Wonky Mars Protocol launch shows ecosystem expansion may not add to network value

New protocols are launching every day on different networks in the crypto space and the trend is likely to continue through this year. When looking at the top five networks by total value locked (TVL) — Ethereum (ETH), Terra (LUNA), Binance Smart Chain (BSC), Avalanche (AVAX) and Solana (SOL) — according to data from DeFiLlama, Ethereum have 579 protocols (including L1 and L2); Terra has 25, BSC has 348, Avalanche and Solana have 187 and 64 protocols, respectively. The low number of protocols and high TVL from Terra surely stand out as the outlier here.

Terra’s TVL reached an all-time high at $20 billion in December 2021 before dropping to $13 billion during the January 2022 crash. To date, the ecosystem has managed to boost its liquidity back to $26 billion.

With only 25 protocols built on the chain, Terra has attracted enough TVL to become the second largest network after Ethereum. The recent announcement of backing UST (Terra’s stablecoin) with $1 billion worth of Bitcoin (BTC) reserves and the Mars protocol launch coincide nicely with the sudden rise in LUNA price at the end of February 2022.

The rise in the chain’s governance token is often an indication of confidence in the network and the protocols, but does a new protocol launch always add value to the network and stimulate user activity and engagement?

Let’s take a look at how the price of LUNA changed when new protocols launched on Terra; then investigate how the most recently launched Mars and Astroport protocols impacted native token prices, user engagement and LUNA price.

LUNA is the tool that ensures the UST-USD peg

Before looking into the correlation between LUNA price and the new protocol launch, it is important to understand the LUNA-UST mechanism that ensures the peg of stablecoin UST to USD.

LUNA is used as a counterpart to UST to maintain the price peg of UST to USD. When UST is worth more than $1, it means there is a greater demand for UST than the supply in the Terra ecosystem. So the protocol incentivizes participants to burn LUNA and mint UST to meet the increasing demand for UST until the value of 1 UST is equal to $1. On the contrary, when UST’s price is lower than $1, the supply of UST is larger than the demand so UST will be burnt and LUNA will be minted until UST’s value reaches $1 again.

By regulating the supply of LUNA in the ecosystem, Terra can effectively keep UST pegged to USD. This mechanism also causes LUNA’s price to increase as the demand for UST increases.

LUNA price is highly correlated with new protocol launches

Very often during the initial pre-launch phases of a new protocol, there is a sudden increase in demand for UST. This is because participants wish to obtain airdrop incentive tokens from the new protocol and they are often asked to lock up UST to provide enough liquidity for the protocol when it launches.

The increasing demand in UST from participants during pre-launch phases of the new protocol causes more UST to be minted and more LUNA to be burnt, resulting in a sudden increase in LUNA price during these pre-launch phases.

Here is an example of the recently launched Mars protocol, where LUNA price jumped from sub $50 to over $60 in two days right after the new protocol pre-launch phases started.

Here is another example of how LUNA price went up from sub $60 to over $90 in December 2021 right after Astroport’s pre-launch phases started.

The new protocol launch in the past two recent cases did help push up LUNA’s price, which can be seen as a positive effect on the Terra network. But to know whether they add value to the Terra ecosystem, one needs to also look at the protocol’s token price and user engagements after the launch.

ASTRO price and volume after the launch

Astroport accumulated $90 million in the lockdrop, but the token price of ASTRO has experienced a downturn after the launch of the protocol due…