Can you trust a savings account offering 20% interest?
The average interest rate on a typical US savings account is just 0.06% these days. Even the most generous banks do not offer more than 1% per year. Money market accounts aren’t much better, and even a high-yield certificate of deposit won’t protect your hard-earned savings from the ravages of inflation.
But there are new kids in town. You can think of cryptocurrencies as high-risk, high-reward bets, but there are also so-called stablecoins that produce extremely stable long-term charts – and some of the accounts associated with them have interest yields. two digits.
The Anchor Protocol account based on the TerraUSD (UST -0.17%) token is the most successful stablecoin solution I have seen. Let’s take a look at the pros and cons of putting your long-term savings there.
What is the Anchor Protocol?
It doesn’t even look like a bank account at first glance, does it? From the name, you might think we were talking about a procedure to keep your boat in one place.
That’s not too far from the truth, in a metaphorical sense. Anchor Protocol is a money market system where people who want to borrow capital can connect with other people who want to earn a decent return on their cash. This is done through a decentralized finance application based on the Terra USD stablecoin, backed by collateral in the form of several different cryptocurrencies. The exact combination of collateral tokens is automatically managed by two different smart contract platforms, and ultimately managed by the Earth (LUNA -3.38%) blockchain.
The entire Anchor Protocol system currently holds $14.0 billion in deposited funds with $5.9 billion in collateral value. Today, about $3.1 billion is borrowed by users on the other side of the equation. The annual effective percentage yield (APY) for anchor protocol holders is 18%, and the annual effective percentage rate (APR) for borrowers is 10.6%. These values fluctuate; the APY was 19.6% on April 30, for example.
You can get started with Anchor Protocol in several different ways. Its cloud-based dashboard lets you add money to your digital wallet through a credit card service or through the popular Apple Pay and Google Pay platforms. You can also find a decentralized finance application that has included a small amount of standardized code that adds Anchor protocol support to any software system. Or you can get really nerdy about it and run this code on your own computer.
But wait, there’s more! You can also buy Terra USD tokens directly and deposit them into an Anchor Protocol service. There are so many ways to go about it, and I’m probably still missing an option or two.
So this is it. With Anchor Protocol, you can earn a generous annual interest rate by letting others borrow your money through a decentralized finance app.
The fundamentals of the pegging protocol are not that different from the money market accounts of an old-fashioned bank. Banks offer loans to certain people that are secured by assets invested by a different group. The technical machines and the actual assets involved may be different, but it’s a fairly familiar concept.
These annual interest rates are hard to beat. If you trust the pegging protocol to deliver returns at these levels for a long time, this seems like an obvious destination for your cash savings.
Traditional savings or money market accounts don’t change their returns very often. When they do, you will receive a letter in the mail explaining what is happening. In most cases, however, you can expect the return you signed up for to remain consistent over the years.
Anchor Protocol does not do this. Its effective return is adjusted monthly, aiming to stay within the 15-20% range. In May 2022, the target was changed from 20% to 18%, with the idea that this slightly lower rate would be more sustainable in the long term. Most Anchor Protocol users discovered this tweak the hard way and then had to research the official explanation themselves.
This rate cut illustrates a broader point. The terms and conditions of this ultra-generous system can change at any time. You can’t count on the “about 20%” target return to stay forever.
Additionally, the lack of a central bank with local branches and real people behind the counter may be a deal breaker for some savers. Anchor Protocol doesn’t have much of a customer service system unless you’re comfortable contacting developers and other users through online channels or social media.
The ugly one
If you just want a super simple savings account that will grow your money at a steady rate forever, Anchor Protocol isn’t for you.
Nor is it for you if you view cryptocurrencies as tulip bulb fad, as master investor Warren Buffett does.
Should you start an Anchor Protocol wallet?
This system isn’t for everyone, but I see its appeal in certain situations.
Anchor Protocol could be a great choice if you want inflation-beating interest rates and don’t mind the involvement of cryptocurrency technologies. It’s even better if you’re confident that stablecoins will really hold firm in the long run and that Terra USD is a reliable implementation of the stablecoins idea. Your returns may vary over time, but earning higher returns than you’d get from regular savings accounts shouldn’t be a problem.
Finally, to use Anchor Protocol, you will also need to be comfortable managing your savings through an unfamiliar system of cloud-based platforms and mobile apps.
That’s a lot of caveats. That being said, crypto investors who want to keep tabs on changes and the general health of Anchor Protocol may want to take a closer look at this high yielding platform.