Amid last week's onslaught of the cryptocurrency market, LUNA appeared to be the only safety net for investors.
When bitcoin (BTC) dropped more than 18% and ether (ETH) dropped almost 17% between Friday (3) and Saturday (4), LUNA also dropped, but the next day, Sunday (5), it soared and hit a new high of $77.73 while bitcoin and ether were still struggling to recover.
Of course, any financial instrument that manages to weather this storm (and come back even stronger) will be an attraction for investors.
But crypto investors have been interested in LUNA for a long time. The token basically hit a record high almost every day for a week.
Unlike popular meme cryptocurrencies like DOGE or SHIB, LUNA also has a pretty robust toke economy.
In addition to facing DAI as the second-best decentralized stablecoin, the vast Earth ecosystem is emerging as a possible and formidable “Ethereum killer” (term given to a network that could dethrone Ethereum in the future).
So let's understand what's happening, why it matters and how developments on Terra are driving the price of LUNA.
TerraUSD (UST) exists as a stablecoin breeder. You can create any trust-backed token using Terra, whether euro or dollar.
This stablecoin is not backed by anything like USDT or USDC, nor is it over-guaranteed like Maker's DAI. DAI is created when users block more than 100% of another cryptocurrency such as ether or USDC as collateral.
TerraUSD does not use any of these mechanisms.
Instead, it's carefully linked to LUNA, Earth's equivalent of Ethereum's ether. Every time someone wants to issue UST, they must also burn an equivalent dollar amount of LUNA (and vice versa).
If you want to emit 50 UST ($50), then you will need to burn 0.774 LUNA (at current prices). Basically, 1 UST can always be burned for $1 in LUNA.
The issue/burn mechanism, in addition to some specialized market arbiters, also helps to prevent UST from trading too much above or below its discount.
All of this is relevant to understanding why LUNA fired recently.
UST can trade a few cents above its backing because there is greater demand for its stablecoin than there is for supply. When that happens, an arbitrage opportunity arises.
If UST is priced at $1.03, for example, then LUNA holders can burn $1 LUNA to create 1 UST. They can sell that UST and make a small profit of $0.03. Here, LUNA is destroyed to increase the UST supply.
If UST is trading at a discount, such as $0.97, then the opposite trade presents a similar opportunity. Users would be encouraged to purchase the UST at a discount and convert it for $1 LUNA. In this environment, UST is burned and the supply is reduced.
But who cares about pennies on arbitrage opportunities?
The reason this matters is because a solid stablecoin (such as one that keeps its ballast through any adversity) is critical to anything you want to do in the world of Decentralized Finance (or DeFi) .
Furthermore, the Terra ecosystem is limited to other popular stablecoins; there is only UST to move stable value.
As DeFi protocols emerge left and right in the Terra ecosystem, users need UST to trade.
Projects such as the Anchor Protocol (which allows you to earn 20% off your UST) or Mirror (which allows users to create synthetic actions that track Apple , Google and Tesla ) have already gained a lot of traction.
At that time, in 2020, there was less than $50,000 allocated to different DeFi projects. Currently, Terra has nearly $13 billion allocated to just ten different projects.
As DeFi becomes popular on Terra, users inside (and outside) the ecosystem will need to use UST to interact with various protocols. This demand will put pressure on stablecoin, possibly pushing it above $1.
Every time there is a premium on UST, smart traders are encouraged to buy LUNA and burn it to issue UST and capture that premium.
The act of buying and destroying a token, from a purely supply and demand perspective, will cause the price of the token to go up. DeFi's growth using land has been absurdly optimistic for its native token.
The trade-off is whether this growth will continue. Although Terra is competing with DAI, could anything dethrone Terra?
*Translated and edited by Daniela Pereira do Nascimento with permission from Decrypt.co .
The post Why the Earth (LUNA) is surviving the crypto market massacre first appeared in Bitcoin Portal .