- The LUNA/USDT pair chalked a new all-time high of $48.54 on Monday.
- Activation of Columbus-5, Terra’s cross-chain interoperability upgrade, sparked the rally since October beginning.
- The latest blockchain upgrade introduced a deflationary feature in the Terra ecosystem.
JAIPUR (Coinchapter.com) – Top trending layer-1 blockchain Terra’s governance cryptocurrency LUNA logged a new all-time high of $48.66 on Monday. The latest high pushed the token’s raking to number 11 on the global crypto leaderboard. LUNA’s new high came amidst the activation of Terra’s Columbus-5 blockchain upgrade and the introduction of a new “token burn” feature.
LUNA has been rallying on the back of the Columbus-5 upgrade since the beginning of October.
LUNA’s Diminishing Supply
LUNA derives its use case from stabilizing stablecoin pegs within the Terra ecosystem. The protocol burns LUNA tokens every time a “peg-stabilization” request shows up. More demand in UST (Terra’s native US dollar-pegged algorithmic stablecoin) translates to an equivalent burning of LUNA tokens to keep the 1:1 peg factor in check.
Previous LUNA token burns were partial. However, Columbus-5 activation resulted in a total burning of the “LUNA seigniorage.” In Terra terminology, seigniorage refers to burning $1 worth of LUNA for minting 1 UST, which expands the UST supply while contracting the LUNA supply simultaneously.
Accelerating the elimination of free LUNAs intensified the deflationary pressure on the token.
“By closely tethering LUNA demand to UST demand, LUNA value capture becomes a function of UST’s adoption in a thriving cross-chain, Internet-native environment. As a result, more demand for UST shifts LUNA’s demand curve outward, while LUNA’s supply curve contracts.”said the Terra team in a recent tweet thread discussing the Columbus-5 upgrade
As per the official announcement, the Terra team noted that the intent behind Columbus-5 is to simplify the protocol’s token economics and “augment the value capture of LUNA based on UST’s growth.”
“A continually expanding UST supply magnifies pressure on the LUNA price over time. This is because consistently expanding the demand while contracting the supply is accentuated by the fact that less LUNA will be required to mint more UST as the LUNA price increases.”read an excerpt from the offcial Columbus-5 launch announcement
Another $1 billion worth of LUNA from the Terra community pool would be burned to fund the launch of Ozone, an algorithmic, claims-based insurance protocol.
Sending a billion-dollar worth of LUNA tokens to an inaccessible address would further push up the prices of the LUNA/USDT pair. Terra plans to reveal the financials of fund allocation for developing Ozone at a later date.
“Many community members have been asking about the community pool’s usage for Ozone, which will be clarified soon as Ozone finalizes its audit and prepares for launch. The plan for $1 billion denominated in LUNA remains, but the specifics of how its execution will follow soon.”
LUNA/USDT Technical Setup
The Columbus-5 upgrade helped LUNA’s bullish cause, but the token ended up in the overbought territory in the process. As a result, sellers showed up to book quick profits off the new top. As a result, LUNA/USDT spot rates dropped from $48.54 to $45.18 due to the bearish pressure, pushing the token’s relative strength index (RSI) down from 73.8 to 62.7.
If the selloff continues, LUNA will end up trimming gains until a drop to $40 (coinciding with the 50-day exponential moving average wave). But a dip below $34 (200-day exponential moving average wave) seems improbable as the said price provides significant support for LUNA/USDT’s current momentum.
Bulls will soon buy the dip, but for now, traders ought to look out for reversal signs to place fresh buy bids.