Layer 1 Boom Drives Terra’s LUNA Token to the Moon

And you thought Solana was hot. Well, it is, but Terra’s LUNA token has eclipsed SOL in the last month.

LUNA has skyrocketed about 265% in the last 30 days compared to SOL’s 150% performance, according to CoinGecko. While Avalanche’s AVAX token has more than tripled in value in that period one thing seems clear amid all this froth — investors love Layer 1 protocols.

These platforms enable users to use DeFi apps built with smart contracts. Yet they tend to be much cheaper to use than apps on Ethereum such as Compound Finance and MakerDAO. Layer 1s achieve the lower fees through different means. Some like Binance Smart Chain process more transactions per block, and the higher supply lowers prices. Others such as Polkadot run many data structures, usually blockchains, in parallel, which also increases transaction throughput, lowering prices.

Transaction Prices

Ethereum transaction prices, called gas, have soared in August. It now costs over $50 to deposit into Compound, which appears to be spurring investors to place their bets on chains such as Terra. Compound’s token has declined 2.6% in the last seven days and is up a relatively mild 10.5% in the last 30 days.

Moreover, bridge infrastructure, the technology that allows people to transfer tokens across Layer 1s, is maturing. On Aug. 23, Nerve, which started as an automated market maker, shifted to become the Synapse Protocol. It will facilitate cross-chain swaps to connected chains in under three minutes. That’s fast. In its announcement post, Synapse highlighted Terra, Avalanche, Solana, and Polygon as examples of a maturing L1 ecosystem, suggesting those projects may soon be interconnected.

Terra’s LUNA is also creating a lot of buzz with a major upgrade planned for Sept. 9. It’s called Columbus-5 and it will activate the Inter Blockchain Communication protocol to communicate with Cosmos and other blockchains. A proposal also recently passed to bring Terra’s stablecoins to the Solana DeFi ecosystem.

Cross-chain bridges will allow Terra to export its stablecoins to other platforms. As LUNA’s value is linked with demand for Terra’s stablecoins, their increased usage across blockchains should be bullish for the token. For example, if demand is high for Terra’s leading stablecoin TerraUSD, the token will trade above its $1 peg, say at $1.05. Users can then buy LUNA, use the Terra protocol to exchange it for $1 of TUSD at peg, and then sell the TUSD on the open market at $1.05. The supply increase brings the price down to $1 while the trader profits from the arbitrage opportunity.

Community Pool

Under the Columbus-5 upgrade, LUNA swapped for UST will be burned, as opposed to sent to a community pool as it is currently. This should add downward pressure on supply and, theoretically, further drive up prices.

Looking at the charts, UST supply does indeed seem loosely correlated with LUNA’s price. There’s been roughly a 13% increase in UST supply in the last 30 days and a whopping 234% increase in LUNA’s price after a lull in both metrics since the mid-May crash.

All this action appears to be lighting a fire under LUNA.With a $12.2B market capitalization, the token is ranked 12th of all cryptocurrencies, according to CoinGecko. In terms of total value locked (TVL), Terra’s $6.5B places it third behind Ethereum and Binance Smart Chain, according to dashboard DeFiLlama. What’s more, that’s happened on the back of only six DeFi applications – Ethereum has over 200, BSC has over 70, and Polygon has 48.

That may change when a slew of new protocols launch soon. These include the Mars Protocol, Terra’s first borrowing and lending protocol, which will feature an undercollateralized loans framework, according to the project’s Twitter account.