Try Quests to earn cryptoKUJIRA is a Defi application that makes it easier to become a liquidator on Anchor. In this report I present a buy/sell recommendation on Kujira's KUJI token.
Team Kujira has implemented various strategies to protect the value of KUJI:
- Holding 3000 KUJI tokens reduced the commission paid on liquidations from 1% to 0.5%. This commission has recently been reduced to 0.5% for all users.
- Staking 300 KUJI tokens grants access to an advanced analytics dashboard.
- Staking 5000 KUJI grants access to an even better, premium dashboard.
- All fees generated on KUJIRA are paid to KUJI stakers.
- Liquidation bids can be placed in UST or in aUST. Bids placed in aUST earn the APY of Anchor Earn, less 23%. That 23% is distributed to KUJI stakers in the form of KUJI. At time of writing, this represents a yield of 4.43% of the aUST on the platform.
As explained in Pinehearst's eye-opening post on Terra Altcoins, the price of all Altcoins on Terra tend to fall. KUJI is no exception.
This chart shows the hourly price of KUJI (in USD) since inception.
These price protection mechanism work by ensuring that KUJI has some utility. KUJIRA users are more likely to buy or hold KUJI because it receives interest payments and grants access to analytics dashboards.
Kujira will allow liquidation bids on bSOL and bATOM loans when these become available on Anchor Borrow.
Kujira also has plans to go cross-chain, thus offering their liquidation app on new borrowing markets.
This will increase the size of the market in which Kujira participates. Fees accrued to KUJI should increase when the protocol enables more liquidations on various borrowing platforms.
Kujira is facing competition from new protocols entering the liquidation market. Lighthouse Defi offers the same functionality as Kujira, minus the 0.5% commission on liquidations. This competition is a significant threat to KUJIRA and to the price of KUJI.
To increase fees accrued to the KUJI token, Kujira will need to:
- Maintain its dominance on Terra by offering a better user experience and advanced functionality; and
- Expand into new markets on other blockchains.
Due to increased competition and the horrible track record of Altcoins on Terra, I do not expect KUJI to increase in value. I may revise my assessment if Kujira successfully expands into other liquidation markets and achieves dominance on other blockchains.
An interesting feature of KUJI is that it will accrue more fees during bear markets. This is because more liquidations take place during market crashes. Let's see if KUJI is a good counter-cyclical asset.
Portfolio management theory recommends holding uncorrelated assets in a balanced portfolio. In traditional finances, this consists of stocks and bonds. Bonds generally maintain their prices when stocks fall. An investor can reduce volatility by periodically rebalancing the assets (i.e., selling bonds to buy cheap stocks during market downturns).
During the last two months, a lot of liquidations took place on Anchor as the price of LUNA fell. This was an ideal time for Kujira to shine. The platform became well known on Terra and it collected more fees due to increased liquidations.
However, the price of KUJI fared worst than LUNA during this bear market. If KUJI does not outperform LUNA during a bear market, it will not do better in a normal market when fewer liquidations take place.
For rebalancing purposes, the price increase of an asset is not the only factor to consider. When two assets are uncorrelated, they can be swapped periodically to reduce the volatility of the portfolio.
Uncorrelated assets have a negative coefficient. The prices of KUJI and LUNA have a moderate, positive correlation. Therefore, KUJI should not be used to rebalance into LUNA during market downturns.
There are better alternatives for investors seeking to hold fee-generating tokens. KUJI's disadvantage is that it receives less fees during bull markets and normal markets. Indeed, liquidation events happen mostly during bear markets. In contrast, Automated-Market-Maker (AMM) tokens like SUSHI and ASTRO receive fees in all market cycles. Indeed, swaps always happen. AMMs can also establish a strong moat once they achieve market dominance. Uniswap is hard to displace because it has the largest liquidity pools on Ethereum. Kujira will have a hard time establishing a moat as its technology is easily copied and does not benefit from liquidity pools or network effects.
Finally, I do not expect the return on investment of KUJI to beat that of LUNA. With its outstanding tokenomics and growing notoriety, LUNA may well be the best investment in the Terra ecosystem.
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