In recent months, Terra and its associated cryptocurrency, LUNA, have increased in popularity. Is there more to this exponential growth than meets the eye?
Terra, an open-source Blockchain platform for algorithmic stablecoins, has been on fire for approximately over the last six months. The value of its native crypto asset Terra (LUNA) has risen from $24 to over $100 over such a period, ranking it among the top 10 cryptocurrencies by market capitalization.
Even though LUNA has shown minor corrections here and there, the coin and the Terra project, in general, have continued to grow strongly. Up to this point, on March 4, LUNA switched to Ether (ETH) in terms of total value staked, with $29.5 billion worth of LUNA locked up within 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 more than four times the number staked on ETH, at 54,768. Finally, in terms of annual staking rewards, LUNA offers an average annual return of around 6.62%, while ETH reaches 4.81%.
With LUNA up more than 350% in the last 12 months, various experts have continued to claim that Terra’s mentioned growth may not be sustainable. In fact, individuals associated with the ecosystem – both for and against – have made massive bets as to where LUNA will be trading around this time next year.
Terra Community on Edge: The $1 Million Bet
With LUNA up more than 350% in the last 12 months, a number of experts have continued to state that Terra’s aforementioned growth may not be sustainable. In fact, individuals associated with the ecosystem – both for and against – have made massive bets as to where LUNA will be trading around this time next year.
Cryptocurrency pseudonym “Sensei Algod” is so bearish on the Terra token that he recently bet $1,000,000 that by March 14, 2023, LUNA would be trading at a lower price than it was on that date, 88 Dollars. Do Kwon, CEO, and founder of Terraform Labs, the company behind Terra, quickly accepted Algod’s proposal. Kwon also put up the same amount stating that the cryptocurrency will definitely trade above $88 by then.
As conversations between the two intensified via Twitter, the duo ultimately decided to seek the services of Cobie, co-host of the UpOnly crypto podcast, who will serve as escrow agent facilitating the entire deal. To explain, both Kwon and Algod have locked up a total of $1 million each in Tether (USDT) inside an Ethereum address labeled “Cobie: LUNA Bet Escrow.”
Kiril Nikolov, head of DeFi strategy at Nexo, a Blockchain-based lending platform, told Cointelegraph that while bets like these can garner 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.
Derek Lim, head of crypto insights for cryptocurrency exchange Bybit, shares the same view. He told Cointelegraph the following, “I don’t think we can or should read too much into this. It would be a stretch to think that this bet between private parties can mean anything insidious or bullish. Instead, we should focus on other factors such as the sustainability of the project’s performance reserve.”
Daniel Santos, CEO of Woonkly, a decentralized finance (DeFi)-based social media network, believes the betting shows the growing popularity of LUNA. “The more popular a project is, the more fans and haters it has. One of the haters made a bet against LUNA and the Terra founder accepted the bet and why not, it’s that simple,” he told Cointelegraph.
Is Terra’s Growth Really Sustainable?
While on paper Terra’s rise looks extremely impressive, especially with LUNA flipping ETH in terms of value staked and its number of respective token stakers, Nikolov pointed out that there is a big difference in the staking model of the two projects, given the inability of investors to withdraw their staked ETH and rewards until Ethereum 2.0 is released. “So it is normal that only a small percentage of all ETH is staked, compared to LUNA,” he added.
Furthermore, Nikolov noted that Terra has done a great job of recognizing that there is the need to implement liquid staking solutions to generate stable and compatible demand, which they can use as collateral. He added that, “Once the Eth2 merger is complete, we can expect the percentage of staked ETH to be similar to that of LUNA, with liquid staking solutions like Lido playing the main role of generating utility from staked ETH, for example as collateral).”
Lim believes that Terra’s current staking returns are quite sustainable, adding that at a very basic level, staking rewards generated through the system’s Tobin fee and spread fees from LUNA/TerraUSD mintburn swaps (UST) are very practical.
Terra’s Anchor Dilemma
The Anchor Protocol (ANC), a decentralized lending application built on top of the Terra ecosystem, currently allows investors in TerraUSD – the platform’s native stablecoin, denominated in US dollars – to accumulate an annual percentage yield (APY) of almost 20%. In theory, such high-interest rates are possible because the deposited stablecoins are pooled and lent out to borrowers to accrue interest.
In addition, in order for a person to borrow from UST, they have to deposit staked tokens, including staked LUNA and ETH, as collateral. When interest earned and staking rewards are unable to keep up with the 20% interest rate, as is the case now, Anchor must take money from its “yield reserve” to make up the gap between your total earnings and payouts.
In its current state, some smart users manipulate Anchor. They, in recent months, have been taking out UST loans at around 2.5% annual percentage rate (APR) and then depositing that same sum back into the protocol of Anchor to accumulate profits of 20%. Thus, there is a significant imbalance in this configuration, since there is more demand for the 20% yields than for the UST borrowers.
To help meet these unsustainable payments, Anchor has been spending its native reserves at a dizzying pace, as evidenced by the fact that the protocol’s crypto coffers, between late December and mid-February, dwindled from 70 million dollars to just over 6.50 million.
Jack Tao, CEO of cryptocurrency exchange Phemex, told Cointelegraph that while Anchor’s extremely high yield ratio has helped drive demand for UST and LUNA—with the latter’s value rising 60% in the last month—, the current APR of the protocol can be extremely difficult to maintain. Tao further commented that, “We have to keep in mind that the cryptocurrency market is very volatile and these high-yield payouts are definitely hard to sustain in the long run, as much of it can be inflated due to speculation. Now that there are more UST than ever, there are already critics who believe that LUNA will not be able to sustain its price unless Terra changes its current model.”
Lim also believes that Achor’s current APR is quite unsustainable. He noted that the protocol works like any other money market. If the yield reserve runs out, the APR adjusts to a sustainable amount – around 12-15% per year – which is quite fine for stablecoins.
On a more technical note, he stated that there are four key issues facing Anchor that must be resolved immediately for the project to move forward sustainably. Among them is the growth of deposits that exceeds that of loans, the difference in the ratios of loans and expenses to maintain an APR of 20%, the slowness with which the protocol allows adding new collateral assets, and the existing friction between Anchor and other blockchain ecosystems.
Nikolov noted that although UST’s fluctuating rate of return reserves on Anchor is unsustainable, it has allowed the stablecoin to become widely adopted. This is something that he believes could play a big role in the long-term success of the asset.
The Ecosystem Must Continue Maturing
Santos is of the opinion that most of the projects that enter the cryptocurrency market -especially in the decentralized finance sector- tend to make use of a high APY model to attract investors, although they know very well that these interest rates inflated yields are not very sustainable in the long run.
He pointed to the case of Wonderland, a project that offered returns of over 80,000%, which ended up causing its demise. That said, he does not see the same thing happening with Terra because the platform offers users a number of use cases as well as a high degree of operational functionality. He further commented that, “Cardano is a prime example, with tons of investors jumping on the ADA bandwagon in the last year. A large part of the cryptocurrency community said that Cardano had ‘nothing’ to offer, something that LUNA is now facing with its detractors.”
As we move into a future increasingly driven by decentralized technologies, it makes sense that the best way for the industry to grow is through continued maturity. This will prevent forcing the projects that join it to offer extremely high returns – which often border on the ridiculous – in order to attract new clients.
By Audy Castaneda
