What's Driving Token Prices? (May 11, 2022)

Katie Talati
May 11, 2022
Join Katie Talati, Arca’s Head of Research, weekly on Wednesday at 4PM EST / 1PM PST as she shares notable token activity over the past week and her insights on what market events drove these token price movements.

  • LUNA (-98%) / UST (-35%) / BTC (-24%) - Over the weekend, an unknown party withdrew ~$500M from Anchor protocol on Terra and sold their UST position. On a low liquidity Saturday night, this broke UST's $1 peg and started a bank run on Anchor and Terra. If you're not familiar with Terra and Anchor, Terra is a decentralized/algorithmic stablecoin protocol that issues UST (Terra's dollar-pegged stablecoin) in exchange for LUNA (Terra's native token). UST and LUNA are minted and burned based on demand for UST. Anchor is Terra's native lend/borrow protocol and was offering an incentivized 20% APY for users to deposit UST in order to grow UST usage and adoption. Terra's foundation had raised significant capital that acted as a backstop in case the peg ever broke (assets in this reserve are BTC and other non-UST stablecoins). As the UST dollar peg broke down over the weekend, the Luna Foundation Guard (LFG) began lending out assets in their reserve in order to purchase UST off the market and restore the peg. Despite this, however, users (likely large institutions based on the dollar amount) continued to withdraw UST from Anchor and sell it, placing more downward pressure on the peg. In tandem, the loaned BTC was sold by market makers, leading to a decline in BTC price. As UST continued to trade below $1, market participants also sold LUNA to lighten up risk. This has caused a general derisking across digital assets. We are currently still watching withdrawals from Anchor, which has gone from $13.2B in TVL to $3.4B in TVL in 4 days.
  • APE (-64%) - After a historic NFT mint that netted Yuga Labs (creators of Bored Ape Yacht Club and other related IPs) over $300M, the project decided to refund users’ gas fees for failed transactions to the tune of $265K. The Yuga Labs land sale for their Otherside metaverse saw massive demand a week and a half ago. However, due to some inefficient minting contracts and the structure of the sale, the mint ended up clogging the Ethereum network and saw over $100M in ETH spent on gas fees, with some spending as much as 2 ETH to mint Otherdeed land. Yuga Labs received a lot of criticism for how they handled the sale and how it took down the Ethereum network for several hours, leading to this refund of user fees.
  • COMP (-32%) - Decentralized lend/borrow protocol Compound received a B- credit rating on its treasury from S&P, making it the first DeFi project to be rated by a reputable credit agency. Although Compound has been proclaimed to have junk status, this marks an important step, as traditional finance becomes increasingly intertwined with digital assets. According to Compound, the S&P cited “the uncertain regulatory regime for stablecoins (USDC), stablecoin-to-fiat convertibility risks, Compound Treasury’s currently limited capital base, and 4.00% return obligation. S&P views the Compound protocol (the source of yield for Compound Treasury) track record of zero USDC losses as partially mitigating the capital risks of the offering.”
  • FLOW (-31%) - Layer 1 gaming-focused blockchain Flow announced it had raised a $725M ecosystem fund for development of the Flow blockchain. Investors in the fund include Dapper Labs (the group behind Flow), a16z, Coatue, Union Square Ventures, Greenfield One, Liberty City Ventures, and CoinFund.
DISCLAIMER: This commentary is not intended to be investment advice, investment research, or a recommendation. Please consult your investment professional for your own circumstances."

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