Messri report: Terra becomes the best-developed ecosystem in 2022

Key insights:

  • LUNA’s price return in the first 2.5 months of 2022 exceeds the sum of the other smart contract ecosystem tokens by a ratio of 7:1.
  • Terra’s TVL market share in the emerging smart contract ecosystem has grown by 54% in 90 days and now accounts for one-third of the emerging ecosystem TVL.
  • Most of TVL’s growth came from debt agreements, as Anchor grew TVL by $5 billion in 30 days. These deposits are largely in pursuit of Anchor’s 20% yield, as debt has only grown by a third relative to deposits.
  • 51% of Terra TVL comes from debt agreements, 8% from DEXs, and 36% from staking agreements. About one-third of TVL in other emerging ecosystems comes from debt protocols and less than half from DEXs.
  • The recent launch of new structurally important protocols (DEX and money markets) is a key source of future growth.
  • The main risk is the cancellation of Anchor UST deposits, which could lead to an oversupply of the UST market outside the protocol.
  • The key opportunity lies in native stablecoins that can be readily used to drive ecosystem growth, as most smart contract ecosystems are limited by stablecoins—a limitation that the Terra ecosystem minimizes.

LUNA excels

By orchestrating an $11 million token price bet on Twitter, it’s safe to say Terra has captured the attention of the crypto community. Note that of course follow the price. And LUNA (the native asset of the Terra ecosystem) has moved away from the center of gravity of general smart contract platform price movements and has become firmly rooted in the moon. Over the past 30 days (March 14), smart contract tokens excluding LUNA and a circulating market capitalization (CMC) of more than $10 billion have fallen by 12%, while the price of LUNA has risen by more than 76% over the same period.

So what happened?

There are two core reasons driving asset repricing.

  1. Risk Reassessment: Adding BTC as a Reserve Asset: The Luna Foundation Guard (LFG) was created to protect the UST peg. As an entity, LFG used LUNA to purchase over $2.2 billion in BTC (by burning to UST and then buying BTC with UST). Another 8 million LUNA (~$800 million) will be used for BTC purchases in the future. Therefore, the UST algorithm is designed to have significantly less risk of a downward spiral scenario, leading to a reassessment of the LUNA asset price.
  2. Increased usage and sound fundamentals: Anchor’s steady 20% yield has attracted a lot of new users and capital as the wider market experiences price and yield declines. As new USTs are minted, LUNA supply is destroyed, leading to upward pressure on prices and a significant increase in commonly used reference metrics such as TVL.

As the risk of instability abates, the primary factor for continued success turns to fundamental adoption of the network and related applications, and UST in a broader sense.

The best way to estimate UST demand is to first break down the relative growth rates of the entire ecosystem, then an increasingly fine-grained breakdown of TVL, then the DeFi space, and finally the protocols. By understanding UST demand, Terra’s bullish and bearish cases can be accurately assessed.

TVL growth and comparison

Messri report: Terra becomes the best-developed ecosystem in 2022

The TVL of the top smart contract ecosystems has declined since roughly the beginning of 2022, roughly reflecting changes in the market price of the native asset. Fantom and Terra are the only two ecosystems with TVL growth in the past 90 days. Terra TVL growth (+49%) was mainly due to the sharp increase in the price of LUNA and the continued expansion of UST supply. As a result, the composition of TVL shares in the emerging smart contract ecosystem has changed, and Terra is now the largest ecosystem outside of Ethereum.

Messri report: Terra becomes the best-developed ecosystem in 2022

Even more impressive than Terra’s 49% growth in TVL 90 days was its 54% increase in TVL market share in the emerging ecosystem. That market share now accounts for almost a third of the top emerging ecosystems. The strong relative performance has shifted Terra from the CMC to the TVL band where the emerging ecosystem is located.

Messri report: Terra becomes the best-developed ecosystem in 2022

When the CMC and TVL of emerging ecosystems are plotted against Ethereum’s data, it becomes clear which ecosystems are gaining or losing ground regardless of overall market changes. In general, up and to the right are good, meaning the ecosystem is more valuable relative to the market leader. Out-of-band on the left means investors are pricing in TVL growth. At the same time, out-of-band signals to the right suggest that investors are skeptical about the sustainability of TVL, or more optimistically, that investors lag in the appreciation of different mechanisms.

Terra has moved significantly out of band to the right over the past 90 days. Even with Terra’s 30-day price up 76%, its CMC has failed to keep pace with its relative TVL growth, meaning investors are either intentionally discounting TVL growth or inadvertently failing to grasp its competitive positioning. When comparing Terra to another well-known protocol, Avalanche, it becomes clear why Terra is undervalued on the basis of TVL.

Messri report: Terra becomes the best-developed ecosystem in 2022

Avalanche has more daily active users, higher DEX TVL, trading volume, and outstanding debt. So why is the market cap and overall TVL almost half of Terra?

About $2 billion of Avalanche’s DEX TVL sits in the stablecoin swap protocol, serving a small volume and completely different stablecoin market. Since UST is a single native stablecoin, Terra does not need this excess capital for similar asset swaps or to maintain peg stability. Therefore, from the perspective of the entire ecosystem, its DEX capital can be used more efficiently. Not to mention, LUNA gains additional value as a monetary asset backing UST.

Much of the underestimation reasoning is attributable to debt agreement statistics. Avalanche has relatively healthy debt utilization in Aave and Benqi at just under 50% (debt outstanding/deposits). Terra’s primary debt protocol, Anchor, is unique compared to Aave and other currency markets on the EVM chain. Utilization is around 20% of total deposits, which means that more capital is present in TVL stats and therefore not being used effectively as interest-earning debt. The underutilization of Anchor is due to the fixed 20% deposit that APY Anchor pays on UST deposits. Deposit APY is paid out of the protocol reserves due to insufficient interest or staking income (collateral in Anchor earns staking rewards paid to depositors), which is often an unsustainable model for debt protocols.

However, what seems unsustainable from a single protocol standpoint, now and in the long run, may be a successful bootstrap for a full-scale network from an ecosystem-wide perspective. To understand the entire Terra ecosystem, let’s break down capital by DeFi sector and protocol type.

Protocol Type Diagram

Messri report: Terra becomes the best-developed ecosystem in 2022

Debt agreements account for about half of the TVL of the entire network, with an increase of nearly 96% in 90 days, making it the fastest growing DeFi field in TVL. Anchor’s high-yielding deposit rates and lagging borrowing volumes are clearly the main drivers.

In addition to being the second largest segment for TVL, liquid staking protocols are also the second fastest growing segment, growing by over 81% in the past 90 days with the launch of Stader. Therefore, the liquid collateral TVL is more than one-third of the network TVL. In contrast, both Ethereum and Solana have prominent liquid staking protocols, accounting for 10-20% of the TVL of their respective networks, suggesting a higher relative adoption of the Terra ecosystem in the space. A big reason for this is that Anchor exclusively uses liquid collateralized derivatives as collateral, as opposed to protocols like Aave on Ethereum, which accept native assets and collateralized derivatives.

Due to the disproportionate share of TVL in debt and liquid pledge agreements, there are definitely underrepresented sectors. DEXs on other networks account for 20-40% of TVL, while Terra DEXs account for less than 10%. However, as mentioned earlier, having a single stablecoin in the ecosystem eliminates a significant portion of the usual DEX TVL on other chains dedicated to the exchange of stable assets. Additionally, Terra’s DEX liquidity maintained strong growth during this period, reaching 55%.

Let’s delve into another layer to examine the growth-driving protocols within each sector.

Messri report: Terra becomes the best-developed ecosystem in 2022

debt agreement


As mentioned, Anchor is the largest protocol on Terra and plays a key role not only in the ecosystem, but also in questioning narratives against the ecosystem.

Messri report: Terra becomes the best-developed ecosystem in 2022

While debt on the platform grew by 57%, Anchor’s total deposits nearly doubled in 90 days. These deposits are either UST in its Earn product or secured collateral used to foreclose. UST deposits receive a fixed interest rate, maintained at 20% APR, and serve as a supply of outstanding debt. Collateralized assets (bLUNA and bETH) are liquid collateralized derivatives whose collateralization proceeds go directly to protocol reserves (and ultimately to UST depositors). Debt can only be made against a bonded mortgage asset.

The protocol’s revenue comes from the pledged proceeds of the collateralized assets and the interest paid by the borrower. Relative to these two sources, the disproportionate increase in UST deposits (+187%) creates an unstable system as depositors’ APY remains the same regardless of income generated through debt or staking. The difference between income and interest payable on deposits is covered by protocol reserves, which are now nearing $1 billion after LFG’s latest injection of $450 million in February. At current deposit levels, reserves alone can fund about 2-3 months of interest on deposits or about 6 months of projected borrower interest and mortgage yields. To continue funding deposit rates, these reserves need to be continually replenished from external parties.

Of course, everyone close to the project already knows this. Some recent proposals suggest tweaking token economics and adding new collateral assets (more income from staking), but none of the solutions are a panacea. It takes too much extra income to maintain interest rates on deposits.

The big question for Anchor isn’t how it will make its system sustainable. Inorganic incentives will have to be reduced at some point, it’s fairly simple. Rather, the question is how it can scale back incentives without immediately releasing too much UST into the market. Nearly two-thirds of UST resides in Anchor or its reserves, so small changes in Anchor demand can lead to large changes in external supply. In short, there is currently not enough UST demand outside of Anchor to absorb the massive capital outflow from Anchor.

Anchor’s excess UST supply needs to be absorbed by demand sources other than LUNA redemptions, which is where the recently launched and upcoming protocols come into play.


Mars recently launched in March following its Lockdrop and Liquidity Bootstrap Auction (LBA). Structurally, the protocol functions more like a traditional currency market similar to Compound than the unique model of Anchor. However, unlike Compound-like money markets, Mars offers contract-to-contract (C2C) lending, meaning that whitelisted protocols can borrow from Mars without depositing collateral in a money market (known as Red Bank). Instead, the collateral is in an external smart contract with an established line of credit. While this feature is only available for leveraged yield farming at first, there will be more unique use cases once the framework is established.

DEX protocol

TerraSwap is the long-standing leading DEX on Terra, but things have changed since Astroport launched in December. Astroport controlled most of the DEX liquidity almost immediately after launch.

Messri report: Terra becomes the best-developed ecosystem in 2022

Astroport continues to dominate marginal DEX liquidity flows and now accounts for over 75% of all DEX liquidity on Terra. This rapid growth is not zero-sum, and overall DEX liquidity has increased during this period. This growth shows that while Astroport has indeed absorbed considerable liquidity, it has also attracted new capital.

For the top pairs in the ecosystem (LUNA-UST and bLUNA-LUNA), an even more lopsided story unfolded. After trading went live in late December, Astroport accounted for nearly 70% of the trading volume for these pairs, and now it has nearly 90% of the volume share.

Messri report: Terra becomes the best-developed ecosystem in 2022

Overall, trading volume on Terra is currently fairly concentrated in two main pairs: LUNA-UST and bLUNA-LUNA. Astroport has been a top-five DEX among cryptocurrencies in early March, almost exclusively from these two pairs. While volume concentration is certainly a risk, it is also an opportunity. As the ecosystem builds, DeFi tokens like ANC and ASTRO are gaining their share of trading volume, and other currency pairs may follow suit. Astroport has shown strong adoption in several major markets and has a lot of potential as more ecosystem tokens come online.

Astroport can support both constant product pools (Uniswap V2 style) and stableswap constant pools (Curve style), enabling it to capture the potential market share of all exchange DEXs. On the other hand, the EVM ecosystem tends to offer multiple products for both markets.

In terms of token economics, Astroport has a fee sharing model (xASTRO) as well as a popular voting locking mechanism (vxASTRO), which further increases fee share and brings additional governance controls and fee boosts.

pledge agreement

Liquidity stakes play a relatively important role in the Terra ecosystem. Due to the deep integration established, the TVL share of the staking protocol is higher than that of other ecosystems. Other ecosystems have retroactively adopted liquid staking, and Terra’s largest protocol has incorporated it natively into the protocol design.

Lido and Stader are the two main protocols that provide liquid collateralized derivatives on Terra. Lido is the larger of the two and has been in operation longer. It powers over $5 billion in bLuna and bETH in Anchor. In addition, there are more LUNAs deposited in Lido, powering the stLUNA assets in the ecosystem.

Stader is about one-tenth the size of Lido on Terra and has over $700 million in TVL. Its staking spinoff is LunaX, which currently lacks the main integration Lido built (i.e. Anchor). However, it is looking to integrate with other lending protocols like Edge. Stader also launched a product called “degen vaults,” a packaging strategy that leverages its LunaX-derived tokens.

Derivative Agreement

There are relatively few derivatives and comps on Terra. Mirror is a synthetic protocol that gives users exposure to traditional assets like Apple stock. It was initially the cornerstone of the ecosystem, but has since declined in popularity. Its TVL share fell below 3% from 35% in August. However, the industry is growing, largely thanks to Prism.

Prism is a recently introduced protocol for restructuring assets into yield components and prime components. When LUNA’s staking income value is separated from its core utility value (principal), it can realize a mature and efficient financial ecosystem. For example, principal tokens can be sold to prevent price movements in LUNA, while the proceeds are still captured in yield tokens. Likewise, variable future earnings can be sold at a fixed upfront price in the form of yield tokens. This form of trading interest rate derivatives is definitely a huge market in traditional markets (worth over $500 trillion, according to Prism).

Derivatives in general remain a growth area for Terra, especially if PoS chains develop large markets for their ongoing interest rates.

UST adopts

Terra’s ultimate success lies in the adoption of UST, both within the growing Terra ecosystem and into a broad range of other on-chain DEXs. UST is the clear decentralized stablecoin frontrunner in several categories: it has the largest supply (over $15 billion in circulating supply); it has the fastest growing circulating supply (+30% in the past 30 days); And, it has the fastest growing usage among various DeFi metrics.

Messri report: Terra becomes the best-developed ecosystem in 2022

The growth of UST continues to expand within and outside the Terra ecosystem. Since adopting UST in October, Osmosis’s second largest token is UST, which is also by far the largest stablecoin on the DEX. Recently, the ZigZag exchange on zkSync accepted a proposal for its market makers to remove USDC and USDT liquidity and instead focus on listing UST pairs. Bitrue, the sixth largest CEX, also announced that it will make UST the underlying asset for 71 trading pairs.

Looking ahead: bullish and bearish

Terra attracted a wide range of critical views, from the fact that it was a new paradigm to that it ended in an inevitable death spiral. A key fork in the road between the two viewpoints is the assumed UST demand once the Anchor subsidy is reduced. Understanding current and potential sources of UST demand is critical to assessing the probability of each argument occurring.


The bearish case hinges on the idea that the tunable model of UST is prone to collapse due to the massive inorganic demands it creates on stabilizers. Anchor’s 20% deposit APY attracts a lot of new UST minting and Anchor deposits. More than two-thirds of the existing UST is used to farm Anchor’s 20% APY, which is unsustainable in its current form. The bear’s argument is that deposit subsidies will inevitably be reduced or terminated altogether, leading to UST outflows.

Given the relative size of UST in Anchor, no other existing UST market is large enough to absorb capital outflows. Therefore, the natural trend is to either exchange for other stablecoins or redeem LUNA. If there are sufficient UST outflows and redemptions, then LUNA will face significant downward price pressure. As falling LUNA prices indicate less confidence in redeeming the asset, UST holders redeem, fearing lower future value. The subsequent sale of redeemed LUNA further facilitated the next UST holder to follow the process, and ultimately led to a death spiral. This phenomenon is called reflexivity, and when it goes down, it’s the demon of all algorithmic stablecoin designs.

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The bullish argument claims that, given the rapid growth of the Terra DeFi ecosystem and the widespread adoption of UST by exchanges and other Layer-1s, there will be enough demand to absorb Anchor outflows by then.

All things considered, Terra’s DeFi ecosystem is still young. Two of the most popular apps have been launched in the past few months as basic primitives that lay the foundation for many more. DEXs on other chains account for about 20-40% of TVL, but Astroport is currently only 5% and growing rapidly, up about 50% in the past 30 days. Mars is certainly poised to grow in a similar fashion. If we assume that these two protocols grow to the same relative size on top of the other layer 1s, it will require around $3-6 billion in additional TVL. And, this is before considering other sources of demand or assuming general ecosystem growth.

Another byproduct that all young protocols face is a massive untapped distribution of liquidity incentives. Other protocols have incentives to gradually release Anchor UST reserves over time, avoiding supply shocks. For example, Astroport recently received a 20% APR (net of incentives) and an additional 10% LP incentive (total APR of 30%) on its LUNA-UST pair. Similar yields exist in DEXs and will continue to attract the hiring portion of Anchor deposits that pose the greatest risk of supply shocks.

Given these two factors, there is sufficient organic growth demand and inorganic new incentives to safely reduce the $8 billion Anchor UST deposit to sustainable levels. Considering the growth phase and trajectory of the protocol, there should be an equal base case for additional UST demand to absorb Anchor outflow. The home run case created more demand in multiple ecosystems than the Anchor outflow required.

More generally, this approach of incentivizing a stable supply and then building the protocol is a unique and effective way to grow the Layer-1 ecosystem. Most emerging and mature ecosystems are constrained by stablecoin supply – a constraint that does not exist in the Terra ecosystem. Terra actually has a large number of stablecoins ready to provide liquidity and has a scalable model to inject new stablecoins that do not suffer from regulatory bottlenecks. This could prove to be a strong differentiator in the long run as the Terra ecosystem and cryptocurrencies in general continue to grow.

final thoughts

Although questioned, it is undeniable that the Terra ecosystem is growing significantly. The rapid growth of UST allows Terra to uniquely expand its ecosystem. With much of Terra’s DeFi ecosystem coming online in the near or near future, timeliness may create enough demand to mitigate Anchor’s inflated deposit levels. Going forward, the Terra ecosystem will be heavily influenced by discussions in the Anchor community about the growth in adoption of its deposit rates, Astroport, Mars, and other DeFi applications, and how UST can be adopted in external ecosystems.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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