Terra Luna : bLuna Arbirtrage Still Exists?

For the past week Luna has fallen in price similar to the rest of the cryptocurrency market. One benefit of the drop in price is the potential arbitrage between bLuna and Luna. Here is a brief look into this arbitrage play and how one can earn ~2% in Luna yield in 21-24 days.

Anchor Protocol's Bonded Assets

In Anchor a big part of its earnings comes from investors providing collateral to purchase borrow UST. The collateral currently accepted in Anchor are bETH and bLuna where the "b" is short for bonded. Both ETH and Luna can be bonded on Anchor and then be deposited onto Anchor. The conversion rate is 1 ETH = 1 bETH and 1 Luna = 1 bLuna.

When the asset is bonded on anchor it takes 21 days to unbond and upto additional 3 day waiting period for transfer back to investor's wallets for use. bETH and bLuna can be thought of as liquid but locked up tokens. Liquid in that it can be swap on be used in pool farms just like any other liquid token. However outside the Terra ecosystem bLuna does not have an application hence is technically locked with in majority of the Terra Network.

Luna : bLuna

There are two ways to unlock, aka burning, bLuna. One is to perform a normal burn which takes 21 days + up to 3 days to transfer back to investor's wallets. The second way is immediate burn where in this situation the investor is actually swapping their bLuna for Luna. The instant swap is often not 1 : 1 but less in Luna. That is 1 bLuna when instant burned will result in less Luna. By how much? It depends on the current price of Luna.

Bear Market Good for Arbitrage

When volatility rising and price movement increasing there is potential Arbitrage to be made when burning bLuna. The front image of post is a chart showing the daily price difference between Luna and bLuna. Since Astroport AMM arrived the arbitrage had reduce to almost zero since the pair liquid trading was adjust so well that people could easily trade from bLuna back to Luna without much price difference.

However since last week as Price of Luna drop the demand for bLuna lessen and it can be seen that the ratio has been below 0.98 for most of the week. Some days the ratio would go all the way down to 0.94 making it almost 6% difference in price between Luna and bLuna.

Example Of Unbonded bLuna to Luna

On Astroport swap Luna for bLuna. Current prices where if I exchange 100 Luna for I get over 102.5 bLuna. This is more than 2.5 Lunas in the swap!

Once the swap is successful I trade unbond the bLuna on Anchor and have to wait 21 days for it to transform into Luna. What I get at the end of the process is 102.5 Luna that I can use as liquid asset. In the end of the three weeks I gained 2.5 Luna. At current price Luna being $61 USD I basically earned $152.5 in three weeks assuming Luna prices do not change. The yield is from 100 Luna or $6,100 for a net 2.5% yield in 3 weeks. Not bad!

If the price difference is not pegged for the year one can actually perform this arbitrage trade with the same initial investment compounded for 17 times. The overall yearly yield is much more than staking UST on Anchor. 17 x 2.5 = 42.5% yield and all of the earning is in Luna. Of course this is under the assumption Luna prices do not fall and the potential arbitrage exists through out the year.

None of what I write is financial advice. It is for entertainment purposes only. Thanks for reading!