Terra (LUNA) price rallies 162% while Bitcoin and altcoin prices drop

Bitcoin (BTC) price appears to have faked out investors with its move to $42,000 last week and while the digital asset struggles to hold above $38,000, altcoins with strong fundamentals and real-world applications are gaining momentum. 

Terra (LUNA), a blockchain protocol that backs the fiat-pegged TerraUSD (UST) stablecoin, is one such project that has managed to buck Bitcoin’s downtrend and climb higher since the start of August

LUNA/USDT 1-day chart. Source: TradingView

Data from Cointelegraph Markets Pro and TradingView shows that the price of LUNA has rallied 162% from a low at $5.53 on July 20 to an intraday high at $14.51 on Aug. 3 as its 24-hour trading volume increased from $137 million to $774 million.

Three reasons for the surge in interest include LUNA’s rapidly expanding ecosystem, the addition of a wrapped form of Ether (ETH) to Anchor protocol which brings Ether staking rewards to the Terra ecosystem and the protocol’s tokenomics which help control the circulating supply of LUNA and UST.

Ecosystem growth attracts new participants

One of the clearest signs of adoption for the Terra ecosystem is its rapidly expanding list of partners and projects launching on the Terra blockchain.

Terra ecosystem. Source: Smart Stake

The growing ecosystem offers access to some of the hottest sectors in cryptocurrency including decentralized finance (DeFi) and nonfungible tokens (NFT) as well as bridges to other blockchain networks such as Ethereum and Solana. The blockchain also supports numerous retail and payment protocols that allow token holders to use LUNA and UST for every daypurchases.

Terra currently offers stablecoin support for 17 fiat currencies including the U.S. dollar, the Euro and the Canadian dollar and there are plans to expand this list as the ecosystem grows.

Related: New study reveals high demand for payments in cryptocurrency

Anchor protocol votes to add Ether as collateral

A second reason for the bullish price growth seen in LUNA is the ongoing vote on the Anchor protocol to add wrapped Ether to the platform in order to mint UST.

The integration is made possible through a partnership with Lido, a staking protocol for Ethereum and Terra, which enables stakers to receive liquid stETH (staked Ethereum) and bLUNA (bonded LUNA) tokens.

Should the vote pass, Ether will become the first collateral option to bring in staking rewards from outside the Terra ecosystem and this is expected to boost the total value locked on the protocol to a new all-time high.

LUNA burns as traders arbitrage UST

A third reason for the increase in demand for LUNA relates to the protocol’s tokenomics and the utilization of LUNA to mint UST.

In order to mint new UST, an equivalent amount of LUNA must be burned in the process which has an effect on the supply and price of LUNA.

As established platforms like Mirror Protocol grow and require more UST to bootstrap the platform and new protocols launch on the Terra network, the increased demand has the potential to trigger price gains for LUNA and UST.

Higher demand for UST typically pushes its price above $1 and this results in arbitrage opportunities for token holders who can purchase $1 of LUNA on exchange and burn it via Terra Station for 1 UST even though the price of UST may currently be $1.10.

This mechanism is how new UST enters the market and also ensures that the protocol maintains its price peg at $1.

As seen in the above tweet, as new UST were been minted over the past week, the circulating supply of LUNA has decreased and this had a positive effect on LUNA price.

The addition of Ether as a collateral option combined with a growing field of stablecoin offerings and new protocols launching on the network all have the potential to lead to further increases in LUNA price.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and trading move involves risk, you should conduct your own research when making a decision.

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