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

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

And, regardless that LUNA has showcased minor corrections right here and there, the forex and the Terra challenge, on the whole, have continued to develop from energy to energy. Thus far, on March 4, LUNA flipped Ether (ETH) when it comes to complete staked worth, with $29.5 billion price of LUNA being locked up throughout the platform in comparison with ETH’s $25.9 billion.

Moreover, Terra’s native information present that the ecosystem at present 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 mean annual yield of round 6.62%, whereas ETH fetches 4.81%.

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

The $1 million guess that has the Terra group buzzing

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

Pseudonymous crypto dealer “Sensei Algod” is so bearish on Terra’s token that he lately wagered $1,000,000 that by March 14, 2023, LUNA will likely be buying and selling at a value 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 value level greater than $88 by then.

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

Cobie: LUNA Wager Escrow. Supply: Etherescan.

Kiril Nikolov, head of DeFi technique at Nexo, a blockchain-based lending platform, advised Cointelegraph that whereas bets like these can collect a whole lot 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 value or if Do Kwon loses the guess. 

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

“I don’t assume that we will or ought to learn an excessive amount of into this. Will probably be a stretch to assume that this wager between personal events can imply something insidious or bullish. As a substitute, we should always give attention to different elements just like the sustainability of the challenge’s yield reserve.”

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

Is Terra’s progress 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 shortcoming 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 carried out an ideal job in recognizing that liquid staking options are wanted with a view to generate secure and composable demand that may additional be used for collateral, including:

“As soon as the Eth2 merge is full, we will anticipate the proportion of staked ETH to develop into much like that of LUNA, with liquid staking options similar 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 through 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 utility constructed atop the Terra ecosystem at present 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 potential 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 put up staked tokens together with staked LUNA and staked ETH as collateral. When the earned curiosity and staking rewards usually are not 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 charge (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 alternate Phemex, advised Cointelegraph that regardless that Anchor’s extraordinarily excessive yield ratio has helped push the demand for UST and LUNA — with the latter’s worth growing by 60% over the previous month alone — the protocol’s present APR could also be extraordinarily laborious to keep up, including:

“We’ve to notice that the crypto market is extremely risky and these excessive yield payouts are positively laborious to maintain in the long term, as a lot of it could be inflated attributable to hypothesis. Now that there’s extra UST in existence than ever, there are already critics that consider LUNA gained’t be capable of maintain its value until Terra modifications its present mannequin.”

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

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

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

Nikolov famous that whereas UST’s fluctuating charge of yield reserves on Anchor is unsustainable, it has allowed the stablecoin to develop into broadly adopted. That is one thing he believes may play an enormous position within the asset’s long-term success.

The ecosystem must proceed maturing

Santos is of the opinion that almost all initiatives getting 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 properly that these inflated return charges usually are not very sustainable in the long term. 

He pointed to Wonderland, a challenge providing returns in extra of 80,000%, which finally resulted within the challenge’s demise. That stated, he doesn’t consider the identical would be the case with Terra as a result of the platform gives customers quite a lot 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 practice over the past yr. An enormous a part of the crypto group was saying that Cardano had ‘nothing’ to supply, one thing that LUNA is now going through with its detractors.”

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

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