The Rationale

Following a 2021 year where DeFi has exploded across all blockchains, numerous DeFi protocols sprung up in droves. Since the inception of yield farming, its users have always had a large focus on the APY offered by the farm. This gave birth to almost a cult behind an APY offered by this or that project. When new users start exploring what DeFi has to offer, oftentimes the first thing that they learn about is APY, after all that is the main allure of DeFi, to allow users to earn passive yield through various financial applications. However, new users are also not informed enough about where this yield is coming from.

Let’s take a short dive into the Anchor Protocol, the biggest go-to “savings” protocol in the DeFi history. Anchor was conceived in March 2021 and saw unprecedented growth, reaching $18 Bn TVL within a year. It advertised a “risk-free” APY of 20%, that was paid in UST, Terra’s stablecoin. All you had to do was to deposit UST and keep collecting the yield. There were no restrictions imposed on capital moving in and out the protocol, with deposits and withdrawals being settled immediately. This seemed revolutionary, and many people invested substantial portions of their wealth in the protocol.

However, the promise of Anchor to become the world’s ultimate savings solution is far from what has actually transpired. Anchor continued to eat into its reserves to pay out early depositors, and eventually reduced its yield to 18% in an attempt to alleviate the pressure of redemptions; to no avail. Eventually, Anchor collapsed, while suffering a major bank run, with UST stablecoin getting depegged from its supposed one dollar price. With UST and Anchor playing systemic roles in the entire Terra ecosystem, the functioning of the blockchain became impossible, and it was halted.

One of the reasons behind such a downfall was that no precautionary measures were taken by the developers of the protocol to control the possible liquidity crunch, and no levers were designed to mitigate the potential exodus of investors, should one occur. Another reason was that investors fell prey to a so-called herd instinct behavior: once a downward trend had emerged, a wave of withdrawals began, originating from investors concerned that if they do not exit their position now, they may not be able to do it in the future. Ironically, should these investors not have liquidated their positions, the collapse of the protocol could have been avoided. This became one of the most notorious examples of recent crypto bank runs, along with Celsius.

Another major reason behind the collapse of Terra and many other crypto businesses that followed (including FTX) is that the capital that was deposited by the users stayed inside a centralized pool managed exclusively by the company. Not only it defied the purpose of the whole “decentralization” movement, it created risks never seen before. As we all learnt from the FTX aftermath, users’ funds were commingled with company’s funds and invested in highly risky endeavors with almost no risk management in place. Effectively, Terra and FTX were operating a classic Ponzi scheme, using recent investors’ funds for paying early depositors.

Instead of establishing a centralized liquidity pool where users deposit to and withdraw the funds from, becoming a single point of failure, we are proposing an on-chain order-book trade execution engine. We believe that users should not be trading with the pool as it gives birth to centralization risks. With Opulence, users will be trading OPLL tokens directly with each other the way it is typically done on exchanges. Paired with the continuous price appreciation of OPLL token, we hope to see the rise of a new revolutionary savings instrument.

For protocols that are currently facing sustainability and inflationary issues, it might be worthwhile to look into implementing precautionary measures to control possible liquidity crunches and to mitigate the potential exodus of investors. In Anchor’s case they were moving towards implementing veANC and introducing locked deposits in exchange for higher yield, but it was too late.