The end of the year is usually a time to relax and prepare for the holiday season, but the final weeks of 2021 saw a crypto market that showed no signs of slowing down.
One of the headline-grabbing stories related to Terra hit an all-time high in terms of Total Value Locked (TVL), and the project surpassed Binance Smart Chain (BSC) as the second-largest decentralized finance blockchain after Ethereum. . After hitting the $ 20 billion TVL mark on Dec. 24, Terra's TVL has dropped to around $ 19.3 billion at time of writing, according to data from Defi Llama, but this is by no means a bearish sign.
Currently, Terra has only 14 protocols built into the chain, compared to 257 protocols on BSC and 377 on the Ethereum network. Terra's protocols have been very successful in attracting liquidity, and the recent launch of the Astroport protocol coincides very well with the rapid rally of Terra's native government token, MOON, to a new all-time high on December 26, 2021.
Looking at the TVL in US dollars against LUNA, the former has seen exponential growth since September 2021, while the latter has remained fairly flat over the same period. It is not difficult to see that the contributing factor to the recent increase in the TVL of the US dollar is the increase in the price of LUNA itself.
While price increases in the governance token often show investor confidence in the chain and protocols, it also appears to generate more lucrative arbitrage opportunities.
Let's take a closer look at some of the strategies used to arbitrage between LUNA and your bLUNA bond asset.
Why are there spreads in the Terra markets?
LUNA is the governance and participation token of the Terra blockchain, while bLUNA is the token that represents the LUNA in participation and its corresponding block rewards. Since bLUNA is fungible and transferable just like LUNA, it is also traded on Terra's decentralized exchange.
Like other currency pairs or tokens that are traded on exchanges, the LUNA / bLUNA pair is traded on different decentralized exchanges (DEX) such as TerraSwap, Loop markets or Astroport you may be priced differently due to pricing inefficiency on different platforms. Arbitrators will benefit from buying at a lower price in one protocol and selling at a higher price in another, which will help platforms resolve pricing inefficiencies and ultimately reach a fair price on all exchanges.
In addition to the common reason for pricing inefficiency, there are other factors specifically related to the nature of bLUNA that cause the LUNA / bLUNA price to differ between protocols.
- bLUNA has a higher price than LUNA in Anchoring protocol. This is because bLUNA, once bonded and minted in Anchor, can only be burned and changed back to LUNA after 21 days (plus three days of processing time), unless it is an instant burn.
- Since bLUNA represents not only the value of the LUNA wagered, but also the block rewards for wagering during the 21-day blocking period, its value is always greater than that of LUNA. As shown in the graph below, the price of bLUNA per MOON is slightly below 1 on Anchor most of the time, with three different outliers showing that bLUNA turned out to be more valuable at 0.97 bLUNA per MOON. .
- LUNA is priced higher in DEX than bLUNA most of the time, possibly due to:
(1) More users selling bLUNA than buying from DEX (therefore bLUNA is worth less) because recording bLUNA in Anchor Protocol takes 21 days if it is not an instant recording. So if users want to get LUNA back instantly, they have to go to a DEX to sell bLUNA. (For an instant bLUNA recording on Anchor, the rate is the same as on TerraSwap.)
(2) Users typically don't want bAssets as much as bLUNA unless they need to use them as collateral at Anchor. Anchor currently provides the linkage functionality to swap LUNA for bLUNA at a very close but slightly less than 1 ratio, meaning inverters get just under 1 bLUNA for 1 LUNA. Although the exchange rate in DEX is better (traders get more than 1 bLUNA for 1 MOON in DEX), users tend to look for the most convenient way, which is to use Anchor Bond, to get their bLUNA so as not to have to switch between different protocols.
How to Capitalize on Terra Arbitrage Opportunities
Based on the price difference explanations presented above, there are two main ways to arbitrate LUNA and bLUNA.
TerraSwap, Loop Markets and Astroport offer swaps for LUNA / bLUNA. There are often small price differences between these DEXs, creating arbitrage opportunities for traders to buy the pair at a lower price on one DEX and sell it at a higher price on another.
The graph below shows the daily average price of LUNA / bLUNA observed in the exchanges of different platforms during December 2021. The ratio is the actual amount of bLUNA received (after deducting fees and slippage) divided by the amount of LUNA offered for exchange. As explained in the previous section, a LUNA is traded for more than one bLUNA on DEX due to increased demand for LUNA on DEX.
The graph below annualizes the daily arbitrage performance between two of the three DEXs. The best opportunity existed on December 15 between TerraSwap and Loop, with an Annual Percentage Yield (APY) of almost 600%.
Arbitration between DEX and Anchor
Investors can trade LUNA for bLUNA on one of the DEXs offering the most bLUNA per LUNA, burn bLUNA on Anchor, and wait 21 days (plus three days) to retrieve more LUNA. Note that the Anchor recording has to be a normal "slow" recording; snapshots will not work because the exchange rate is the same as TerraSwap.
Based on the 24-day annualized performance (21 + three days of Anchor burn processing), the graph below shows the APY of arbitrage between different DEX and Anchor.
Lido's The 8% APY of LUNA's net interest is also added as a risk-free benchmark performance comparison. During the month of December, the highest APY reached 80% on December 27 and has since declined significantly, falling below risk-free returns in the new year.
This could be because Terra's growing popularity and increased involvement in different Terra protocols have helped streamline pricing across all platforms, reducing pricing inefficiencies and arbitrage opportunities, and consequently creating a lower price. just.
Smart investors are always on the lookout for the next opportunity
As shown in historically observed trading data from December 2021, there are LUNA / bLUNA arbitrage opportunities on different protocols on Terra. Traders can choose the riskiest way to arbitrate between different DEX platforms, such as TerraSwap, Astroport, and Loop Markets, or they can choose the safest way to arbitrate between these DEX and Anchor platforms, given that they are willing to hold bLUNA for 24 days.
The annualized performance of the DEX and Anchor arbitrage strategy consistently outperformed Lido's risk-free liquid stake in December 2021 until recently, when the return nearly evaporated on January 1, 2022.
This was possibly due to increased participation and price rationalization in Terra's protocols. Arbitrage opportunities are likely to reappear in the future due to volatilities in trading volumes and participation or the launch of new DEX protocols.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every trade and investment move involves risk, you need to do your own research when making a decision.
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