How Terra Founder Do Kwon Meddled with Anchor's Interest Rate: A Deep Dive
The collapse of Terra (LUNA) and its stablecoin UST sent shockwaves through the cryptocurrency market. A key element in this drama was Anchor Protocol, the flagship savings protocol of the Terra Luna ecosystem, and the role of TerraForm Labs founder, Do Kwon, in manipulating its interest rates. This article delves into the allegations and evidence surrounding Kwon's interference with Anchor's yield, shedding light on the controversial decisions that contributed to the eventual downfall.
The Anchor Protocol: A Promise of High Yield
Anchor created demand for Terra. Unlike stablecoins such as Tether and USDC, Terra wasn’t directly backed by reserves. Instead, it was known as an “algorithmic” stablecoin, relying on arbitrage and complex mechanisms to maintain its peg. A central promise of the Anchor Protocol was its high interest rate for depositors. But how did this high rate originate, and what was Do Kwon's involvement?
Do Kwon's Alleged Intervention: From 3.6% to 20%
A new report claims that Do Kwon, Founder of TerraForm Labs and Terra (CRYPTO: LUNA), intentionally hiked Anchor Program’s interest from 3.6% to 20%, despite warnings. According to Mr. B, the Anchor Protocol platform was designed to only offer an interest rate of 3.6%. The Wu blockchain took to Twitter, explaining that the initial interest rate of the Anchor protocol was initially 3.6% until Do Kwon rejected it. Then, the Terra founder bumped the interest rate, allegedly to attract more users and fuel the growth of the Terra ecosystem.
This intervention raised concerns from the beginning. The artificially high yield wasn't sustainable and relied on external capital injections to maintain its stability. This led to a reliance on a Ponzi-like structure, where new deposits were used to pay existing depositors.
The Mechanics of Anchor's Yield Generation
Currently, Anchor borrowers pay around 10% APR on their loans. Borrowers also have to put down significant collateral. Anchor generates yield on the collateral. Do Kwon, co-founder and chief executive officer of Terraform Labs, laid out a series of measures on Jan. 28 to tackle the issue of depleting reserves on Anchor. These measures proved insufficient to address the underlying problem: the protocol was unsustainable at the high interest rates it offered.
Declining Reserves and the Inevitable Collapse
Anchor, the flagship savings protocol of the Terra Luna ecosystem, has seen its reserves decline by 35.7% in the past seven days, according to Terra.Engineer. This decline was a symptom of the unsustainable model. As reserves dwindled, maintaining the high interest rate became increasingly difficult, eventually leading to the de-pegging of UST and the subsequent collapse of the entire Terra ecosystem.
The Aftermath and Lessons Learned
The Terra/Luna collapse serves as a stark reminder of the risks associated with algorithmic stablecoins and unsustainable DeFi protocols. Do Kwon's alleged meddling with Anchor's interest rate highlights the dangers of centralized control and the importance of transparency in decentralized finance. Investors must carefully evaluate the underlying mechanics and sustainability of any project before committing their capital.