Terra’s LUNA token rose to as high as $104.58 on Wednesday morning, topping a previous all-time record of $103.34 notched last December.
According to data from CoinMarketCap, LUNA was up 25% over the previous 24 hours. As of press time, the token had pulled back a bit to $102. LUNA has now more than doubled in price since putting in a 2022 low of about $44 in late January. Its current valuation just shy of $38 billion makes it the sixth-largest cryptocurrency by market cap.
LUNA’s new milestone makes it an outlier among large-cap cryptocurrencies, with names like bitcoin (BTC), ethereum (ETH), cardano (ADA), binance (BNB), avalanche (AVAX) and solana (SOL) down 40-70% from all-time highs.
The LUNA/UST relationship
The gains for LUNA are likely thanks to strong demand for sister token TerraUSD (UST), an algorithmic stablecoin pegged to the U.S. dollar.
UST maintains its dollar peg by burning or issuing LUNA tokens. When the value of UST drops below $1 (for example, to $0.98), holders of UST can convert UST to $1 worth of LUNA (therefore, arbitrageurs can pocket the $0.02 difference).
Conversely, if – as appears to be occurring now – demand for UST drives the price of the token over $1, users can mint additional UST (driving the price of UST back down to $1) by burning the dollar-equivalent amount of LUNA. This burning of LUNA tokens to create UST drives up the price of LUNA.
Anchor Protocol driving UST demand
Behind that strong demand is Terra’s Anchor Protocol, a decentralized finance (DeFi) platform advertising an annualized percentage yield (APY) of nearly 20% on Terra stablecoins. That high yield compared to other stablecoin lending protocols has attracted an influx of capital into Terra in recent weeks. The total value locked (TVL) on the platform soared to $12.6 billion, making it the largest DeFi protocol by TVL in the Terra ecosystem, according to data provider DeFi Llama.
Anchor is currently paying out a 19.46% APY for users that lock up their UST in the protocol. The Luna Foundation Guard (LFG) tweeted last Saturday that it was minting the “maximum amount” of UST to keep up with demand.
Due to the high demand in UST, the maximum amount is being minted by the protocol everyday. As a result, people have turned to the curve pool to get their UST, which has caused the curve pool to become unbalanced.
— LFG | Luna Foundation Guard (@LFG_org) March 5, 2022
In another tweet this morning, the LFG said it would burn the remaining 4.2 million LUNA left in its treasury to provide UST liquidity to the stablecoin decentralized exchange Curve.
Due to such a high demand for $ust , the curve pool is unbalanced again…
LFG council members just voted on burning the 4.2m $luna left in LFG treasury.#LUNAtics
— LFG | Luna Foundation Guard (@LFG_org) March 9, 2022
To add further tailwinds, Terra co-founder Do Kwon tweeted that the LFG is adding $418 million in reserves to its treasury, bringing its total to $1.5 billion.
The reserves could be used to buy LUNA tokens to convert to UST, or to shore up Anchor’s reserves to pay those sky-high yields to depositors. Either scenario would put upward pressure on the price of LUNA.
. @LFG_org has just added $418M to its reserves – current balance around 1.5B
— Do Kwon ? (@stablekwon) March 9, 2022
CORRECTION (March 9, 8:15 UTC): Corrects to say 4.2 million LUNA tokens. Original version said $4.2 million of LUNA tokens.
