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Comment by codedokode | Hacker News Reader

But do you need regulation? Promises to produce 20% interest out of thin air when banks don't offer a single percent are suspicious enough in my opinion.

It doesn't make sense. If there was a risk-free way to get 20% income without doing anything then people could stop working and live just from their savings.

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Agreed! I would emphasize (and empathize) that there are muuuuuuch higher yields in the crypto space, so, many of these people felt like they were being responsible in a happy medium.

(The other yields are not fixed yields and very temporary, but it is easy to come out ahead. Not for passive investment chasers)

Regardless it was still up to them to be more discerning. Amazing it got that big.

About half the yield came from loan interest. The other half was from Luna Foundation dumping money into Anchor's reserves. Users could take out collateralized loans against Luna, Ethereum, Atom, Avalanche, and Solana tokens. Anchor isn't what brought down Terra. The way UST was supposed to remain stable is what killed the whole thing when it backfired.

As I understood, people were taking loans at exorbitant interest rates because they could invest it back into some Anchor or UST related tokens and get even more profit. This is not a realistic business model.

Here is a quote from a random article:

> A popular strategy that many have used was the recursive lending strategy, this involved:

> 1. Depositing bLUNA as collateral on Anchor

> 2. Borrowing UST to buy LUNA

> 3. Swap LUNA to bLUNA to repeat Step 1

Regarding this:

> The other half was from Luna Foundation dumping money into Anchor's reserves.

And where do those money ultimately come from? I guess from unlucky investors who bought UST/LUNA and were left with useless tokens? Then this resembles a classic Ponzi scheme.

[1] https://medium.com/qi-capital/lessons-learned-from-the-may-c...

>This is not a realistic business model.

I disagree. The return could just go down over time. The idea of taking more loans out against your borrowed loans is risky and can be done with any other loan provider. It opens you to a lot of risk because if you get liquidated you will lose a lot.

>Then this resembles a classic Ponzi scheme.

Anchor itself isn't. A Ponzi scheme is where earlier investors are paid with the funds of later investors and is not sustainable without growth. In a Ponzi scheme not everyone can withdraw their money as the total reported money is more than the money deposited. In the case of Anchor the money reported is actually the same as the money deposited. Everyone is able to withdraw their UST. You can still get 18.06% APY on UST from Anchor right now.

The actual issue is with how Terra handles contraction of UST demand. As it turns Luna into an inflationary currency instead of a deflationary one. This is the danger of having your collaterals value tied to the growth of the stable coin itself. I can see how Terra + Anchor can look like a Ponzi scheme, but I personally don't see it that way. I personally just see another algorithmic stable coin deegging as demand for it goes down. The same thing would have eventually happened even without anchor. People could just get board of the project and decided to pull out.

Also those borrowers were receiving inflationary Anchor tokens as rewards. When the value of Anchor would spike high enough, borrowers were actually paying negative interest rates.

Anchor did a decent job of obfuscating the nature of the scheme.

That strategy is just a round about way to increase leverage. The interest rates weren't even that crazy. I think the highest I ever saw was 10%. Most of it gets offset from staking rewards from the collateral assets. I thought it was a good way to take out collateralized loans against staked ETH. It was great until it wasn't.

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