Anchor, the yield-generating protocol built on the Terra blockchain, saw some $5 billion of deposits, or more than a third of the total, vanish over the past few days in what is the equivalent of a crypto-style bank run on one of the blockchain industry's most popular projects.
Deposits on Anchor, which offered up to 19.5% yield on deposits, plunged to $8.7 billion on Monday from $14 billion on Friday, data by the protocol's dashboard shows.
The deposits into the blockchain-based protocol are mostly in Terra's dollar-pegged stablecoin, terraUSD (UST).
In recent days, the stablecoin has lost its dollar peg repeatedly in what appears to be a crisis of confidence among some traders and investors.
"There were some pretty wild things going on in the Terra ecosystem last night, particularly around $UST depegging," David Shuttleworth, DeFi economist at ConsenSys, said to CoinDesk in an email. "This triggered some market panic and caused users to withdraw from Anchor."
Terra's stablecoin and the financial system built around it are under pressure as UST has lost its dollar peg twice in just three days. UST is the largest algorithmic stablecoin, a type of dollar-pegged cryptocurrency that is not backed by assets and maintains its price by creating and destroying supply through a swap with another token, in this case, luna (LUNA).
Investors flocked to the Anchor protocol to gain from double-digit yields, catapulting the circulating supply of UST from $2 billion to a high of $18.5 billion in a year, as investors needed UST to deposit. Critics called out the protocol's high yield for being unsustainable because interest revenue from borrows did not cover yield payouts and required an outside source to replenish the reserves. Mirror Tracker shows that the Anchor Yield Reserve is on track to be depleted in as soon as a month, falling to $176 million from $323 million in the last 30 days.
Ryan Clements, a professor at the University of Calgary, said algorithmic stablecoins are inherently vulnerable to losing their peg to the downside and falling to a death spiral if investors lose faith in the price stability.
To address fears, Terra-developer firm Terraform Labs and other investors created a forex reserve called the Luna Foundation Guard (LFG) to backstop UST in case of market volatility. LFG reserves stood at around $3.5 billion after it acquired $1.5 billion in bitcoin (BTC) on Friday.
After UST fell to $0.98 during the weekend, the LFG announced that it will lend $1.5 billion in BTC and UST to defend the peg of its algorithmic stablecoin to the U.S. dollar.
ANC, the Anchor protocol's governance token that offers a percentage of the protocol revenue, fell 35% in 24 hours and is down by 87% from its all-time high reached on March 19, 2021, according to CoinGecko.
Read more: UST Stablecoin Loses Dollar Peg for Second Time in 48 Hours, LUNA Market Cap Falls Below UST's