Terra’s “liquidity bootstrapping pools” were supposed to stop DeFi protocol token pump and dumps at launch, however the concept isn’t working as well as it should.
Every day, new protocols are launched on various crypto networks, and this trend is expected to continue throughout the year. According to data from DeFiLlama, Ethereum (ETH), Terra (LUNA), Binance Smart Chain (BSC), Avalanche (AVAX), and Solana (SOL) are the top five networks by total value locked (TVL). Ethereum has 579 protocols (including L1 and L2), Terra has 25, BSC has 348, Avalanche has 187, and Solana has 64. Terra stands out as the anomaly here, with its limited number of protocols and high TVL.
Terra’s TVL peaked at $20 billion in December 2021 before plummeting to $13 billion during the crisis in January 2022. To date, the ecosystem has been able to restore $26 billion in liquidity.
Terra has attracted enough TVL to become the second largest network after Ethereum, despite having only 25 protocols established on the chain. The debut of the Mars protocol and the recent announcement of backing UST (Terra’s stablecoin) with $1 billion in Bitcoin (BTC) reserves fit neatly with the unexpected spike in LUNA pricing towards the end of February 2022.
The growth in the chain’s governance token is frequently seen as an indication of trust in the network and protocols, but does the launch of a new protocol always bring value to the network and drive user activity and engagement?
Let’s look at how the price of LUNA varied as new protocols were launched on Terra, and then look at how the most recently launched Mars and Astroport protocols affected native token pricing, user engagement, and the price of LUNA.
LUNA is the tool that keeps the UST-USD peg in place
It’s vital to understand the LUNA-UST mechanism, which ensures the peg of stablecoin UST to USD, before looking into the correlation between LUNA pricing and the new protocol rollout.
LUNA is utilised as a counterpart to UST in order to keep the UST/USD price peg. When UST is worth more than $1, it indicates that there is a bigger demand for UST in the Terra ecosystem than there is supply. As a result, the protocol encourages participants to burn LUNA and mint UST in order to meet the rising demand for UST until 1 UST equals $1. When the price of UST falls below $1, the supply of UST exceeds the demand, hence UST will be burned and LUNA will be minted until the price of UST reaches $1 again.
Terra can effectively keep UST tied to USD by managing the supply of LUNA in the ecosystem. As the demand for UST grows, this mechanism causes the price of LUNA to rise.
The price of LUNA is significantly connected with the advent of new protocols
There is frequently a surge in demand for UST during the early stages of a new protocol’s development. This is due to the fact that participants want to get airdrop incentive tokens from the new protocol, and they are frequently asked to lock up UST to ensure that the system has enough liquidity when it starts.
During the pre-launch phases of the new protocol, participants’ increased demand for UST leads more UST to be coined and more LUNA to be burned, resulting in a sharp increase in the LUNA price.
Here’s an example of the recently introduced Mars protocol, where the LUNA price rose from around $50 to over $60 just two days after the pre-launch phase of the new protocol began.
Another example is how the price of LUNA rose from about $60 to over $90 in December 2021, shortly after Astroport’s pre-launch phases began.
The development of a new protocol in the last two cases has pushed up the price of LUNA, which can be considered as a good influence on the Terra network. However, in order to determine whether they contribute value to the Terra ecosystem, one must examine the protocol’s token price and user involvement after launch.
After the debut, the price and volume of ASTRO
Astroport raised $90 million in the lockdrop, but because to the adverse market situation at the start of 2022, the token price of ASTRO has fallen since the protocol’s introduction. Since the beginning of March, the price has risen and is now trading at its debut price.
Since the airdrop, the daily number of swaps on Astroport has been steadily increasing for roughly three months, showing active user participation on the site.
Since its introduction, the overall trading volume transacted on Astroport has been steadily increasing, peaking in the middle of March.
The Astroport debut was a success, and post-launch statistics indicates that the site has maintained user activity and engagement. The tale of the Mars Protocol, on the other hand, is rather different.
After the debut, the price and volume of Mars
MARS token price decreased from 1.65 UST to 0.7 UST in less than an hour following the Mars launch on March 7, 2022. This is in stark contrast to the price reaction immediately following the debut of Astroport. What happened to MARS, then?
The protocol was unable to load successfully in the web browser when it was planned to go live on March 7, 2022, at 11 a.m. GMT. Users who sought to claim the airdrop tokens via the protocol’s website were unable to do so and were forced to wait until the site was operational.
However, advanced users who knew how to interface with the Terra chain directly called the Terra station’s claim rewards method and were able to claim MARS before the less tech-savvy users. They promptly dumped the tokens on the market, causing the price to plummet.
To explain how to claim MARS by interacting with Terra chain in more detail, the investor must first know the Mars protocol’s airdrop contract address, which is publicly available on etfinder; then, and this is the tricky part, they must know which method in the code to call on Terra Station to claim the rewards.
Because the protocol is new, the code is frequently unavailable in the public domain, making it difficult for individuals to identify the claim method. However, the majority of the tech-savvy investors assumed that Mars protocol was a fork of Astroport. As a result, the claim procedure was almost certainly the same as Astroport’s. It turned out that this was correct, and these investors were able to claim the MARS airdrop by utilising the chain’s “claim rewards and unlock” function.
The Mars Protocol website was still down three hours after the stated launch time, and the airdrop MARS could not be claimed via the website. MARS’ price had already plunged 60% in three hours, from $1.65 to $0.64, and there was little that could be done if the investor didn’t know how to engage with the Terra network.
Protocol is still not working… and $MARS are getting dumped like trash…
— E.Hu (@elenahoolu) March 7, 2022
Let’s take a look at the two big products on the Mars protocol that were released shortly after the launch. After the airdrop, Red Bank, a savings and lending platform, has struggled to maintain user engagement. The number of transactions peaked at around 5,000 per day on the third day after the debut and has been steadily declining since then. Since day one, the daily volume in US dollars has decreased from $212 million to $13 million as of March 27.
Users can supply liquidity to ANC-UST, LUNA-UST, and MIR-UST through Fields, a space in the Mars protocol for yield farming schemes. The transaction and volume history for Fields after the debut reflects a similar picture. The product is struggling to maintain the same level of activity as on launch day, with the number of transactions falling to 1/8 of what they were at their peak and the volume in USD falling to less than 1/30 of what it was on launch day.
Although it’s impossible to say whether the launch problem harmed user involvement and faith in the Mars protocol, the data suggests that the protocol has struggled to draw volumes and activity after its introduction.
As seen in the contrast between Astroport and Mars, which have very similar pre-launch plans but very different post-launch outcomes, a new protocol launch does not always add value to the network.
Incidents on the day of the launch risk not just the protocol, but also user trust in the ecosystem. The vast majority of prospective investors will be turned off by an airdrop occurrence that allows only the most tech aware investors to claim first. New protocols that emerge on the Terra chain in the future should make greater attempts to prevent such instances, or investors’ long-term interests and trusts could be squandered far sooner than expected.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.