Here is how Terra traders use arbitrage to profit from LUNA and bLUNA


The end of the year is usually the time to relax and prepare for the holidays, but in the last few weeks of 2021, the crypto market shows no signs of rest.

One of the headlines related to Terra hit an all-time high in terms of total locked value (TVL). The project surpassed Binance Smart Chain (BSC) to become the second largest decentralized financial blockchain after Ethereum. Based on the TVL mark of 20 billion U.S. dollars reached on December 24, Terra’s TVL has fallen to approximately 19.3 billion U.S. dollars at the time of writing. Llama, But this is by no means forming or forming a bearish signal.

The total value of the top 5 is locked on the top 5 blockchain. Source: Defi Llama

At present, compared with the 257 protocols on the BSC and the 377 protocols on the Ethereum network, Terra has only built 14 protocols on the chain. Terra’s protocol successfully attracted liquidity. The recently launched Astroport protocol coincided with the rapid rebound of Terra’s local governance token. LunaIt hit a record high on December 26, 2021.

Comparing TVL in USD with LUNA, the former has experienced exponential growth since September 2021, while the latter has remained fairly stable during the same period. It is not difficult to see that the reason for the recent rise in US dollar TVL is the price increase of LUNA itself.

Terra TVL in US dollars (left) and LUNA (right). Source: Defi Llama

Although the rise in the price of governance tokens usually indicates investor confidence in chains and protocols, it also seems to generate more profitable arbitrage opportunities.

Let’s take a closer look at some strategies for arbitrage between LUNA and its bonded asset bLUNA.

LUNA price and Luna/bLuna premium percentage. source: Reverse encryption

Why is there a spread in Terra’s market?

LUNA is the governance and pledge token of the Terra blockchain, and bLUNA is the token representing the pledged LUNA and its corresponding block rewards. Since bLUNA is fungible and transferable like LUNA, it is also traded on Terra’s decentralized exchange.

Like other currency or token pairs traded on exchanges, LUNA/bLUNA pairs are traded on different decentralized exchanges (DEX), such as Earth exchange, Circular market or Spaceport Due to the low price efficiency of different platforms, there may be different prices. Arbitrageurs will buy in one agreement at a lower price and sell in another agreement at a higher price, thereby helping the platform solve the problem of price inefficiency and eventually reaching a fair price in all exchanges.

In addition to the common reasons for price inefficiency, there are other factors particularly related to the nature of bLUNA that make LUNA/bLUNA prices vary from agreement to agreement.

  • The price of bLUNA is higher than LUNA Anchor agreementThis is because once bLUNA is bound and cast on Anchor, it can only be burned and exchanged back to LUNA after 21 days (plus three days of processing time), unless it is burned instantly.
  • Since bLUNA not only represents the value of staking LUNA, but also represents the block reward during the 21-day lock-up period, so its value is always higher than that of LUNA. As shown in the figure below, on Anchor, the price of each LUNA of bLUNA is slightly below 1 most of the time. Three different outliers show that bLUNA happens to be more valuable at a ratio of 0.97 bLUNA per LUNA.
The hourly price of each LUNA’s anchor bLUNA is less than 1. source: Reverse encryption
The pegged bLUNA hourly price of each LUNA is always lower than 1. source: Reverse encryption
  • In most cases, the price of LUNA on DEX is higher than that of bLUNA, which may be due to:

(1) There are more users selling bLUNA than users buying on DEX (so the value of bLUNA is lower), because it takes 21 days to burn bLUNA on Anchor Protocol, if it is not burned immediately. Therefore, if users want to get back LUNA immediately, they need to go to DEX to sell bLUNA. (For instant bLUNA burning on Anchor, the rate is the same as TerraSwap.)

(2) Users usually don’t need bAssets like bLUNA, unless they need to use them as Anchor collateral. Currently, Anchor provides a binding function to exchange LUNA for bLUNA at a very close but slightly lower ratio-that is, investors get a slightly lower ratio of 1 bLUNA to 1 LUNA. Although the exchange rate of DEXs is better (traders get 1 LUNA more than 1 bLUNA on DEXs), users tend to seek the most convenient way, that is, to use Anchor Bond to get their bLUNA, so that they are not in a different agreement Switch between.

How to take advantage of Terra’s arbitrage opportunities

Based on the price difference explained earlier, there are two main ways to arbitrage LUNA and bLUNA.

TerraSwap, Loop Markets and Astroport all provide LUNA/bLUNA swaps. There is usually a small price difference between these DEXs, which creates arbitrage opportunities for traders to buy at a lower price on one DEX and sell at a higher price on another DEX.

LUNA/bLUNA price comparison across DEX. source: Reverse encryption

The chart below shows the daily average price of LUNA/bLUNA observed from swaps on different platforms in December 2021. This ratio is the amount of bLUNA actually received (after deducting fees and slippage) divided by the amount of LUNA provided for the swap. As mentioned in the previous section, due to more demand for LUNA on DEX, one LUNA exchanges multiple bLUNAs on DEX.

The following chart annualizes the daily arbitrage returns between any two of the three DEXs. The best opportunity between TerraSwap and Loop occurred on December 15th, with an annual return (APY) close to 600%.

Arbitrage LUNA/bLUNA pair between different DEX. source: Reverse encryption

Arbitrage between DEX and Anchor

Investors can exchange LUNA for bLUNA on one of the DEXs with the highest bLUNA provided by LUNA, burn bLUNA on Anchor, and wait 21 days (plus 3 days) to get more LUNA. Please note that the burning on the Anchor must be normal “slow” burning; instant destruction will not work because the exchange rate is the same as TerraSwap.

Based on the annualized return of 24 days (21 + 3 days from Anchor destruction processing), the figure below shows the APY of arbitrage between different DEX and Anchor.

Arbitrage between DEXs and Anchor APY and LUNA staking APY. source: Reverse encryption

Lido The 8% APY of LUNA Liquid Staking is also added as a risk-free benchmark return comparison. In December, the highest APY reached 80% on December 27, and has dropped sharply since then, falling below the new year’s risk-free return.

This may be because Terra’s growing popularity and participation in different Terra agreements help to rationalize cross-platform prices, reduce price inefficiencies and arbitrage opportunities, and thereby create fairer prices.

Smart investors are always looking at the next opportunity

As shown by historical exchange data observed in December 2021, LUNA/bLUNA arbitrage opportunities exist in different agreements 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 Anchor, provided they are willing Hold bLUNA for 24 days.

The annualized return of the DEX and Anchor arbitrage strategy has been better than the risk-free Lido liquid mortgage in December 2021, until the return almost evaporated on January 1, 2022.

This may be due to more participation and price rationalization in the Terra agreement. Due to fluctuations in trading volume and participation or the launch of the new DEX agreement, arbitrage opportunities may reappear in the future.

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