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 last six months, putting it within the prime 10 cryptocurrencies by market capitalization. 

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

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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, a variety of pundits have continued to say that Terra’s aforementioned development will not be sustainable. The truth is, people related to the ecosystem — each for and in opposition to — have positioned huge bets in regard to the place LUNA will probably 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, a variety of pundits have continued to say that Terra’s aforementioned development will not be sustainable. The truth is, people related to the ecosystem — each for and in opposition to — 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 mentioned 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 all the settlement. To elaborate, each Kwon and Algod have locked up a complete of $1 million every in Tether (USDT) inside an Ethereum tackle labeled “Cobie: LUNA Guess Escrow.”

Kiril Nikolov, head of DeFi technique at Nexo, a blockchain-based lending platform, advised Cointelegraph that whereas bets like these can collect numerous 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 guess. 

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

“I don’t assume that we are able to or ought to learn an excessive amount of into this. Will probably be a stretch to assume that this wager between non-public events can imply something insidious or bullish. As an alternative, we should always give attention to different components just like the sustainability of the venture’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 in style a venture is, the extra followers and haters it has. One of many haters positioned a guess in opposition to LUNA and Terra’s founder accepted the guess and why not — it’s that easy,” he advised 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 traders 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 an important job in recognizing that liquid staking options are wanted with a purpose to generate steady and composable demand that may additional be used for collateral, including:

“As soon as the Eth2 merge is full, we are able to count on the share of staked ETH to develop into much like that of LUNA, with liquid staking options corresponding to Lido enjoying the principle function 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 stage, 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 utility constructed atop the Terra ecosystem at present permits traders 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 publish staked tokens together with staked LUNA and staked ETH as collateral. When the earned curiosity and staking rewards will not be in a position to keep according to the outlined rate of interest of 20% — which is the case proper now — Anchor is pressured to take cash from its “yield reserve” to compensate for the hole current between its whole 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, advised 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 laborious to keep up, including:

“Now we have to notice that the crypto market is extremely unstable and these excessive yield payouts are positively laborious 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 except Terra modifications its present mannequin.”

Lim, too, believes that Achor’s present APR is fairly unsustainable. He identified that the protocol capabilities identical to some 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. 

On a extra technical word, he acknowledged that there are 4 key points dealing with Anchor that have to be solved instantly to ensure that the venture to maneuver ahead in a sustainable method. These embrace 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 latest collateral property 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 develop into broadly adopted. That is one thing he believes may play a giant function 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 traders, regardless that they know fairly properly that these inflated return charges will not be very sustainable in the long term. 

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

“Cardano is an effective instance, with tons of traders leaping on the ADA prepare over the past yr. A giant 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 one of the best ways for the sector to develop is thru continued maturity. That is to forestall these initiatives coming into the fray from being pressured to supply extraordinarily excessive returns — usually bordering on being ridiculous — with a purpose to entice new shoppers.