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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

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).

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