Luna Token Price Soars, But Is Network Growth Sustainable?

Terra, an open-source blockchain platform for algorithmic stablecoins, has been on fire for the past half year or so. The value of his native crypto asset Terra (LUNA) has risen from $24 to over $100 in the past six months, placing it in the top 10 cryptocurrencies by market capitalization.

And, even though LUNA presented minor corrections here and there, the currency and the Terra project, in general, continued to strengthen. At this point, on March 4, LUNA toppled Ether (ETH) in terms of total staked value, with $29.5 billion of LUNA locked in the platform compared to $25.9 billion of ETH.

Additionally, native data from Terra shows that the ecosystem currently has over 230,000 stakers, making it the second most staked crypto asset with over four times the number of those staking ETH at 54,768. Finally, in terms of annual staking rewards, LUNA boasts an average annual return of around 6.62%, while ETH fetches 4.81%.

With LUNA up over 350% in the past 12 months, a number of pundits have continued to argue that Terra’s aforementioned growth may not be sustainable. In fact, individuals associated with the ecosystem – both for and against – have placed massive bets as to where LUNA will trade at this time next year.

The $1 Million Bet That’s Rocking the Terra Community

With LUNA up over 350% in the past 12 months, a number of pundits have continued to argue that Terra’s aforementioned growth may not be sustainable. In fact, individuals associated with the ecosystem – both for and against – have placed massive bets as to where LUNA will trade at this time next year.

Pseudonymous crypto trader “Sensei Algod” is so bearish on the Terra token that he recently bet $1,000,000 that by March 14, 2023, LUNA will be trading at a lower price than it was on the aforementioned date at $88. Algod’s proposal was quickly picked up by Do Kwon, CEO and Founder of Terraform Labs, the company behind Terra, who also put up the same amount saying that the cryptocurrency will most certainly trade at a price above $88 by then.

As conversations between the two escalated via Twitter, the duo ultimately decided to search for services of Cobie, co-host of the UpOnly crypto podcast, who will serve as escrow agent facilitating the entire deal. To elaborate, Kwon and Algod locked up a total of $1 million each in Tether (USDT) in an Ethereum address tagged “Cobie: LUNA Bet Escrow.”

Cobie: LUNA Bet Escrow. Source: Etherescan.

Kiril Nikolov, head of DeFi strategy at Nexo, a blockchain-based lending platform, told Cointelegraph that while bets like these can get a lot of attention, they don’t “really matter. “in the grand scheme of things. He added that the developers will continue to build on Terra regardless of the price of LUNA or if Do Kwon loses the bet.

A similar opinion is shared by Derek Lim, Head of Crypto Information for cryptocurrency exchange Bybit, who told Cointelegraph:

“I don’t think we can or should read too much into this. It would be an exaggeration to think that this bet between private parties can mean something insidious or bullish. Instead, we should focus on other factors such as the sustainability of the project yield reserve. »

Daniel Santos, CEO of Woonkly, a decentralized finance (DeFi)-based social media network, believes that betting is a testament to the growing popularity of LUNA. “The more popular a project is, the more fans and detractors it has. One of the haters placed a bet against LUNA and the founder of Terra accepted the bet and why not – it’s as simple as that,” said he told Cointelegraph.

Is Terra’s growth really sustainable?

While on paper Terra’s rise looks hugely impressive, especially with LUNA toppling ETH in terms of staked value and their respective number of stakers, Nikolov pointed out that there is a major difference in the model. of the two projects, given the inability of investors to withdraw their staked ETH and its rewards until the release of Ethereum 2.0. “Thus, it is normal that only a small percentage of all ETH is staked, compared to LUNA,” he added.

Additionally, Nikolov noted that Terra has done a great job recognizing that liquid staking solutions are needed to generate stable, composable demand that can then be used as collateral, adding:

“Once the Eth2 merger is complete, we can expect the percentage of ETH staked to become similar to that of LUNA, with liquid staking solutions such as Lido playing the primary role in generating the utility of ETH staked, for example, as collateral). ”

Lim believes Terra’s existing staking returns are quite sustainable, adding that at a very basic level, staking rewards generated through the system’s Tobin tax and spread fees from mintburn LUNA/TerraUSD (UST) swaps are very practical.

Terra’s Anchor Riddle

Anchor Protocol (ANC), a decentralized lending application built atop the Terra ecosystem, currently allows investors in TerraUSD – the platform’s US dollar-pegged stablecoin – to accrue an annual return by percentage (APY) of almost 20%. Theoretically, such high interest rates are made possible by the fact that deposited stablecoins are pooled and loaned to borrowers to accrue interest.

Additionally, in order for an individual to borrow UST, they must post staked tokens, including staked LUNA and staked ETH as collateral. When interest earned and staking rewards are unable to keep in line with the stated interest rate of 20% – which is the case at the moment – Anchor is forced to take money out of its “ performance reserve” to compensate for the difference between its total income and payments.

In its current state, Anchor is being manipulated by some savvy users who over the past few months have taken out UST loans at an annual percentage rate (APR) of nearly 2.5% and then deposited that same amount into the Anchor protocol. to accumulate 20% profit. Thus, there is a major imbalance within this setup as there is more demand for 20% yields than for UST borrowers.

To help cope with these unsustainably high payouts, Anchor scoured its native reserve pools at a breakneck pace, as evidenced by the fact that the protocol’s crypto vaults, between late December and mid-February, Shrunk from $70 million to just over $6.50 million.

Jack Tao, CEO of cryptocurrency exchange Phemex, told Cointelegraph that while Anchor’s extremely high rate of return has helped boost demand for UST and LUNA – with the latest value increasing by 60% in the past month alone – the protocol’s current APR can be extremely difficult to maintain, adding:

“We should note that the crypto market is very volatile and these high yield payouts are certainly difficult to sustain over the long term as much of it can be inflated due to speculation. Now that there are more USTs than ever, there are already critics who think LUNA won’t be able to sustain its price unless Terra changes its current model.

Lim also thinks Achor’s current APR is pretty unsustainable. He pointed out that the protocol works like any other money market. If the yield reserve runs out, the APR is adjusted to a sustainable amount – around 12-15% per year – which is good enough for stablecoins.

Six-month Terra (LUNA) price chart. Source: CoinGecko.

On a more technical note, he said there are four key issues facing Anchor that need to be addressed immediately for the project to move forward in a sustainable way. These include the growth of deposits outpacing borrowings, the difference in borrowing and spending ratios to maintain a 20% APR, the slow pace at which the protocol allows the addition of new collateral assets, and friction existing between Anchor and other blockchain ecosystems.

Nikolov noted that while the fluctuating rate of UST yield reserves on Anchor is not sustainable, it has allowed the stablecoin to gain widespread adoption. This is something he believes could play a big role in the long-term success of the asset.

The ecosystem must continue to mature

Santos is of the opinion that most projects entering the crypto market – especially the decentralized finance sector – tend to use a high APY model to attract investors, even though they know very well that these rates swollen yields are not very durable in the long run. Course.

He pointed to Wonderland, a project offering yields in excess of 80,000%, which ultimately led to the demise of the project. That said, he doesn’t think it will be the same with Terra as the platform offers users a number of use cases as well as a high degree of operational functionality, adding:

“Cardano is a good example, with tons of investors jumping on the ADA bandwagon over the past year. Much of the crypto community was saying that Cardano had “nothing” to offer, to which LUNA is now confronted with its detractors.

As we move into a future increasingly focused on decentralized technologies, it stands to reason that the best way for the industry to grow is through continued maturity. This is to prevent projects entering the fray from being forced to offer extremely high returns – often bordering on the ridiculous – in order to attract new clients.