This is a follow-up to our previous article Terra Protocol: LUNA’s Meteoric Rise & Bridging Fiat and Stablecoin.
It seems as if everyone is a LUNA maxi nowadays. With LUNA’s price reaching yet another all-time high to close to $106 on Tuesday (March 29), is it time for you to start taking note of LUNA and the Terra ecosystem?
Recent Terra Developments
Putting aside an uptick in the broader crypto market, several factors are leading to bullish sentiment about LUNA.
1. $11 million bets over LUNA price
Terra’s co-founder and CEO Do Kwon has been busy making bets with crypto personalities. Earlier this month, Kwon finalised a $1 million bet and a $10 million bet with pseudonymous crypto influencers AlgodTrading (known for his anti-LUNA sentiments) and Gigantic Rebirth, respectively.
The parties are betting on whether the price of LUNA will be higher or lower than $88 (price when bets were finalised) in a year’s time.
In the meantime, the millions will sit in an escrow wallet.
2. Buying $10 billion BTC for UST stablecoin reserve
“UST is going to be the first internet native currency that implements the Bitcoin standard as part of its monetary policy.” - Do Kwon (Bloomberg)
Another prominent action by Terra is Kwon’s announcement that the LUNA Foundation Guard (LFG), a Singapore-based non-profit working on the Terra blockchain, will amass a $10 billion bitcoin reserve for UST in the long-term. The LFG is advised and overseen by an international Council and includes Kwon as council member.
Unlike traditional stablecoins like USDT, UST is an algorithmic stablecoin and is not backed by a fiat currency. From our previous article, you know that UST maintains its peg to the US dollar by minting and destroying LUNA tokens in a supply and demand cycle. This mechanism has raised criticism around a LUNA ‘death spiral’ if UST were to lose its peg.
While not explicitly stated, Terra’s response to this criticism is to grow its BTC reserve - which will strengthen UST’s peg to the US dollar, according to Kwon. He previously stated that the project will keep “growing reserves until it becomes mathematically impossible for idiots to claim de-peg risk for UST.”
The LFG has been buying BTC since January this year. As of March 29, the bitcoin address used by the LFG shows that a total of close to 27,785 bitcoin has been bought. Kwon also claimed that Terra has $3 billion of funds ready to buy more BTC.
3. Hopefully a more sustainable Anchor Protocol?
More than half of Terra’s TVL is in debt protocols, particularly Anchor Protocol. Currently, most UST issued is deposited into Anchor, which provides high payouts of 20%. Critics have argued that such a high yield is not sustainable. Anchor itself asked the LFG for $450 million in February to maintain its high yield.
However, a new community vote that passed on March 24 may make Anchor more sustainable in the long term - by dynamically adjusting interest rates each month.
Yield reserves are the amount of capital held on Terra to sustain its 20% yield. With this adjustment, yield rates will drop if yield reserve drops, until the latter starts to increase.
Terra’s $10 billion BTC reserve is also expected to contribute to Anchor.
Still, Be Cautious
There are two things we should pay attention to.
Yes, UST will finally be backed by an asset, and Kwon believes BTC “is the strongest digital reserve asset”. However, BTC is also notoriously volatile. If its price drastically drops, the value of UST will be hit as well. In this case, a ‘death spiral’ for LUNA is still possible.
In addition, although regulating UST’s peg to the dollar is one major use case, we need to remember that LUNA is deployed on the Terra blockchain. Therefore, the development of the Terra ecosystem is also important in determining the long-term success of LUNA. Kwon would need more than an Anchor Protocol to win those bets in 2023.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
Risk Reminder: Crypto trading carries a risk. All trading activities are done at your discretion and at your own risk. The information here should not be regarded as financial or investment advice from ApolloX. ApolloX will not be liable for any loss that might arise from your use of any financial product.
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