This article comes fromCointelegraph, the original author: ELAINE HU, compiled by Odaily translator Katie Ku.
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Terra Market Analysis
One of the most notable news is that Terra reached an all-time high in terms of TVL (Total Value Locked), the project overtook BSC to become the second only DeFi chain behind Ethereum. After hitting the $20 billion mark on Dec. 24, Terra's TVL has dropped to around $19.3 billion at the time of writing (not a bearish sign), according to Defi Llama.
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The top five public chains with locked value. Source: Defi Llama
TVL in USD terms has experienced exponential growth since September 2021 compared to LUNA, which has remained fairly flat over the same period. It's not hard to see that the main reason for the recent increase in the TVL USD price is the increase in the LUNA price itself.
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The total locked value of Terra USD and LUNA are compared. Source: Defi Llama
Let's look at some strategies for arbitrage between LUNA and its backing asset, bLUNA.
LUNA price VS LUNA /bLuna premium ratio. Source: Flipside Crypto
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Why is this happening on Terra's marketplace?
LUNA is the governance and pledge token of the Terra public chain, while bLUNA is the token representing the pledged LUNA and its corresponding block rewards. Since bLUNA is fungible and tradable like LUNA, it is also traded on Terra's decentralized exchange.
Like other currency or token trading pairs traded on exchanges, LUNA/bLUNA trading pairs traded on different decentralized exchanges (DEXs) may have different prices due to price inefficiencies of different platforms. Arbitrageurs will profit by buying from one agreement at a lower price and selling at a higher price on another agreement, helping platforms resolve price inefficiencies and ultimately reach across all exchanges a fair price.
In addition to common causes of price inefficiency, there are other factors, such as those related to the nature of bLUNA, that make the price of LUNA/bLUNA vary between different protocols.
The price of bLUNA is higher than that of LUNA on the Anchor protocol. This is because bLUNA once staked and minted on Anchor can only be burned and traded into LUNA after 21 days (plus 3 days processing time), unless it is burned immediately.
Since bLUNA not only represents the value of the LUNA held, but also represents the block reward of the LUNA held during the 21-day lock-up period, its value is always higher than that of LUNA. As shown in the graph below, on Anchor, the price of bLUNA is slightly below 1 most of the time, and three different outliers show that bLUNA is more valuable at a ratio of 0.97 (bLUNA/LUNA).
The price of LUNA on the exchange is usually higher than that of bLUNA, and the reasons may be:
Unless users need to use them as collateral on the Anchor protocol, users will not expect to get other LUNA series assets like bLUNA. Currently, Anchor provides a binding function to trade between LUNA and bLUNA at a ratio very close to but slightly lower than 1. That is, investors get slightly less than 1 bLUNA for 1 LUNA. Although the exchange rate on DEX is better, because traders can get more than 1 bLUNA through 1 LUNA on DEX. But users tend to look for the most convenient way, which is to use Anchor bonds to get their bLUNA, so that they don't have to switch between different protocols.
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How to take advantage of Terra's arbitrage opportunities
TerraSwap, Loop Markets, and Astroport all offer LUNA/bLUNA transactions. There are often slight spreads between these exchanges, which creates arbitrage opportunities for traders, who can buy the pair at a lower rate on one exchange and sell it at a higher rate on another exchange.
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LUNA/bLUNA price comparison on DEXs. Source: Flipside Crypto
The chart below calculates the arbitrage daily return for any two of the three exchanges. The best opportunity appeared between TerraSwap and Loop on December 15th, with an annual yield (APY) close to 600%.
Arbitrage LUNA/bLUNA trading pairs between different DEXs. Source: Flipside Crypto
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Arbitrage between DEX and Anchor Protocol
The chart below shows the annualized yield (APY) of arbitrage between different DEXs and Anchors, based on annualized returns over 24 days (21 + 3 days of Anchor burnt processing).
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Arbitrage between DEX and Anchor annual returns vs. LUNA staking annual returns. Source: Flipside Crypto
This may be due to Terra's greater user adoption and participation in different Terra protocols, helping to rationalize prices between platforms, reducing price inefficiencies and arbitrage opportunities, thereby creating a fairer price.
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Savvy investors are always gearing up, waiting for the next opportunity
Judging from the transaction data observed in December 2021, there are arbitrage opportunities for LUNA/bLUNA trading pairs between different protocols on Terra. Traders can choose a riskier way to arbitrage between different DEX platforms (such as TerraSwap, Astroport, and Loop Markets), or they can choose a safer way to arbitrage between these DEX platforms and the Anchor protocol, provided they are willing to hold Have bLUNA for 24 days.
In December 2021, the annualized returns of DEX and Anchor protocol arbitrage strategies have consistently outperformed risk-free Lido liquidity staking. Until recently, that return all but evaporated on January 1, 2022.
This may be due to greater user participation and price rationalization in the Terra protocol. Arbitrage opportunities may arise again in the future due to fluctuations in trading volume and participation rates, or due to the launch of new DEX protocols.
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