Terra, an open-source blockchain platform for algorithmic stablecoins, has been on fire over the last half-year or so. The value of its native crypto asset LUNA<\/a>\u00a0has risen from $24 to over $100 during the last six months, placing it in the top 10 cryptocurrencies by market capitalization.\u00a0<\/p>\n And, even though LUNA has showcased minor corrections here and there, the currency and the Terra project, in general, have continued to grow from strength to strength. To this point, on March 4, LUNA flipped Ether (ETH<\/a>) in terms of total staked value, with $29.5 billion worth of LUNA being locked up within the platform<\/a> compared to ETH\u2019s $25.9 billion.<\/p>\n Furthermore, Terra\u2019s native data show that the ecosystem currently has over 230,000 stakers, making it the second-most staked crypto asset with more than four times the number of those staking ETH at 54,768. Lastly, in terms of its annual staking rewards, LUNA touts an average annual yield of around 6.62%, while ETH fetches 4.81%.<\/p>\n With LUNA up over 350% in the last 12 months, a number of pundits have continued to claim that Terra\u2019s aforementioned growth may not be sustainable. In fact, individuals associated with the ecosystem \u2014 both for and against \u2014 have placed massive bets in regard to where LUNA will be trading around this time next year.<\/p>\n With LUNA up over 350% in the last 12 months, a number of pundits have continued to claim that Terra\u2019s aforementioned growth may not be sustainable. In fact, individuals associated with the ecosystem \u2014 both for and against \u2014 have placed massive bets in regard to where LUNA will be trading around this time next year.<\/p>\n Pseudonymous crypto trader \u201cSensei Algod\u201d is so bearish on Terra\u2019s token that he recently wagered $1,000,000<\/a> that by March 14, 2023, LUNA will be trading at a price point lower than what it was on the above said date at $88. Algod\u2019s proposition was swiftly taken up by Do Kwon, CEO and founder of Terraform Labs, the firm behind Terra, who also put up the same amount claiming that the cryptocurrency will most definitely be trading at a price point higher than $88 by then.<\/p>\n As conversations between the two escalated via Twitter, the duo eventually decided to seek out the services<\/a> of Cobie, co-host of the crypto podcast UpOnly, who will serve as an escrow agent facilitating the entire agreement. To elaborate, both Kwon and Algod have locked up a total of $1 million each in Tether (USDT<\/a>) within an Ethereum address labeled<\/a> \u201cCobie: LUNA Bet Escrow.\u201d<\/p>\n Kiril Nikolov, head of DeFi strategy at Nexo, a blockchain-based lending platform, told Cointelegraph that while bets like these can gather a lot of attention, they don\u2019t \u201creally matter\u201d in the grand scheme of things. He added that developers will keep on building on Terra regardless of LUNA\u2019s price or if Do Kwon loses the bet.\u00a0<\/p>\n A similar opinion is shared by Derek Lim, head of crypto insights for cryptocurrency exchange Bybit, who told Cointelegraph:\u00a0<\/p>\n \u201cI don\u2019t think that we can or should read too much into this. It will be a stretch to think that this wager between private parties can mean anything insidious or bullish. Instead, we should focus on other factors like the sustainability of the project\u2019s yield reserve.\u201d<\/p><\/blockquote>\n Daniel Santos, CEO of Woonkly, a decentralized finance- (DeFi)-based social media network, believes that wagers showcase LUNA\u2019s growing popularity. \u201cThe more popular a project is, the more fans and haters it has. One of the haters placed a bet against LUNA and Terra\u2019s founder accepted the bet and why not \u2014 it\u2019s that simple,\u201d he told Cointelegraph.<\/p>\n While on paper, Terra\u2019s rise seems extremely impressive, especially with LUNA flipping ETH in terms of staked value and their number of respective token stakers, Nikolov pointed out that there\u2019s a major difference in the staking model of the two projects, given the inability of investors to withdraw their staked ETH and its rewards until Ethereum 2.0 is released. \u201cThus, it\u2019s normal that only a small percentage of all ETH is staked, compared to LUNA,\u201d’ he added.\u00a0<\/p>\n Furthermore, Nikolov noted that Terra has done a great job in recognizing that liquid staking solutions are needed in order to generate stable and composable demand that can further be used for collateral, adding:<\/p>\n \u201cOnce the Eth2 merge is complete, we can expect the percentage of staked ETH to become similar to that of LUNA, with liquid staking solutions such as Lido playing the main role of generating utility of the staked ETH, for example, as collateral).\u201d<\/p><\/blockquote>\n Lim believes that Terra\u2019s existing staking yields are quite sustainable, adding that at a very baseline-type level, the staking rewards generated via the system\u2019s Tobin tax and the spread fees from the LUNA\/TerraUSD (UST) mintburn swaps are very practical.<\/p>\n The Anchor Protocol (ANC), a decentralized lending application built atop the Terra ecosystem currently allows investors in TerraUSD \u2014 the platform\u2019s native United States dollar-pegged stablecoin \u2014 to accrue an annual percentage yield (APY) of nearly 20%. Theoretically, such high interest rates are made possible by the fact that the deposited stablecoins are pooled and lent out to borrowers to accrue interest.<\/p>\n Also, in order for an individual to borrow UST, they need to post staked tokens including staked LUNA and staked ETH as collateral. When the earned interest and staking rewards are not able to stay in line with the outlined interest rate of 20% \u2014 which is the case right now \u2014 Anchor is forced to take money from its \u201cyield reserve\u201d to compensate for the gap existing between its total earnings and payouts.\u00a0<\/p>\n In its current state, Anchor is being manipulated by some savvy users who, over the past few months, have been taking UST loans at an annual percentage rate (APR) of close to 2.5% and then depositing that same sum back into the Anchor protocol to accumulate 20% profits. Thus, there is a major imbalance within this setup because there is more demand for the 20% yields than for UST borrowers.<\/p>\n To help meet these unsustainably high payouts, Anchor has been going through its native reserve pools at a furious pace, as is highlighted by the fact that the protocol\u2019s crypto coffers, between late December and mid-February, shrunk<\/a> from $70 million to just a little over $6.50 million.<\/p>\n Jack Tao, CEO of cryptocurrency exchange Phemex, told Cointelegraph that even though Anchor\u2019s extremely high yield ratio has helped push the demand for UST and LUNA \u2014 with the latter\u2019s value increasing by 60%<\/a> over the past month alone \u2014 the protocol\u2019s current APR may be extremely hard to maintain, adding:<\/p>\n \u201cWe have to note that the crypto market is highly volatile and these high yield payouts are definitely hard to sustain in the long run, as much of it may be inflated due to speculation. Now that there\u2019s more UST in existence than ever, there are already critics that believe LUNA won\u2019t be able to sustain its price unless Terra changes its current model.\u201d<\/p><\/blockquote>\n Lim, too, believes that Achor\u2019s current APR is pretty unsustainable. He pointed out that the protocol functions just like any other money market. If the yield reserve depletes, the APR is adjusted to a sustainable amount \u2014 around 12\u201315% per annum \u2014 which is pretty good for stablecoins.\u00a0<\/p>\n On a more technical note, he stated that there are four key issues facing Anchor that need to be solved immediately in order for the project to move forward in a sustainable manner. These include deposit growth outpacing borrowing, difference in borrowing and spending ratios to maintain an APR of 20%, the slow rate at which the protocol allows for the addition of new collateral assets and existing friction between Anchor and other blockchain ecosystems.<\/p>\n Nikolov noted that while UST\u2019s fluctuating rate of yield reserves on Anchor is unsustainable, it has allowed the stablecoin to become widely adopted. This is something he believes could play a big role in the asset\u2019s long-term success.<\/p>\n Santos is of the opinion that most projects entering the crypto market \u2014 especially the decentralized finance sector \u2014 tend to make use of a high APY model to attract investors, even though they know quite well that these inflated return rates are not very sustainable in the long run.\u00a0<\/p>\nThe $1 million bet that has the Terra community buzzing<\/h2>\n
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Is Terra\u2019s growth really sustainable?<\/h2>\n
Terra\u2019s Anchor conundrum<\/h2>\n
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The ecosystem needs to continue maturing<\/h2>\n