Key metrics signal Terra (LUNA) price is preparing for a recovery

LUNA price is far from its all-time high but three key metrics signal that the altcoin could be preparing to rally. Terra (LUNA) price lost 31% over the past four weeks, erasing all of the gains accrued year-to-date and even though the token continues to outperform the broader cryptocurrency market by 20%, Terra is struggling to hold above the $85 support.

Previously, a few bullish catalysts were Terra’s USD (UST) stablecoin flipping Binance USD (BUSD) to become the third-largest stablecoin on April 18 and the April 26 announcement that Fireblocks, a digital asset custody platform had seen institutional clients invest over $250 million into the Terra decentralized finance (DeFi) ecosystem.

This positive newsflow was not enough to instill confidence in Terra investors and there were also a few changes that might have partially subdued the continuous inflow of deposits on the network. For instance, on May 1, Anchor Protocol, Terra’s largest DeFi application by deposits, introduced a semi-dynamic adjustment to its previously fixed 20% annualized percentage yield (APY). The Anchor earn rate was cut to 18% and going forward it will be reviewed monthly.

TVL grew, but Dapp transactions declined

Terra's main decentralized application metric increased by 41% over the past month as the network's total value locked (TVL) hit an all-time high at 254 million LUNA. Notice how Terra's DApp deposits saw a 77% jump in 2022, reaching the equivalent of $21.2 billion. As a comparison, Binance Chain's TVL currently stands at $9.8 billion, a 9% increase in BNB terms year-to-date. Avalanche, another DApp scaling solution competitor, saw a 28% TVL increase in AVAX terms to a $7.9 billion value.

To confirm whether DApp use has effectively increased, investors should also analyze the transaction count within the ecosystem. Anchor holds a $16.6 billion TVL, equivalent to 78% of Terra’s decentralized application deposits. The protocol averaged 70,150 transactions per day last week, which is 15% below the levels seen in early April.

Astroport, an automated market-making project, holds the number two position in TVL terms within Terra’s ecosystem, with $1.6 billion worth of deposits. Notably, last week, an average of 50,650 transactions per day took place, a 30% decline from the previous month. According to Terrascope data, the Terraswap decentralized asset liquidity application had 31,400 average daily transactions over the past week. The number is similar to the levels seen in early April.

Derivatives data show no sign of distress

The reduced use of Terra DApps does not seem to have impacted derivatives traders' appetite. The above chart shows LUNA futures contracts open interest holding steady at $706 million. This data is critical because a smaller number of futures contracts could limit arbitrage desks and institutional investors’ activity.

Furthermore, Terra has the third-largest open interest behind Bitcoin (BTC) and Ether (ETH). As a comparison, Solana (SOL) and XRP futures contracts hold a $660 million open interest.

LUNA Fundamentals are still solid

Even though it seems impossible to pinpoint the cause of LUNA's price drop, the decrease in the network's decentralized apps use can partially explain the movement. However, the increase in its smart contract deposits, as shown by the TVL increase and sound interest from derivatives traders point to a price recovery in the near-term.

The data suggests that Terra holders are not concerned about the 31% price correction and are more focused on the ecosystem's growth versus its competitors. As long as these metrics remain healthy, investors are not likely to sell at a loss.