Anchor Protocol Will Readjust Interest Rates Each Month, ANC Falls by 5%

Anchor protocol, the decentralized money market built on the Terra blockchain, will dynamically adjust interest rates each month following a community vote that passed on Thursday.

With the new proposal, payout rates would increase by 1.5% if yield reserves increase and drop by 1.5% if yield reserves fall by 5%. The payout rate change will be capped at 1.5%, which means that this is the maximum they can increase or decrease by.

The move is aimed at making Anchor more sustainable in the longer term. Anchor used to offer payout rates of up to 20% for depositing UST, Terra's dollar-pegged stablecoin.

Yield reserves are the amount of capital held on Terra to sustain its current 19.5% yield rate. Anchor locks over $14.76 billion worth of tokens and is the largest lending tool on Terra, according to tracking data.

Anchor’s interest rates are generated via staking rewards from major proof-of-stake blockchains and are hence considered more stable than money market interest rates.

Meanwhile, some Anchor users criticized the development on the proposal’s official discussion forum. “Anchor’s competitive advantage is a STABLE deposit rate. If we switch to a dynamic rate we’re giving up on that advantage,” pseudonymous user ‘fulltimecrypto' wrote. Other users were more upbeat. “We’re big enough now. It’s time to mature a bit and realize 20% on stables is excessive,” said ‘DefiantProtocol.’ “Cutting the rate in half wouldn’t lead to a significant flight of capital.”

Rates are currently set to drop by 1.5% as the yield reserves fell last month. Anchor’s native ANC token dropped as much as 5% in the past 24 hours following the development and trades at $2.56 at the time of writing.