Terra (LUNA) is an algorithmic stablecoin project that mints and burns its LUNA token and its US Dollar-pegged stablecoin, UST, to keep UST from losing its peg. Since February 1 2022, the LUNA token's market cap has increased to $34B from $20B. It’s unclear exactly why LUNA is going up, but contributing factors could include Terra’s recent $1B fundraise, Anchor Protocol’s recovery, and Wonderland’s collapse ending.
A Billion Dollars
On February 22, 2022, Terra announced via tweet that it had raised $1B in a private token sale: "The Luna Foundation Guard (LFG) has closed a $1 billion private token sale to establish a decentralized $UST Forex Reserve denominated in $BTC!" The tokens Terra sold will be locked up for four years. The idea is that, with a significant reserve mostly held in Bitcoin, Terra will be able to stabilize its stablecoins more effectively. As investors adopt Terra's stablecoins, LUNA is burned to mint more UST, which increases the price of all existing LUNA tokens.
Anchor Protocol and LUNA's Total Value Locked
On February 1 2022, Terra's total value locked (TVL) was $12B. Today it is $23B. This may be partly attributed to the recent stabilization of Anchor Protocol (ANC).
Anchor Protocol (ANC) is the largest lending protocol on the Terra network, with $11.6B in total value locked (TVL), representing roughly 50% of all TVL in the Terra ecosystem. Anchor is well known for offering a 20% yield on staked UST. Investors looking to save, called savers, can deposit Terra's stablecoin, UST. Anchor then lends that UST to borrowers, who deposit proof-of-stake assets as collateral.
In a sideways market, Anchor's reserve fund of proof-of-stake assets–the collateral from the borrowers–fails to increase in value. This lack of growth makes it difficult to pay 20% returns to savers.
If too many investors want to park stablecoins with Anchor, and too few investors want to borrow, this creates a further imbalance because there isn’t enough loan interest to pay a 20% yield to savers. To continue meeting its promised yield for savers, Anchor burns through its reserves and mints more ANC tokens to distribute.
In late January 2022, this effect tanked Anchor. At one point, the protocol had $6.1B deposited in savings and $1.5B borrowed. This imbalance required Anchor mint more ANC to pay investors, causing a steep decline in the price of the ANC token. ANC dropped to $1.25 from $4 during February 2022.
Anchor has since recovered–due in part to a cash injection–and the ANC token trades above $4 again. As more investors use Anchor, more UST is minted, which drives up the price of LUNA. According to traders, Anchor appears to be stronger than before it crashed, but some investors are not convinced.
TIME Wonderland is Done Crashing Terra LUNA
The collapse of TIME Wonderland forced investors to unwind leveraged positions on Abracadabra that paired Terra's UST with other assets. This UST was minted using leverage, and when the positions were closed, the price of LUNA went down to account for the UST being "withdrawn." The effect of Wonderland's crash may finally be subsiding. That said, LUNA may also be going up again due to similar DeFi shenanigans.