67% of UST’s Demand Comes from Anchor Protocol: Stablecoin Now 3rd Largest
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67% of UST’s Demand Comes from Anchor Protocol: Stablecoin Now 3rd Largest

Over 67% of UST tokens are locked on Anchor because of its generous APY, but analysts claim this is not sustainable.
Neither the author, Ruholamin Haqshanas, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Terra’s decentralized stablecoin UST has become the third-largest stablecoin by market capitalization. The stablecoin has been expanding its market cap aggressively, growing by nearly 100x since the start of 2021. However, this has stirred up concerns, with some arguing that UST could face liquidation problems as it gets bigger. 

UST Surpasses $17 Billion in Market Cap

UST, a dollar-pegged algorithmic stablecoin, has surpassed Binance USD (BUSD) to become crypto’s third-largest stablecoin. Notably, the stablecoin’s growth has been exceptional, rising from $180 million at the beginning of 2021 to over $17.6 billion as of April 18. 

Tether (USDT) and USD Coin (USDC) are the only two stablecoins preceding UST, each commanding $82 billion and $49 billion in market cap, respectively. These two stablecoins are built similarly, with their companies holding a dollar-equivalent asset for every stablecoin in circulation — at least theoretically. 

However, UST is different in that there is no centralized entity holding its reserves assets. Instead, the stablecoin uses LUNA, Terra’s governance and staking token, to keep its dollar peg through an algorithmic incentive mechanism. This has been made possible through arbitrage traders, who can use the inefficiencies in the ratio between LUNA and UST to profit off the difference while simultaneously helping UST hold its peg. 

For instance, when UST is trading for more than a dollar, arbitrageurs can burn LUNA and mint UST. This way, they earn a profit while increasing the supply of UST which would bring its price back down to its peg. Similarly, when UST is trading for less than a dollar, arbitrageurs burn UST to mint LUNA. This decreases the supply of UST and brings its price back up to its peg.

However, with the UST market cap increasing at an unprecedented rate, some have expressed concerns that the algorithmic stablecoin might not be able to maintain its peg. Tether Chief Technology Officer Paolo Ardoino said:

“If you have a liquidation [with an algorithmic stablecoin of UST’s size] with this market, you can still handle that. But imagine if you have a $80 [billion] or $100 billion market cap stablecoin like tether that’s [primarily] backed by digital assets. It’s really hard to predict what will happen and [know] if there will be enough liquidity to backstop that immense cascade.”

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Nearly Two-Thirds of Demand for UST Comes From Anchor

Another potential concern is that more than 67% of demand for UST comes from DeFi lending protocol Anchor. In other words, around 12.5 billion UST tokens are currently locked in Anchor. That is mainly because Anchor offers a generous 19.48% APY for those willing to deposit their UST tokens. 

Some argue that this is not sustainable and when Terra fails to maintain that yield UST holders could proceed to sell their tokens. Given that around 70% of UST token holders are on Anchor, a sell-off of this magnitude could easily lead to UST losing its dollar peg and crashing. 

However, in an interview last month, the founder and CEO of Terraform Labs Do Kwon defended the high rate offered by Anchor, arguing that this is a reflection of the current level of returns offered by DeFi. He said:

“It’s actually not unnatural for currencies of growing economies to offer higher interest rates than those of mature, stable economies. I think that’s going to set the thesis for what the Terra ecosystem is going to look like and its monetary policy.”

While there are certain issues with UST, it is worth noting that other stablecoins are also not without controversy. Particularly, there have been concerns that Tether, which was revealed in March last year that only 2.9% of its tokens were backed by cash reserves, could collapse in the event of a run. 

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Do you think Anchor’s offered APY rate is sustainable? Let us know in the comments below.

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