Terra (LUNA), the native token on the same blockchain, fell to a more than one-month low this week due to a price shock generated by the release of 10 million tokens into circulating supply. This week, LUNA price plummeted 14% and is now trading near a one-month low of $81.34. This week, it is also one of the worst-performing cryptocurrencies.
The majority of the token’s losses are the result of a contribution of 10 million LUNA tokens to the Luna Foundation Guard (LFG). Terraform Labs, the principal Terra developer, donated the donation, which will be used to boost the LFG’s stablecoin reserves.
LFG’s reserves, which back the stablecoin UST, are valued at approximately $2.45 billion, with Bitcoin accounting for over 70% of the total (BTC). The LUNA gift was recently used to purchase extra BTC for the reserve by the community. However, the 10 million tokens came from Terraform’s non-circulating LUNA reserves as well. Their emergence into active, circulating supplies resulted in a deflationary influence on LUNA prices. The price of the token dropped by more than 6% as a result of the contribution.
The reserves held by LFG are an attempt to boost UST’s legitimacy as a totally decentralized algorithmic stablecoin. The reserves are intended to serve as a buffer against extreme liquidity shocks. But Terra’s high concentration of BTC in its reserves has triggered some LUNA selling. BTC’s price swings are enormous, rendering it unsuitable for use as a reserve currency. The value of Terra’s reserves has hit a one-month low when compared to BTC.
LUNA has been criticized for having a non-circulating supply controlled by Terraform Labs that is considerably greater than the token’s circulating supply. The launch of these tokens may cause more volatility in LUNA pricing. According to Terra Analytics data, 383 million LUNA tokens are locked, with 358 million tokens in circulation.
Terraform and the LFG has managed to solve the supply gap by burning LUNA on a regular basis to mint UST. The move inflates the token’s pricing while also generating a more stablecoin for circulation. In LUNA’s existence, roughly 132 million tokens were burned prior to the donation. However, if more LUNA is released from Terraform’s reserves, the token is still vulnerable to external shocks.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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