%. But who knows.

Financial freedom for the rest of your life with less than £200,000 in the bank, what’s the catch?

Now, to be clear, I am not suggesting for a second that anyone should go and dump their savings into Anchor Protocol and try live off them.

That would be a recipe for disaster. No one really knows how safe or stable Anchor’s 20% yield will prove to be in the long run.

And as we’ll see soon, it’s already on dodgy ground.

Here’s what I think’s interesting about Anchor (I’m going to just shorten it to Anchor from now on).