Terra founder predicts stablecoin “inflection point” in 2022

Do Kwon, the founder of Korean blockchain project Terra, believes demand for his US dollar pegged stablecoin could increase “rapidly” early in 2022, before reaching an “inflection point” this time next year.

The stablecoin, known as ‘UST,’ is fast approaching a market cap of US$10 billion, which was the end of year target set by Kwon early in 2021.

In comments provided exclusively to Asia Markets, Kwon has suggested that figure could grow significantly in coming months, as UST is adopted by more protocols.

“Currently, dozens of projects are in the audit pipeline and are gearing up for launch in the first quarter of 2022, which could amplify UST demand momentum rapidly once live,” Kwon said.

Those projects include the highly anticipated ‘Astroport’ and ‘Mars Protocol,’ which Kwon says “form foundations of a thriving DeFi ecosystem” and can serve as “liquidity black holes” for UST.

It comes after Kwon revealed 160 projects were preparing to launch on Terra earlier this year.

Terra LUNA price surge

Do Kwon says rising demand for UST is the main factor behind a 65% increase in the price of Terra’s LUNA token over the past seven days.

“LUNA’s price appreciation is a function of the demand for UST via seigniorage,” Kwon said.

“UST serves the critical role of providing decentralized money pegged to an existing unit of account at the base layer of an evolving DeFi stack.”

At the time of publication, the price of Luna was at an all time high of more than $80 – a nearly 17,000% increase on this time 12 months ago.

The coin has captured the attention of serious investors, including an Australian fund manager who recently said he had taken a “substantial” position.

UST demand explained

Kwon says the accelerating demand for UST (and subsequent LUNA burn rate) can likely be attributed to several sources:

• A recent governance proposal passed to burn approximately 90% of the LUNA in the ‘community pool’ (88 million LUNA) , which were gradually swapped for UST over the course of two weeks.

• A partnership that saw Terra team up with Abracadabra for the so-called MIM-UST Degenbox, which offers up to 100% APY on UST by depositing into Anchor and leveraging yield farming and has accelerated demand for UST on the Ethereum blockchain.

• Two recent governance proposals that passed to incentivize the UST-3CRV pool on Curve Finance (the leading DeFi app by Total Value Locked) using LUNA incentives to augment the liquidity of the pool.

• The expansion of the export demand for UST via the Wormhole bridge between Terra, Ethereum, Solana, Binance Smart Chain, and Polygon.

• The deployment of around $3 million worth of LUNA incentives for UST pools on multiple layer one ecosystems to increase UST liquidity in various pools.

Kwon says it’s difficult to attribute the recent acceleration in the demand of UST, which burned around 15 million LUNA in the past two weeks, to any singular source, but thinks the above are likely primary catalysts.

Exchange listings

Native LUNA has recently been added on the Kraken exchange, however Kwon says beyond that he can’t provide any commentary around what exchanges may list LUNA and UST next.

However, he does expect that as the demand for UST grows, the “momentum to list UST and LUNA” on major exchanges (natively not just ERC-20 versions) will “also accelerate.”

Stablecoin wars

Terra’s UST is currently the fourth largest stablecoin by market cap, behind USDT, USD and BUSD, however it is fast making up ground and Kwon says UST is uniquely positioned to succeed into the future.

“While several stablecoin incumbents have outstanding liabilities surpassing UST, most of them are subject to the custodial risk of their issuers in uncertain regulatory climates,” he said.

“Others, such as DAI, are not as scalable due to their over-collateralization models that rely heavily on centralized stablecoins as collateral underpinning the solvency of their systems.

“DeFi protocols and applications that tether stablecoin liquidity to UST gain a significant advantage over competitors as their protocols are not beholden to the counter-party and custodial risk of the centralized issuer.

“Decentralized finance requires decentralized money at the base layer.”

Terra LUNA price outlook

Kwon says the LUNA/UST price dynamics operate in a manner designed to capture value from the growth of demand (and hence outstanding supply) of its flagship product – the UST stablecoin.

“Even during bear markets, if demand for UST grows, so does the value capture of LUNA,” Kwon said.

“For example, 20% APY on UST deposits via Anchor Protocol is highly appealing when capital flows from price-volatile assets to more risk-averse yield-bearing positions when markets are in the red.

“Additionally, surging swap fee accumulation for the market (on-chain swap) on Terra is a function of increased demand for using UST on the Terra network, which translates to increased staking yields to LUNA stakers, making it even more attractive to bond in the network and hold over the long-term.

“It also reduces the liquid supply of LUNA, triggering sharper price movements since a lower percentage of the supply is available on exchanges.”

Currently, LUNA staking yield is north of 9.8%

“At this point next year, we may be close to an inflection point of decentralized stablecoin demand and adoption as UST and others like MIM + FRAX begin absorbing larger portions of the market shares of stablecoin incumbents like Tether and USDC, which are ripe for disruption,” Kwon said.

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