Analytics /By Tuan Dinh Le

$LUNA Price Analysis

What is Terra?

Terra is a blockchain protocol built for financial payments for the e-commerce sector. The project creates its own stablecoin through algorithms to facilitate payment and reduce transaction fees. A portion of the transaction fees saved is also deposited into their Treasury fund, which is used for fiscal budgeting purposes that helps to maintain the stablecoin prices.

Highlight

  1. $LUNA is the native token for Terra and core to the ecosystem
  2. $LUNA is used to maintain the stability for Terra stablecoins
  3. It is the governance token for the Terra ecosystem, where important proposals are decided and voted for by the community staking $LUNA.

How Terra Protocol Work (In General)

In order for $UST to stay at ~$1, any price movement will have to move to another token, $LUNA. The method is as follows:

  • If the $UST price is higher than the peg price, the user can swap $1 of $LUNA value for 1 $UST. This is called “seigniorage“.
  • If the $UST price is lower than the peg price, the user can swap 1 $UST for $1 of $LUNA value. This is called “contraction“.

From this we can deduce: As the supply of UST increases, the supply of LUNA decreases, and vice versa.

Pros And Cons

You can see that only the seignorage phase (1) is the one that generates all the direct profits, while contraction (2) does quite a bit of damage. The change in $LUNA supply will directly affect $LUNA price. It is because of this that Terra focuses on strengthening the $UST use case (see The Potential below) and has a satisfactory compensation mechanism for contraction cases.

In contraction cases, the main losers are the Validators: 500,000 $LUNA to become a validator and 21 days for unstaking.

To offset these risks, validators are encouraged by means of:

  1. Gas Fee: At the end of each block, the fee will be divided according to the stake ratio for the validators. Users can choose any asset ($LUNA, Terra’s stablecoin) to pay the gas fee, and of course validators and delegators will receive as many assets.
  2. Tax per transaction: Each transaction from $UST, Terra will earn 0.1 – 1% of the transaction value. Taxes are also paid on a variety of assets, and validators will also receive all of these assets depending on what the payer chooses.
  3. $LUNA reward from seigniorage: Although there is currently no seignorage bonus for validators, as mentioned, the reserve rewards will continue to be distributed to validators for the next three years.
  4. Airdrop: New projects in the Terra ecosystem have a tradition, which is an airdrop for stake LUNA users

The Potential

The value of $LUNA token is proportional to the growth of the Terra ecosystem. This is because as the demand for Terra money increases, more $LUNA tokens have to be burned for Terra money. This makes $LUNA tokens scarcer and hence more valuable.

The Terra ecosystem is currently expanding on top of its Anchor protocol, which allows for a high fixed savings rate of 20%, and the Mirror protocol, which allows for exposure to any asset with an active price feed. Its latest development includes Alice Finance, which is a decentralised platform for impact investing. These platforms will accrue more demand for Terra money which will drive the valuation of $LUNA tokens.

$LUNA Price Analysis

$LUNA validators are not inflationary validators. Instead, the authorised person earns a variety of fees. With the low fee of Terra blockchain, staking brings a profit of ~5% APY.

However, more than 30% of the $LUNA supply is currently staked and every time you stake you need to wait at least 21 days to unlock it. This means that if the price of $LUNA starts to go parabolic, any $LUNA staking will not be sold on the exchange any time soon.

Note that parabolic is the perfect word to describe the price action of $LUNA since early 2021. It has increased more than 20x since January 2021 and continues to rise.

This is due to the huge demand for $UST which caused it to be greater than $1 many times at the end of January and February. So Terra burned millions of $LUNA each week to generate the $UST needed to maintain the pegged price of $UST ($1).

Source: https://terra.smartstake.io/

The question is where does all this $UST demand come from?

The answer seems to be Protocol Mirror, Binance’s booming DeFi ecosystem and more.

  1. Mirror Protocol

    Mirror Protocol is built by Terraform Labs and operates on the Terra blockchain. Mirror Protocol makes it possible for you to mint tokens that reflect the prices of stocks and other assets. This means connecting crypto humans to traditional financial markets like Amazon, Tesla, and even GameStop stocks.

    Source: mirror.finance

    These synthetic tokens are called m-assets, which are minted by collateralising the $UST. At least 150% of the $UST value of m-assets must be deposited. So if you want to buy a stock worth $1,000, you need to deposit at least $1,500 worth of $UST.

    To do this, Terra airdropped to $LUNA and $UNI holders on the first day of its launch. So you can use m-assets on Ethereum and transport them to and from the Terra blockchain using the Mirror Financial Shuttle Bridge. But that is not all, because Binance Smart Chain (BSC) is also built using Cosmos SDK.

    It is likely that in the near future, Mirror will launch new products:

    • Yield bearing stock.
    • Self-direct index funds.
  2. Binance Smart Chain
    BSC can easily interact with Terra blockchain. There are more than 64M $UST on BSC, some yield aggregators like Auto Farm, or providing quite a high yield on m-asset pairs like UST-Amazon, UST-Tesla, UST-Netflix.

    Source: https://mirror.smartstake.io

    Mirror Finance alone has reached a TLV of $1.84B, nearly $445M of which are m-assets. The craziest part is that Terra Station allows you to easily send $UST and m-assets directly to Ethereum and BSC.

  3. Anchor Protocol

    Source: https://coinsutra.com/anchor-protocol-analysis/

    Anchor Protocol is a project in the Lending Borrowing segment, but it seems that many people know the project as a “bank” in Crypto with most interest rates ranging from 18 to 20%. Current project products include: Borrowing $UST and depositing $UST to receive interest.

  4. Orion Money

    Orion Money is Terra’s first prize winner DeFi Connected Hackathon, with the aim of bringing money flow from other ecosystems such as Ethereum, Binance Smart Chain into Terra through the Anchor Protocol portal.

    Specifically, users deposit ERC-20 Stablecoins such as $USDT,$DAI, etc. into Orion Money, the system will convert to $UST and deposit into Anchor Protocol to receive interest. And the next destination is Solana and Binance Smart Chain.

  5. Alice Finance
    Now, what happens when you have a strong payment network to invest in stocks and commodities and have also found a way to earn steady interest on your savings in a decentralised way?

    Source: alice.co

    Terra has essentially created a complete alternative to the current financial system. All that is left to do is bring all of these protocols together and provide it all in a really user-friendly interface.

    Alice is a one-stop service in the future of finance.

    Source: Twitter.com

    All of the above indicates that we will see $UST on a lot more blockchains and exchanges. This will be encouraged by an initiative recently announced by Terra, in which Terra will reward anyone who convinces DeFi protocols to incorporate $UST.

    This will be very easy to do because Terra is compatible with a lot of blockchains. It will lead to increased demand for $UST and for $LUNA to mint that $UST. That is why I think that $LUNA has a lot of potential.

Author

Tuan Dinh Le
Economics Design

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