Unprecedented! DeFi app promising 20% interest on stablecoin deposits raises concerns
A nearly 20% interest rate is unheard of in most of traditional finance. But that’s exactly what Anchor Protocol is promising people willing to deposit the crypto stablecoin UST into its decentralized finance app.
It’s a hefty return for simply parking an asset in a savings account when most regular banks provide less than 1%. But according to Do Kwon, the man behind the Terra blockchain powering both Anchor and UST stablecoin, the high interest rate is a reflection of the current level of returns DeFi can offer investors.
“It’s actually not unnatural for currencies of growing economies to offer higher interest rates than those of mature, stable economies,” Kwon said in an interview. “I think that’s going to set the thesis for what the Terra ecosystem is going to look like and its monetary policy.”
Anchor’s current rate of 19.45% is an ambitious promise, even for an industry known for its explosive growth and minting overnight billionaires. Some DeFi projects used to offer even higher rates just a year or two ago during a DeFi boom, but with few remaining projects, skeptics have questioned whether the rates are sustainable. The rate is by far larger than those offered by similar products, including at Circle, which offers accredited investors 3% to 5.5% interest for USDC stablecoin deposits. Furthermore, there could be severe consequence if the rate were to drop.
Anchor’s high interest rate plays a vital role in creating demand for UST -- the largest decentralized stablecoin worth $15 billion -- and a sudden drop could test the cryptocurrency’s setup to mirror the U.S. dollar, potentially causing a crash. Unlike centralized stablecoins like Tether or USDC, UST is not backed by any fiat currency and its peg to the dollar is
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