Lucas Outumuro, Head of Research at Blockchain analytics firm IntoTheBlock (ITB) took a closer look at $LUNA, which is the native staking and governance token of Terra protocol, in particular the main catalysts that are driving its price higher — even during a bear market.
ITB is “a data science company applying cutting-edge research in AI to deliver actionable intelligence for the crypto market.”
What Is Terra ($LUNA)?
The official Terra documentation has this to say about the Terra Protocol:
“The Terra protocol is the leading decentralized and open-source public blockchain protocol for algorithmic stablecoins. Using a combination of open market arbitrage incentives and decentralized Oracle voting, the Terra protocol creates stablecoins that consistently track the price of any fiat currency.
“Users can spend, save, trade, or exchange Terra stablecoins instantly, all on the Terra blockchain. Luna provides its holders with staking rewards and governance power. The Terra ecosystem is a quickly expanding network of decentralized applications, creating a stable demand for Terra and increasing the price of Luna.“
As for the protocol’s two main tokens, it says:
- Terra: “Stablecoins that track the price of fiat currencies. Users mint new Terra by burning Luna. Stablecoins are named for their fiat counterparts. For example, the base Terra stablecoin tracks the price of the IMF’s SDR, named TerraSDR, or SDT. Other stablecoin denominations include TerraUSD or UST, and TerraKRW or KRT. All Terra denominations exist in the same pool.“
- Luna: “The Terra protocol’s native staking token that absorbs the price volatility of Terra. Luna is used for governance and in mining. Users stake Luna to validators who record and verify transactions on the blockchain in exchange for rewards from transaction fees. The more Terra is used, the more Luna is worth.“
And this is Binance Academy’s brief explanation of what Terra is:
“Terra is a blockchain network built using Cosmos SDK specializing in stablecoin creation. Rather than use fiat or over-collateralized crypto as reserves, each Terra stablecoin is convertible into the network’s native token, LUNA. LUNA allows holders to pay network fees, participate in governance, stake in the Tendermint Delegated Proof of Stake consensus mechanism, and peg stablecoins.
“To peg a stablecoin like TerraUSD (UST), a USD value of LUNA is convertible at a 1:1 ratio with UST tokens. If UST’s price is, for example, at $0.98, arbitrageurs swap 1 UST for $1 of USD and make 2 cents. This mechanism increases UST demand and also reduces its supply as the UST is burned. The stablecoin then returns to its peg.
“When UST is above $1, say at $1.02, arbitrageurs convert $1 of LUNA into 1 UST and make 2 cents. The supply of UST increases, and demand for UST also decreases, bringing the price back to peg. Apart from reducing stablecoin volatility, validators and delegators stake LUNA for rewards. These two actors play an essential part in keeping the network secure and confirming transactions.
“You can purchase LUNA via Binance and then store it, stake it, and participate in governance with Terra Station, the official wallet and dashboard for the Terra blockchain network.“
IntoTheBlock’s Analysis of Terra ($LUNA)
In a blog post published on March 11, Outumuro, who is ITB’s Head of Research, said that “LUNA’s recent rise has been fuelled” by the following catalysts:
- “A $1 billion fundraise from the Luna Foundation Guard (LFG) to build Bitcoin reserves to support UST — the Terra ecosystem’s stablecoin — peg to the dollar“
- “LFG replenishing the Anchor protocol’s yield reserve with $450M, used to provide depositors with a rate of 19.5% on UST“
- “Increased demand for UST (mostly to obtain these high rates) has resulted in a vast amount of LUNA being burnt, effectively reducing its supply“
He went on to say that Terra has “incentivized yields on UST on Ethereum and Avalanche, making it one of the best returns on stablecoins across multiple chains.”
Outumuro pointed out that “Anchor has managed to support yields near 20% on UST by charging high borrowing rates (around 13% at the moment) and subsidizing the remainder through the yield reserve, which they just augmented.”
He also mentioned the following two governance proposals that are hoping to make these yields sustainable:
- “Limiting rates for large depositors, providing lower yields for those providing over $100,000 and $500,000“
- “Introduction of a voting-escrowed “ve” tokenomics for Anchor where depositors would require to lock their ANC tokens for veANC in order to boost their yield up to 20% APR“
The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.