bETH and Beyond — Onboarding of Diverse bAssets on Terra Network
TerraUSD Demand Forecast based on Supply Metrics and Linear Regression Model Analysis
The successful launch of bETH collateral on Anchor Protocol was undoubtedly the most talked about event within the Terra community last week, perhaps second only to the bullish price action of LUNA. In less than 7 days of launch, the protocol has locked in over 200M USD worth of ETH collateral on Terra network and is bolstering the sustainability of Anchor Protocol as we speak.
Needless to say, implementation of diverse PoS assets as collateral on Anchor Protocol has some major benefits to the network. The introduction of novel collateral such as bETH can;
- Fortify the yield reserve of the protocol by inaugurating wider range of collateral into the network;
- Provide broad spectrum of investment artillery to end-users to meet their demands;
- Improve visibility of Terra ecosystem and build awareness within and outside the realm of cryptocurrency.
All the above ultimately contribute towards increasing TVL on Terra network, and further trigger a positive feedback loop to increase UST demand and push up the price of LUNA. Thanks to close collaboration with Lido Finance, the recent launch of Solana Wormhole, and the imminent Columbus 5 upgrade, introduction of various PoS assets into the Terra network as collateral has become a reality.
In this article, we will a) forecast the effects of bETH on various Anchor Protocol metrics, and b) evaluate the full impact a diverse bAssets can have on UST Market Cap.
Methodology & Disclaimer
For the purpose of this analysis we have projected a base case scenario by benchmarking some key metrics using the historic data of Anchor loan, locked collateral value, LTV, and bLUNA to staked LUNA ratio. Together with the key benchmarks, a careful evaluation of various token supply metrics of each key PoS blockchains were utilized to optimize the accuracy of this analysis.
The bETH supply forecast was projected by extrapolating the number of staked ETH as the blockchain transitions from ETH 1.0 (PoW) to ETH 2.0 (PoS). As with all extrapolation, the projection may present some discrepancy from real data. We will be updating the analysis as we collect more data points in the near future.
Not Financial Advice. Always DYOR.
What are bonded Assets?
Skip to Bonded ETH if you are familiar with the concept of bAssets.
Bonded Assets are defined as following on the Anchor Protocol documentation page.
bAssets are liquid, tokenized representations of staked (bonded) assets in a PoS blockchain. They allow stakers to gain liquidity over their staked assets, enabling the locked value in staked assets to be utilized in financial applications such as Anchor.
By “bonding” the PoS assets into bAssets, the protocol is able to incorporate the staking rewards of the underlying assets, allowing investors to utilize bAssets as a collateral to take out a loan, for example, and accrue ANC rewards on Anchor Protocol. Currently there are 2 PoS tokens, namely LUNA and ETH that can be bonded into bAssets, and the protocol is working towards introducing various PoS tokens into the Terra ecosystem for further growth and sustainability of the protocol.
Bonded ETH
Topline Summary
By end of 2021, bETH collateral on Anchor Protocol will increase borrow demand by 249M UST, effectively increasing UST demand by 11.0%
Key ETH Metrics
Ethereum is currently transitioning from a Proof-of-Work to a Proof-of-Stake blockchain and the series of upgrade to ETH 2.0 (PoS Ethereum) will make the network more scalable, secure, and sustainable. This is of our key interest as the bETH collateral is realized with PoS ETH through staking on Lido Finance. The current status of total ETH supply is outlined as below.
It’s important to understand the different states of ETH supply in order to predict the full potential that bETH can unlock on the Terra network. Let’s first go through each type of ETH supply in detail.
Total Supply — 117,179,863 ETH¹
Number of tokens that currently exists and are either in circulation or locked (or staked in ETH’s case)
PoW ETH — 110,177,333 ETH
Number of tokens that has not yet been staked. This is the number of original PoW ETH tokens in circulation.
Staked ETH — 7,002,530 ETH²
Number of tokens that has been staked. Ethereum staking started in Dec 2020 with the release of Beacon Chain network.
Currently, self staking ETH comes with many limitations. There’s a minimum stake requirement of 32 ETH in order to secure and validate the network, and the staked ETH gets locked until the ETH 2.0 upgrade is finalized (with no set deadline at the moment). Self staking as a validator also requires some technical knowledge of the Ethereum blockchain.
Liquid Staking is an innovation that solves above limitations. Through liquid staking services such as Lido Finance, ETH can be staked without technically being “locked”. This is enabled by the issuance of a derivative token known as stETH, which can be used as a regular un-staked token (transfer, store, spend, trade, etc.).
bETH taps into the Liquid Staking supply, namely, that of Lido Finance (stETH). By evaluating various supply metrics, benchmark metrics and stETH dominance (Lido Finance Market Share), we will derive bETH supply projection and evaluate how it affects UST demand.
Benchmark bAsset Ratio & Average LTV
Now that we have detailed through the supply metrics of ETH, we will derive some key benchmark metrics to evaluate the impact on UST demand from the integration of bETH to Anchor Protocol.
The assumption made here is that the ratio of bonded assets to staked assets will be similar across different PoS tokens. Just as staked LUNA provides different benefits from bonded LUNA, such as staking rewards and airdrops, investors across different PoS blockchains will also have similar interests in diversifying their assets into bonded vs. staked assets. There are 64,734,000 bonded LUNA³ and 354,524,000 staked LUNA⁴ in the Terra network at the time of writing, and bonded LUNA to staked LUNA ratio sits at 18.3%. This will be used as the benchmark bAsset Ratio. Roughly speaking, this means that there will be 5 staked assets for every bonded asset.
From Anchor Dashboard, we have extracted data points for the daily outstanding loan and collateral value to calculate the average LTV. Upon evaluating the data, we were able to spot a noticeable increase of LTV starting July 23rd (This was when the governance proposal for increasing the max LTV for bLUNA to 60%⁵ was implemented). We have made the assumption that the max LTV will remain at 60% for the time being, and utilized the average LTV data from July 23rd and on, as it will represent the real LTV value of the protocol more accurately. As such, average LTV of 36.7% will be used in our analysis.
bETH Supply Forecast
On-chain data of liquid staking ETH 2.0 suggests that there are 875,004 ETH⁶ staked on Lido Finance (Shout out to Elias Simos for the awesome Dune Analytics data!). Lido is clearly the top player in ETH liquid staking and currently stakes 81.9% of the total liquid staking supply (~1.1M ETH). It’s worth noting, however, that the total liquid staking supply represents mere 0.75% of the total ETH supply. The transition to ETH 2.0 has only just begun and there are roughly 94% of the total ETH supply yet to be staked.
Above is the historic data of liquid staking ETH supply since the launch of Beacon Chain with linear model regression to forecast the liquid staking ETH supply prediction by end of 2021. Keep in mind that the liquid staking supply will at some point increase exponentially (as opposed to linearly as the model above), but the growth will likely remain linear until end of 2021 where liquid staking ETH supply will stay below 10% of total ETH supply.
By fitting a trendline to the historic data points, we obtain below equation.
y = 25568x — 119143
R² = 0.9776
The high R² value suggests that the liquid staking ETH supply has indeed been growing linearly for the past 40 weeks, and by plugging in 60 weeks (corresponding to Dec 27th, 2021), the linear regression model forecasts 1,415,937 ETH staked in Liquid Staking services by the end of 2021.
Assuming Lido remains a market leader in Liquid Staking at the market share rate of 81.9%, 1,159,652 stETH will be staked on Lido Finance, and at benchmark bAsset ratio of 18.3%, that translates to 211,745 bETH minted on Anchor Protocol.
Predicted UST Impact from bETH
211,745 bETH translates to roughly 677M UST at current ETH price of $3,200. At average LTV of 36.7%, we predict additional 249M UST loan from bETH collateral alone.
At current TerraUSD market cap of 2.26B UST⁷, we predict loan from bETH collateral to increase UST demand by +11.0% by end of 2021.
Prospective PoS Blockchain bAsset
The real beauty of Lido x Anchor collaboration starts with the diverse PoS tokens that could be implemented as bAssets for Terra network. In fact, the governance proposal for integration of various PoS tokens such as Solana, Aave and Polkadot has been passed and soon we will be seeing myriads of PoS tokens as stAsset on Lido Finance.
Bonded SOL
Topline Summary
Upon integration with Anchor Protocol, bSOL collateral has the potential to increase borrow demand by 237M UST, effectively increasing UST demand by 10.5%
Key SOL Metrics
Solana’s supply metrics is relatively straight forward compared to that of Ethereum. The key difference is that Solana has some “locked” supply that are still under custody of Solana Foundation and is not yet circulating⁸. Please not that Locked Solana can either be staked or unstaked, and should not be double-counted towards the total supply (i.e. Unstaked + Staked = Total).
bSOL Supply Forecast
For the purpose of bSOL supply forecast, we have constructed a more conservative and probably more realistic metric of Lido’s market share. Instead of the 81.9% market share in the ETH example, which represents the share of Lido’s liquid staking out of total liquid staking ETH, we have benchmarked the share of Lido’s liquid staking out of total PoS ETH.
Staking Solana has relatively low barriers to entry with the freedom to unstake when needed (with a few days of unlocking period), making average investors are more likely to stake Solana outside Lido Finance. As such, Lido’s market share of 12.5% out of total PoS ETH will be used instead in analyzing bSOL supply.
With Solana, we predict upside of 48,093,640 stSOL staked (assuming Lido market share of 12.5%), and up to 8,781,604 bSOL minted on Anchor Protocol (at benchmark bAsset ratio of 18.3%)
Predicted UST Impact from bSOL
8,781,604 bSOL translates to roughly 645M UST at current SOL price of $73.5. At average LTV of 36.7%, we predict additional 237M UST loan from bSOL collateral alone.
At current TerraUSD market cap of 2.26B UST, we predict loan from bSOL collateral to have upside potential of increasing UST demand by +10.5% upon integration to Anchor Protocol.
The Bull Case Scenario (A Whiff of Hopium)
Chorus One is closely working with Lido to bring stSOL to life and it may not be too long before we see bSOL go live on Anchor Protocol. Of course, integration of other stAssets (and bAssets) may only be a hypothetical speculation, but let’s go ahead and dive in deeper to evaluate the full potential of Lido x Anchor Protocol collaboration.
List of PoS Blockchain
For the last portion of the UST demand forecast, we have analyzed the below PoS blockchains;
The above PoS tokens have either passed governance proposal to be added to Lido Finance as stAsset or has been actively discussed/mentioned in blockchain forums, and are within top #20 cryptocurrency by staked value.
Methods of Calculation
We took a similar approach with the above blockchains in deriving the UST demands.
- Evaluated supply metrics of each PoS tokens to gauge the upper limits of staked supply.
- Assumed Lido Market Share of 12.5% to derive stAsset supply
- Benchmarked bAsset Ratio of 18.3% to derive bAsset supply
- Applied Average LTV of 36.7% and token price of Aug 21, 2021 to calculate estimated UST loan
- Derived % increase in UST demand against the TerraUSD market cap of Aug 21, 2021
Exhaustive Impact on UST demand
Below is the predicted impact on UST demand through integration of each aforementioned PoS blockchain to Anchor Protocol (via Lido Finance). From our analysis, we predict an upside potential of up to +56.6% increase in UST demand with over 1.2B UST predicted loan.
Even though integrating all the above PoS assets is a certainly bullish scenario, it is worth noting that the collateral and loan value are rather conservative predictions, since all above calculation are made with current value of the token (Aug 20th, 2021), while many on-chain data and high-time-frame analysis are suggesting an extended bull market until the end of 2021 and well into 2022. It would be more accurate to view above prediction as the lower bound of what can happen to UST demand by end of 2021.
Food for Thought
Of course, there is no guarantee that all the tokens above will be integrated into Terra network, but it is a topic worth discussing within the Terra community for sure. With Solana wormhole and Columbus-5 upgrade in the near future, bridging these assets to Terra is not only feasible but surely in the cards. Maybe, just maybe, our data shows a glimpse of the next blockchain we should be collaborating with (take it with a grain of salt)
Hope you enjoyed this week’s article and the comprehensive analysis of diverse PoS tokens and their potential impact on UST demand. Feel free to reach out to us at Four Barbers Twitter with any questions or suggestions.
[1]: Staking Rewards — Ethereum (Aug 20, 2021)
https://www.stakingrewards.com/earn/ethereum-2-0/metrics
[2]: @hagaetc. ETH2.0 Deposits (Aug 19, 2021)
https://dune.xyz/hagaetc/eth2-0-deposits
[3]: Anchor Protocol Dashboard (Aug 20, 2021)
https://app.anchorprotocol.com/
[4]: Staking Rewards — Terra (Aug 20, 2021)
https://www.stakingrewards.com/earn/terra/metrics
[5]: [Proposal] Increasing the capital efficiency on Anchor
https://forum.anchorprotocol.com/t/proposal-increasing-the-capital-efficiency-on-anchor/873
[6]: @eliasimos. Eth2 Liquid Staking
https://dune.xyz/eliasimos/Eth2-Liquid-Staking
[7]: Coingecko — TerraUSD (Aug 20, 2021)
https://www.coingecko.com/en/coins/terra-usd
[8]: Solana Twitter — Clarification on “Unlocked” & “Circulating” Supply
https://twitter.com/solana/status/1347192115835629568?lang=en
