Explaining How Anchor Protocol Works to Someone Not Well-versed in Crypto

 

Investing in cryptocurrency has become one of the biggest actions of investors today. This industry has made such a huge impact globally that new investors who are non-crypto natives are beginning to seek a piece of the pie. 

However, to be successful at cryptocurrency, you have to use certain tools. The anchor protocol is one such tool and we’ll look at what it is and its functions!

 

Contents:

Explaining the Basics

The Lender

The Debtor

The Anchor Protocol

The Reserve

Final Thoughts

 

Explaining the Basics

The anchor protocol can be simply defined as a tool that works to enable both a lender and borrower on a decentralized platform to have successful transactions. The anchor protocol is designed with a special code that helps a lender of cryptocurrency get the right value for their coins from a borrower who is looking for a certain amount of cryptocurrency.

 

The anchor is basically a middleman that reassures both parties that They are carrying out a non-risky transaction. This role is played by a bank on decentralized markets and unlike banks, the anchor protocol does not make a profit for itself in the process.

 

The anchor protocol is just one part of a stable money market system. The other three are the Lender, the debtor, and the Yield reserve. Let’s look at the roles each of these plays in detail:

 

The Lender

The lender is anyone who wants to make an investment with the expectation of making a profit. They can connect their online account to an anchor protocol with the expectation of taking advantage of the interests offered. In order for the services to be offered, the lender has to pay a small fee. They can then keep their investment connected to the anchor protocol for as long as they want. During this period, the lender has the liberty to make a withdrawal at any time of course considering the withdrawal fees put in place by the protocol.

 

This scenario begs an important question: where does the anchor get the money to offer the interest to the lender? To answer this we need to consider the next key player.

 

The Debtor

The debtor is an owner of the cryptocurrency which has a good chance of increasing exponentially in value over time. However, to make more profit on the decentralized market, they’ll need to use stable coins to make other investments.  

The anchor protocol will help the debtor access these funds. However, to do this they have to offer collateral. This is achieved by binding the anchor protocol to their cryptocurrency. After this is done, they can then collect a loan for the amount of money they require to make an investment. The debtor also pays interest on the money borrowed, which essentially enables the lender to get the profit they’re expecting.

 

The debtor also has the liberty to pay back the funds borrowed at any time they feel like it. Because there is no strict contract, the debtor does not have to worry about making payments on time. However, the bond between their wallet and the anchor protocol expires after a period of 20 days.

 

The Anchor Protocol

The anchor is designed to make sure that the lender gets the interest promised on their deposit. This is done by making sure that the money made from the debt collected from the borrower is sufficient enough to make the payment.

 

The protocol works by following precise coded commands which allows it to mediate the transactions between the lender and the debtor With the right directions, the protocol automatically charges a certain interest on the revenue the debtor borrows.

 

Additionally, using the debtor’s wallet, staking rewards can be generated. These rewards will be further distributed to other parties who ensure the blockchain continues to function optimally.

 

The Reserve

A yield reserve also plays an important role in ensuring that the transactions between the anchor and the other involved parties are without any issues. How does this reserve work? Let’s say the amount of revenue generated from the debtors exceeds that required to pay to the lenders, the additional funds will then be put into the reserve.

 

The reserve will also be used if the debtors don't make enough money to cover the interest owed to the lenders. In such cases, the funds from the reserve will be used to ensure the leaders get what’s owed to them.

 

Final Thoughts

The anchor protocol presents a clear opportunity for all kinds of investors. Upon consideration, it seems to be an effective tool that ensures profit generation across the board. However, this concept is relatively new and will only reach its full potential when more individuals recognize its use.

 

This can be done by providing rewards to any individual who adopts this protocol in their trading. With the acceptance of a large audience, anchor protocols will continue to become even more valuable.

 

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