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Can LUNA Reach $170? This VC Fund Thinks It Has The Fundamentals

The Rockaway Blockchain Fund (RBF) has published a bullish case on Terra (LUNA) and its growing ecosystem. This project has been gaining a lot of attention in the crypto space and its price reflects the hype with an 8,809% rally in the 1-year chart.

At the time of writing, LUNA moves sideways in the lower and higher timeframes and trades at $16,67. The 30-month chart remains in the green, still showing a 6.3% profit. However, RBF believes there is still room for a massive rally.

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LUNA on a downtrend in the daily chart Source: CoinGecko

RBF made a previous prediction in 2020, expecting Terra and its ecosystem to drive the price of its native token to $5 by 2025. Their prediction was outperformed by a wide time margin. Therefore, they have set a new price target at $170 for the next 5 years. The main reason, LUNA’s deflationary supply:

The higher LUNA price will be driven by a decrease in the LUNA token supply as well as by the fact that cash flow will be distributed among proportionally fewer staked LUNA tokens.

LUNA’s Burn And Mint Mechanism

Terra’s ecosystem is based on its stablecoins supply (UST, KRT). Unlike Tether (USDT), USD Coin (USDC), and other similar assets, Terra’s stablecoin are decentralized and rely on a stability mechanism to maintain their price pegged to the U.S. dollar.

This mechanism requires that for every UST or KRT minted, 1 LUNA must be burn. As RBF stated in their report, the mechanism works both ways and could boost LUNA’s price further as Terra takes over a bigger stablecoin market share.

In April 2021, the total stablecoin supply stood at $75 billion which represented a 91% increase since January 2019. In contrast, the U.S. Dollar monetary supply has grown by 5% since 2000 and will reach $4.5 trillion by 2025, according to RBF estimates. Stablecoins could amount to around 20% of this future supply.

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Source: Rockaway Blockchain Fund

Terra could have around 20% of the stablecoin market by that time. With more substantial growth than the rest of its competitors. RBF believes that Terra could “become the leading stablecoin provider” in the same period. The report claims:

In our model, we account for this supply decrease as cash flow to stakers, because the net economic effect is similar. This projected increase of the total stablecoin supply is the main value driver behind the LUNA token price. Past daily minting amounts (left axis) together with the cumulative UST supply (right axis) are shown on the chart below.

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Source: Rockaway Blockchain Fund

Terra’s savings protocol Anchor could be the main driver. Decentralized Finance has seen incredible adoption in the past year. In this sector, trading is the main use case. However, RBF expects Anchor to become the dominant force on savings. Thus, adding more burning pressure into LUNA. The report concluded the following:

we also believe the LUNA token can be worth more than $170 as the LUNA token supply decreases and cash flow will be distributed among fewer staked LUNA tokens. Investors in the LUNA token might see another 10x multiple on invested capital from current valuation levels.

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Why LUNA’s Tokenomics Points To A Sustain Rally

Terra (LUNA) has been moving sideways during the past day but record impressive gains in the weekly chart with a 30.1% profit, at the time of writing. On the 1-year chart, the token has 8,794% in profits. The project has seen several partnerships. However, its core strength seems to be its tokenomics.

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LUNA moving sideways in the daily chart. Source: LUNAUSDT Tradingview

Researcher and investor Flood Capital have compared Terra’s stablecoin UST with Tether, USD Coin, DAI, to explained LUNA’s tokenomics. According to Flood Capital, part of the token’s supply must be burned with every UST minted on Terra’s ecosystem.

Tokens with burn mechanisms and deflationary pressure have seen tremendous appreciation during this cycle. Binance native token BNB and PancakeSwap’s CAKE amongst them. As the researcher said, $1 of UST minted equals $1 of LUNA burned.

With a market cap estimated at $1.87 billion, UST is in the top 5 stablecoins behind DAI, Binance USD, and USDC with Tether in the highest positions. Flood Capital expects UST to increase in adoption and demand. Therefore, the token’s supply will be reduced. The researcher said:

UST is currently the 5th largest stable coin with a mcap over $1.87b and ~$100m daily trading volume, it has done this with only 7 exchange listings. The Luna ecosystem has generated massive demand for UST with no major listings, this indicates clear product market fit.

UST Demand Leads To LUNA’s Appreciation

Further data from Flood Capital indicates demand for UST has skyrocketed from January 25th to April 25th. During this period, UST’s supply has gone from less than $500 million to the current levels. On average, the stablecoin has grown by $18 million per day. Flood Capital added:

Thus $18m worth of Luna being burned. I expect this to accelerate with more protocol releases and cross chain composability with Columbus-5.

The token’s current circulating supply stands at 376 million with 254 million already staked. The researcher concluded there are only 122 million tokens available in the market. On average, the token’s supply is burned at .27% daily. Flood Capital said:

Companies like Apple and Exxon, renowned for their share buyback programs have bought back ~20-25% of their shares over 5-10 years! Luna is doing those same numbers in 100-125 days.

As shown in the chart below, the token could run out of “liquid coins” in around 122 days if UST demand continues to grow.

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Source: Flood Capital

The researcher expects more projects to be launch on Terra’s ecosystem and possible further listings of UST in major exchanges. According to the co-founder of Terra Do Kwon, UST’s market cap could hit $10 billion by end of 2021. Flood Capital said:

The Luna ecosystem has just really started with only 2 major applications, yet this has caused the creation of over 1.5b UST in the past 3 months. As Luna continues to attract developers, new protocols and UST demand will explode, we are still early.

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Why LUNA’s Recent Rally Could be the Start of a Bullish Trend

Amongst the best-performing assets in the crypto space over the past week, Terra (LUNA) has registered 18.9% gains over the weekend. Just behind AAVE (+19%), SNX (+20.8%), and SUSHI (+21.8%), LUNA has managed to outperform YFI and RUNE, two of the most resilient DeFi assets, per a Messari report.

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Source: Messari

Developed by Terraform Labs as a blockchain to support stable programmable payment and an “open financial” infrastructure with a lending protocol and a synthetic assets platform, Terra’s ecosystem is composed of a basket of fiat pegged stablecoins. LUNA is used to “stabilized” this basket.

Terra has the ultimate objective of replacing banks, credit card networks, and payment gateways, as stated in the protocol’s official website. Therefore, Terra has created a blockchain layer with solutions that can be adopted by merchants and consumers. Since its inception:

(…) it continues to steadily provide infrastructural improvements and tools for the foundations of laying down a credibly neutral, distributed, and radically transparent ecosystem.

LUNA is trading at $14,21 with a 6.3% in the daily chart. In the weekly and monthly chart, LUNA has 8% and 30.6% losses, respectively. Although it has been following the general sentiment in the market, LUNA and Terra’s ecosystem seem poised to resume their bullish momentum.

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LUNA with moderate gains in the daily chart. Source: LUNAUSDT Tradingview

Terra (LUNA) with potential to drive further demand

LUNA holders can use the token to obtain staking rewards from three main sources: compute fees or gas fees, taxes, and seigniorage rewards. The rewards are determined by the amount of LUNA staked. If the transaction volume on Terra’s blockchain increases, so do the rewards receive by LUNA holders.

Therefore, the rewards function as an incentive mechanism to bet on Terra’s long-term growth. Stablecoin UST, part of the ecosystem, saw an 800% growth in 2021, per a report by CoinGecko. This stablecoin climbed to the 5th position by market cap. The report claims:

Unlike most ETH-based algo stablecoins, UST has managed to create a reliable peg through an ecosystem than incentivizes usage and attracts a strong community.

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Source: CoinGecko

Mirror protocol is powered by smart contracts based on the Terra network and is a major source for UST demand. The protocol allows users to create synthetic assets or Mirrored Assets, like stocks, that “mimic” the price of the real-world asset.

CoinGecko stated that Terra “capitalized on Robinhood debacle” when the GameStop (GME) drama reached its peak. Also, Terra’s Anchor Protocol offers a product with a 20% fixed interest rate based on UST. The report states:

Upcoming project such as Alice, SPAR And Vega are expected to further strengthen the demand for UST.

As reported by staking provider SmartStake, there was $4,7B LUNA staked as of April 17th with $223 million deposit in Anchor UST and $518 million in Anchor bLuna as collateral. Mirror Protocol as $2,078,234,849 on its platform. In total, Terra has a Total Value Locked of over $7 billion.

LUNA has been listed on Bitfinex, Tokocrypto, Bitfinex and is becoming a key component of Binance and its ecosystem.

Do Kwon, co-founder of the Terra ecosystem, shared a tweet by James Wang, an analyst at investment firm ARK Invest, with a highly bullish perspective on LUNA. Wang is a MIR holder and an active voter on its governance model.

Founded by Catherine Woods in 2014 and with $52.85 billion assets under management, ARK Invest is one of the most important investment firms in the U.S. It currently holds the “largest” Exchange Traded Fund (ETF) portfolio in the traditional market.

Do Kwon asked James Wang if they shall get ARK Invest to allocate capital on Mirror, Wang replied: “Yes!”. However, no official announcement has been made by Terraform Labs or Ark Invest.