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This article was originally written as a typical case in an article discussing the risk-free interest rate in the PoS public chain, but it was found in the process that it can be completely independent, so it is listed separately and published in advance.

Terra can be said to be the public chain with the most complex financial architecture design in the current encryption industry. The issuance and anchoring model of its native stablecoin UST has also sparked many heated controversies. In this paragraph, we will not discuss whether Terra is a Ponzi scheme, but focus on two important interest rates in its ecology: Luna's PoS pledge rate and Anchor's UST deposit rate.

Who is the risk-free rate on Terra?

Since the main goal of Terra is not simply to build a smart contract platform, but to issue the stable currency UST and promote its adoption. Therefore, Terra's economic model is also significantly different from other smart contract public chains. Terra's native token Luna is not only used to pay public chain gas fees and participate in governance, but also needs to issue stable currency UST by burning Luna.

Therefore, for Terra, it seems that there are two currency systems in its ecology, and these two tokens also have relatively independent interest rate systems. One of them is the Luna interest rate determined by Terra's PoS pledge yield, and the other is the UST stablecoin deposit rate provided by the famous deposit application Anchor in Terra.

Currently, Luna's interest rate is about 7%, while UST's deposit interest rate in Anchor is as high as 19.4% (see the figure below).

So, who can represent the risk-free interest rate of Terra ecology?

Based on the previous analysis, it can be seen that the PoS pledge rate guaranteed by minting rights can be considered risk-free. Therefore, Luna, which can be used for PoS staking in Terra, and its rate of return are obviously more suitable as Terra's risk-free interest rate.

So the next question is, can the UST deposit rate as high as 19.4% provided by Anchor be regarded as a risk-free rate? In other words, is the interest rate provided by Anchor also guaranteed by the coinage right, or is it from the normal operating profit of the agreement? Is there even another possibility that Anchor is just a Ponzi scheme that borrows new to pay old?

Is Anchor a Ponzi scheme?

Maintaining stablecoin yields close to 20% to depositors over the long term, even in the crypto industry, is clearly unsustainable. So, what mechanism does Anchor rely on to maintain this abnormal income level? To answer this question, we first need an appropriate analytical framework.

At present, the mainstream encrypted economic system can be basically divided into two categories. One is that the protocol directly controls the minting rights of the native currency in the system, and the tokens minted by it are used as the main means of payment in the economic system, such as public chains, chain games, etc. economic system. Since this kind of economic system involves the issuance and recycling of currency, it is very similar to the national economy in the real world, so its analysis also requires the use of a more complex macro analysis framework.

Another economic system is an application such as Anchor or Lido. Its basic business model is to obtain profits by absorbing resources outside the system and managing them to add value. This type of economic system does not have the right to issue and recover the settlement currency within the system, so it is more similar to a traditional profit-oriented company. Therefore, if you want to analyze this type of application, you can directly apply the classic financial analysis framework, that is, describe it through the balance sheet and income statement.

Of course, some people will say that the Anchor protocol also issued its own native token ANC, which also has the right to issue currency. That's right, but these tokens will not participate in the main business of Anchor, which is the asset management business of UST, and will not be used as the main payment settlement intermediary by any economy. Therefore, these tokens are essentially more like company shares that rely on profits or governance rights to capture value, rather than currencies circulating in a virtual economic system.

From another perspective, without the participation of ANC tokens, Anchor's UST deposit and loan business will not be substantially affected, and it can still continue to operate according to the current business logic. Therefore, ANC is not an integral and integral part of Anchor's business, but only serves as an external credential for capturing profits or distributing governance rights outside the system.

The significance of the existence of ANC is more to discount the future profit expectations of the agreement, and to subsidize users in the early cold start stage of the project. This is very similar to the subsidy war in the early Internet industry, except that the red envelopes issued were changed from cash to company stocks.

Next, let us directly analyze the composition of Anchor deposit income through the traditional income statement.

1. The cost of Anchor

Anchor's biggest and only cost is to pay depositors interest on deposits. Here we take the data on March 31 as an example to calculate. The current deposit size of UST in Anchor is about 12 billion UST, and the deposit rate is 19.4%. Therefore, the daily cost of Anchor is about 6.4 million UST.

2. Anchor income

Anchor's income includes two parts, one of which is the loan interest charged by Anchor when it lends out loans.

From the screenshot above, we can see that the interest rate that needs to be paid to Anchor to lend UST from Anchor is 12.69%. Of course, since the lender will receive ANC tokens, the actual cost of the loan is only 4.45%. However, these subsidies only reduce the cost of users, and have no direct impact on Anchor's protocol revenue. Therefore, Anchor's daily interest income is still 32.1 billion UST*12.69%/365, which is approximately equal to 1.118 million UST.

Another part of Anchor's income comes from the collateral pledged by the lender to the Anchor agreement, that is, the income generated during the mortgage period by the liquid pledge certificate bLuna.

We have estimated based on the data in the Anchor dashboard, and we can conclude that the current daily income of the three collaterals is about (4.87 billion*6.9%+1.68 billion*4%+0.17 billion*7.2%)/365, which is approximately equal to 1.1 million UST.

In addition, it can be seen from these data that, as the main source of income of Anchor, the interest rate generated by the three collaterals supported by Anchor currently does not exceed 10%. In other words, even if the size of the collateral increases to twice the size of the total deposit, the income it generates cannot cover the cost of interest expenses. Therefore, Anchor's current business structure cannot be profitable on its own, regardless of market conditions.

After the statistics just now, we can finally conclude that Anchor's daily net operating profit is 1.118 million + 1.1 million-6.4 million, which is approximately equal to -4.18 million UST. In other words, Anchor is currently losing more than $4 million a day to maintain the normal operation of the business.

So the next question is, where does the money come from? It is important to know that Anchor itself does not have the right to mint UST. If seigniorage cannot be collected from the entire system by printing money, then the only way to make up for losses is to borrow new ones to repay old ones, and to obtain subsidies from outside the system. This is also the basic principle of Anchor. A key part of nature.

Fortunately, Anchor chose the latter method, which is to establish a reserve pool through external subsidies to make up for daily operating losses.

The subsidy reserve pool was established last year with an initial capital of approximately 70 million UST. After this part of the funds was exhausted, the Terra official (Luna Foundation Guard) made a second round of capital injection of about 500 million UST in February this year. As of now, the balance of funds in the account is only 360 million US dollars. According to the current burning rate, it can only be supported for another 3 months.

For daily subsidy consumption, readers can pass thiswebsitewebsite

Monitor it more intuitively.

Finally, let's spend a little more time to answer what is the essential difference between the UST interest rate provided by Anchor and Luna's interest rate.

To put it simply, Anchor’s interest rate comes from commercial profits and subsidies, much like a large central enterprise that takes the initiative to bear losses in order to undertake national phased strategic tasks, and maintain operations through continuous capital injection from the Ministry of Finance. Therefore, the interest rate of Anchor is essentially commercial credit plus the invisible guarantee of the Ministry of Finance of the public chain. The rate of return of Luna is completely guaranteed by the coinage right, which reflects the sovereign credit of Terra, the public chain. (Commercial credit is guaranteed by commercial profits, and sovereign credit is guaranteed by minting rights.)

Therefore, for the question at the beginning of this article, we can now give a clear answer, that is: Anchor is not a simple Ponzi scheme, but Anchor's current business model is obviously unsustainable.

What is Anchor's endgame?

Anchor's current model is obviously unsustainable, but where Anchor will go in the future is not something that Anchor can decide by itself. As mentioned above, the main significance of Anchor at this stage is to cooperate with the Terra team to achieve phased strategic goals.

And this strategic goal is to build a reservoir for UST before Terra finds the real main usage scenarios of UST. If the subsequent promotion of UST goes smoothly, Anchor can gradually reduce subsidies, lower deposit rates, and gradually release UST liquidity to the market.

And if the promotion of UST is not smooth enough, Anchor must continue to adopt high subsidies to recover liquidity in order to prevent UST issuance and Luna token prices from entering a death spiral. This is why Terra is currently being questioned by many people as Ponzi The main reason for innovation.

Therefore, judging from the current development stage, Terra obviously adopts the strategy of exchanging space for time to gradually promote the scope of use of UST. It has to be said that this is a strategic choice with an extremely delicate design but also quite bold. However, within the limited time exchanged by Anchor, whether Terra can find a truly suitable usage scenario for UST will be the core proposition that will test the Terra team for some time to come. And the way to answer this key proposition will ultimately determine whether Terra will become a great financial innovation, or another blockchain scam that will eventually collapse.