Strong UST Demand Drives LUNA Outperformance

Key Points

• LUNA has outperformed this week, as has more or less been the case since last November.
• UST demand has been a key driver of this, with the stablecoin now the third-largest by market cap.
• Higher demand UST creates downwards pressure on LUNA supply, supporting the token.

After hitting more than one-month lows in the $75.00s per token on Monday, the governance token native to the Terra blockchain LUNA staged a stunning 18% rebound and is back to trading near the $90.00 level this Tuesday.

The rebound was partially catalysed by broad strength in crypto markets, with the two largest cryptocurrencies by market capitalisation bitcoin and ethereum bouncing a respective 2-3% each amid dip-buying.

But crypto strategists have attributed LUNA’s outperformance this week to a very strong fundamental backdrop regarding the growth of the Terra ecosystem.

Indeed, whereas bitcoin and ethereum both trade a respective 35-40ish% below their record high levels posted last November, LUNA is up over 50% since last November, and hit a record high earlier this month.

UST Now Third Largest Stablecoin

One of the big crypto stories of this week was Terra’s US dollar-pegged algorithmic stablecoin UST overtaking Binance’s stablecoin BUSD in market cap.

According to CoinMarketCap on Tuesday, TerraUSD has a market cap of $17.63B versus Binance USD’s $17.37B, making it the third-largest stablecoin by market cap after Tether at $82.81B and USD Coin at $49.89B.

UST has seen a meteoric rise in its market cap since last November, jumping from under $3B to current levels nearing $18B. That compares to a rise in BUSD’s market cap of only about $4B over the same time period and a roughly $9B increase in USDT’s market cap.

UST’s growth likely has a lot to do with the attractive yields on offer in the Terra ecosystem, most notably the Anchor Protocol’s stable near 20% APY payout.

Indeed, since last November, the trade value locked (TVL) on the Anchor Protocol has jumped from about $4.5B to current levels around $15.5B, driving much of UST’s recent growth, data on DeFi Llama shows.

Looking at the TVL of the broader Terra ecosystem; it has more than doubled from around $11.5B mid-last November to current levels in the $28.00Bs.

For comparison, over the same time period, TVL on the ethereum network has slumped by about $40B to around $116B.

UST Demand Drives LUNA Scarcity

Recent growth in demand for UST as crypto investors seek to take advantage of the various high yield opportunities on offer on the Terra network has been a key factor supporting the price of LUNA in recent months.

Given the incentive mechanism behind how UST maintains its peg (through the minting and burning of equal dollar amounts of LUNA tokens), when demand for UST goes up, putting upwards pressure on the peg, arbitrageurs are incentivised to burn Luna tokens, reducing supply.

Total LUNA token supply had fallen to under 740M tokens as of Monday, down from the genesis total supply of 1B, with much of this decline coming since last November.

Luna May Weather Broader Crypto Market Storms

Much of the broader cryptocurrency market’s recent downturn has its roots in rising interest rates in the US as a result of the Fed’s recent hawkish policy shift towards emphasising bringing inflation under control.

However, so long as demand for UST continues to grow, exerting fresh downwards pressure on LUNA supply, there is every reason to believe that LUNA can continue to weather broad cryptocurrency market storms.

LUNA bulls will now look to push the token back above its 21 and 50-Day Moving Averages in the $93-$97.00s area and then back above the $100 mark.

Meanwhile, dips may continue to be viewed as buying opportunities. Notably, the 200-Day Moving Average has held up well so far in 2022 and currently resides just under $70. LUNA holders will likely jump at the opportunity to add to their positions should the token fall back to these levels once again.