Luna token price is soaring, but is the network’s growth sustainable?


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Terra, an open-source blockchain platform for algorithmic stablecoins, has been on hearth during the last half-year or so. The worth of its native crypto asset LUNA has risen from $24 to over $100 over the last six months, inserting it within the high 10 cryptocurrencies by market capitalization. 

And, regardless that LUNA has showcased minor corrections right here and there, the foreign money and the Terra mission, typically, have continued to develop from energy to energy. Up to now, on March 4, LUNA flipped Ether (ETH) when it comes to complete staked worth, with $29.5 billion value of LUNA being locked up within the platform in comparison with ETH’s $25.9 billion.

Moreover, Terra’s native information present that the ecosystem at the moment has over 230,000 stakers, making it the second-most staked crypto asset with greater than 4 instances the variety of these staking ETH at 54,768. Lastly, when it comes to its annual staking rewards, LUNA touts a median annual yield of round 6.62%, whereas ETH fetches 4.81%.

With LUNA up over 350% within the final 12 months, plenty of pundits have continued to say that Terra’s aforementioned development might not be sustainable. Actually, people related to the ecosystem — each for and towards — have positioned huge bets in regard to the place LUNA will probably be buying and selling round this time subsequent yr.

The $1 million wager that has the Terra group buzzing

With LUNA up over 350% within the final 12 months, plenty of pundits have continued to say that Terra’s aforementioned development might not be sustainable. Actually, people related to the ecosystem — each for and towards — have positioned huge bets in regard to the place LUNA will probably be buying and selling round this time subsequent yr.

Pseudonymous crypto dealer “Sensei Algod” is so bearish on Terra’s token that he recently wagered $1,000,000 that by March 14, 2023, LUNA will probably be buying and selling at a worth level decrease than what it was on the above stated date at $88. Algod’s proposition was swiftly taken up by Do Kwon, CEO and founding father of Terraform Labs, the agency behind Terra, who additionally put up the identical quantity claiming that the cryptocurrency will most positively be buying and selling at a worth level greater than $88 by then.

As conversations between the 2 escalated by way of Twitter, the duo finally determined to seek out the services of Cobie, co-host of the crypto podcast UpOnly, who will function an escrow agent facilitating your entire settlement. To elaborate, each Kwon and Algod have locked up a complete of $1 million every in Tether (USDT) inside an Ethereum deal with labeled “Cobie: LUNA Wager Escrow.”

Cobie: LUNA Wager Escrow. Supply: Etherescan.

Kiril Nikolov, head of DeFi technique at Nexo, a blockchain-based lending platform, informed Cointelegraph that whereas bets like these can collect lots of consideration, they don’t “actually matter” within the grand scheme of issues. He added that builders will carry on constructing on Terra no matter LUNA’s worth or if Do Kwon loses the wager. 

An identical opinion is shared by Derek Lim, head of crypto insights for cryptocurrency change Bybit, who informed Cointelegraph: 

“I don’t assume that we will or ought to learn an excessive amount of into this. It is going to be a stretch to assume that this wager between non-public events can imply something insidious or bullish. As an alternative, we must always deal with different elements just like the sustainability of the mission’s yield reserve.”

Daniel Santos, CEO of Woonkly, a decentralized finance- (DeFi)-based social media community, believes that wagers showcase LUNA’s rising reputation. “The extra fashionable a mission is, the extra followers and haters it has. One of many haters positioned a wager towards LUNA and Terra’s founder accepted the wager and why not — it’s that straightforward,” he informed Cointelegraph.

Is Terra’s development actually sustainable?

Whereas on paper, Terra’s rise appears extraordinarily spectacular, particularly with LUNA flipping ETH when it comes to staked worth and their variety of respective token stakers, Nikolov identified that there’s a significant distinction within the staking mannequin of the 2 initiatives, given the lack of buyers to withdraw their staked ETH and its rewards till Ethereum 2.0 is launched. “Thus, it’s regular that solely a small proportion of all ETH is staked, in comparison with LUNA,”’ he added. 

Moreover, Nikolov famous that Terra has performed a terrific job in recognizing that liquid staking options are wanted in an effort to generate steady and composable demand that may additional be used for collateral, including:

“As soon as the Eth2 merge is full, we will count on the proportion of staked ETH to turn out to be much like that of LUNA, with liquid staking options corresponding to Lido enjoying the principle position of producing utility of the staked ETH, for instance, as collateral).”

Lim believes that Terra’s current staking yields are fairly sustainable, including that at a really baseline-type degree, the staking rewards generated by way of the system’s Tobin tax and the unfold charges from the LUNA/TerraUSD (UST) mintburn swaps are very sensible.

Terra’s Anchor conundrum

The Anchor Protocol (ANC), a decentralized lending software constructed atop the Terra ecosystem at the moment permits buyers in TerraUSD — the platform’s native United States dollar-pegged stablecoin — to accrue an annual proportion yield (APY) of practically 20%. Theoretically, such excessive rates of interest are made doable by the truth that the deposited stablecoins are pooled and lent out to debtors to accrue curiosity.

Additionally, to ensure that a person to borrow UST, they should submit staked tokens together with staked LUNA and staked ETH as collateral. When the earned curiosity and staking rewards aren’t in a position to keep in step with the outlined rate of interest of 20% — which is the case proper now — Anchor is compelled to take cash from its “yield reserve” to compensate for the hole current between its complete earnings and payouts. 

In its present state, Anchor is being manipulated by some savvy customers who, over the previous few months, have been taking UST loans at an annual proportion price (APR) of near 2.5% after which depositing that very same sum again into the Anchor protocol to build up 20% earnings. Thus, there’s a main imbalance inside this setup as a result of there may be extra demand for the 20% yields than for UST debtors.

To assist meet these unsustainably excessive payouts, Anchor has been going via its native reserve swimming pools at a livid tempo, as is highlighted by the truth that the protocol’s crypto coffers, between late December and mid-February, shrunk from $70 million to just a bit over $6.50 million.

Jack Tao, CEO of cryptocurrency change Phemex, informed Cointelegraph that regardless that Anchor’s extraordinarily excessive yield ratio has helped push the demand for UST and LUNA — with the latter’s value increasing by 60% over the previous month alone — the protocol’s present APR could also be extraordinarily exhausting to keep up, including:

“We now have to notice that the crypto market is extremely risky and these excessive yield payouts are positively exhausting to maintain in the long term, as a lot of it could be inflated because of hypothesis. Now that there’s extra UST in existence than ever, there are already critics that imagine LUNA gained’t have the ability to maintain its worth until Terra adjustments its present mannequin.”

Lim, too, believes that Achor’s present APR is fairly unsustainable. He identified that the protocol features similar to some other cash market. If the yield reserve depletes, the APR is adjusted to a sustainable quantity — round 12–15% each year — which is fairly good for stablecoins. 

Terra (LUNA) six-month worth chart. Supply: CoinGecko.

On a extra technical word, he said that there are 4 key points dealing with Anchor that must be solved instantly to ensure that the mission to maneuver ahead in a sustainable method. These embody deposit development outpacing borrowing, distinction in borrowing and spending ratios to keep up an APR of 20%, the sluggish price at which the protocol permits for the addition of recent collateral belongings and current friction between Anchor and different blockchain ecosystems.

Nikolov famous that whereas UST’s fluctuating price of yield reserves on Anchor is unsustainable, it has allowed the stablecoin to turn out to be extensively adopted. That is one thing he believes might play a giant position within the asset’s long-term success.

The ecosystem must proceed maturing

Santos is of the opinion that the majority initiatives coming into the crypto market — particularly the decentralized finance sector — have a tendency to utilize a excessive APY mannequin to draw buyers, regardless that they know fairly effectively that these inflated return charges aren’t very sustainable in the long term. 

He pointed to Wonderland, a mission offering returns in excess of 80,000%, which finally resulted within the mission’s demise. That stated, he doesn’t imagine the identical would be the case with Terra as a result of the platform provides customers plenty of use instances in addition to a excessive diploma of operational performance, including:

“Cardano is an effective instance, with tons of buyers leaping on the ADA prepare during the last yr. An enormous a part of the crypto group was saying that Cardano had ‘nothing’ to supply, one thing that LUNA is now dealing with with its detractors.”

As we transfer right into a future being pushed more and more by decentralized applied sciences, it stands to purpose that the easiest way for the sector to develop is thru continued maturity. That is to stop these initiatives coming into the fray from being compelled to supply extraordinarily excessive returns — typically bordering on being ridiculous — in an effort to appeal to new shoppers.