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

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

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 Terra (LUNA) has risen from $24 to over $100 over the past six months, putting it within the prime 10 cryptocurrencies by market capitalization. 

And, although LUNA has showcased minor corrections right here and there, the foreign money and the Terra undertaking, on the whole, have continued to develop from power to power. Up to now, on March 4, LUNA flipped Ether (ETH) by way of whole staked worth, with $29.5 billion price of LUNA being locked up inside 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 occasions the variety of these staking ETH at 54,768. Lastly, by way of 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 few pundits have continued to say that Terra’s aforementioned development is probably not sustainable. In actual fact, people related to the ecosystem — each for and in opposition to — have positioned huge bets in regard to the place LUNA will likely be buying and selling round this time subsequent 12 months.

The $1 million wager that has the Terra neighborhood buzzing

With LUNA up over 350% within the final 12 months, quite a few pundits have continued to say that Terra’s aforementioned development is probably not sustainable. In actual fact, people related to the ecosystem — each for and in opposition to — have positioned huge bets in regard to the place LUNA will likely be buying and selling round this time subsequent 12 months.

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 likely 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 larger than $88 by then.

As conversations between the 2 escalated by way of Twitter, the duo ultimately determined to seek out the services of Cobie, co-host of the crypto podcast UpOnly, who will function an escrow agent facilitating your complete 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 Guess Escrow.”

Cobie: LUNA Guess 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 plenty 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. 

The same opinion is shared by Derek Lim, head of crypto insights for cryptocurrency trade Bybit, who informed 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 personal events can imply something insidious or bullish. As an alternative, we should always concentrate on different elements just like the sustainability of the undertaking’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 undertaking is, the extra followers and haters it has. One of many haters positioned a wager in opposition to 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 by way of staked worth and their variety of respective token stakers, Nikolov identified that there’s a serious distinction within the staking mannequin of the 2 tasks, 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 share 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 the intention 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 turn into just like that of LUNA, with liquid staking options equivalent to Lido enjoying the primary position of producing utility of the staked ETH, for instance, as collateral).”

Lim believes that Terra’s present 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 the moment permits buyers in TerraUSD — the platform’s native United States dollar-pegged stablecoin — to accrue an annual share yield (APY) of almost 20%. Theoretically, such excessive rates of interest are made attainable 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 will not be in a position to keep in keeping with 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 present 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 share price (APR) of near 2.5% after which depositing that very same sum again into the Anchor protocol to build up 20% income. Thus, there’s a main imbalance inside this setup as a result of there’s 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 trade Phemex, informed Cointelegraph that although 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 take care of, including:

“We have now 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 as a consequence of 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 worth until Terra adjustments its present mannequin.”

Lim, too, believes that Achor’s present APR is fairly unsustainable. He identified that the protocol features 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. 

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

On a extra technical notice, he said that there are 4 key points going through Anchor that have to be solved instantly to ensure that the undertaking to maneuver ahead in a sustainable method. These embody deposit development outpacing borrowing, distinction in borrowing and spending ratios to take care of an APR of 20%, the gradual price at which the protocol permits for the addition of latest collateral property and present 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 into broadly 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 tasks coming into the crypto market — particularly the decentralized finance sector — have a tendency to utilize a excessive APY mannequin to draw buyers, although they know fairly nicely that these inflated return charges will not be very sustainable in the long term. 

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

“Cardano is an efficient instance, with tons of buyers leaping on the ADA prepare during the last 12 months. A giant a part of the crypto neighborhood 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 one of the best ways for the sector to develop is thru continued maturity. That is to forestall these tasks coming into the fray from being pressured to supply extraordinarily excessive returns — typically bordering on being ridiculous — with the intention to appeal to new shoppers.

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