LUNA Drops 20% As Investors Panic, What’s The Link To Anchor?

LUNA has fallen sharply in recent days, deeper than larger cryptocurrencies. At press time, Terra’s native token at critical support barely moves above $50 with a loss of 16.4% in the last 24 hours.

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LUNA on a downtrend in the 4-hour chart. Source: LUNAUSDT Tradingview

According to to Wu Blockchain, the token lost as much as 20% in the past day. Apparently private investors were panicking about selling their LUNA funds due to concerns about several of their dApps and UST. The latter is one of several stablecoins operating on the Terra ecosystem that relies on a supply and demand mechanism to maintain its peg.

As NewsBTC reported in December, UST is gaining relevance in the DeFi sectors. The stablecoin gives holders access to the Anchor Protocol, the Terra-based lending and lending application that consistently offered its users a 19.5% compound return on their UST deposits.

This percentage exceeds that of its competitors, some of which have trouble offering a 10% yield with comparable products. However, the current downward trend in the crypto market has had a major impact on LUNA and the Terra ecosystem.

Some users believe the ecosystem as a whole could be at risk due to a reduction in Anchor’s reserves, which some forecast could reach $0 in the coming weeks. Without these funds, the protocol would not be able to repay its users and Terra’s mechanism would allow it to take another step in its assets.

The pegged UST has been offered in recent days as more users seem to believe this theory. This is how panic spreads among sellers who want to limit their losses. At the time of writing, UST has made a significant recovery as it hit a multi-month low of 0.98 against the US dollar.

UST is recovering its pegged position on the 4-hour chart. Source: Trading Display

Terra (LUNA) Inventor solves anchor problems

Do Kwon, co-founder and CEO of Terraform Labs, the entity behind Terra’s ecosystem, recently addressed the controversy surrounding Anchor and UST. In an effort to counterbalance the FUD, as one LUNA holder put it, Do Kwon emphasized Anchor’s goals.

The first, he wrote on a Twitter thread, is to make the market returns on stablecoins less volatile, while increasing the capital efficiency of the platform. Anchor’s Yield Reserve is a “centerpiece” for addressing these issues, but this part of the protocol can work with either a surplus or a deficit. kwon said:

Recently, as crypto markets have started to deleverage, deposits have risen sharply and borrowing has fallen. The yield reserve has been short to maintain deposit yields.

Users seem to believe that the Yield Reserve, Kwon said, “should always operate with a surplus,” and that the depletion of the YR “will have disastrous consequences.” The Terraform Labs co-founder said Anchor’s Yield Reserve has always been designed to be used under current market conditions.

About the second widespread concern from users, Kwon said that if the protocol runs out of money in its Yield Reserve, it will “operate like a regular money market” and still offer users about 15% to 16% in incentives. Therefore, he concluded that the protocol, and by extension the ecosystem, “will be good”.

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Going forward, the Terraform Labs team will make improvements to reduce “LUNA dominance in Anchor collateral below 40%.” In this way a similar situation could be avoided. Meanwhile, Kwon said:

I am determined to find ways to subsidize the revenue reserve. Anchor is still in the growth phase and maintaining the most attractive yield in DeFi stable will amplify that growth and build canals.

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