Terra burnt $185 million worth of LUNA in the past month, driving the token’s price to a new record high.
How is LUNA burning related to the stablecoins on the platform?
The upcoming Columbus-5 upgrade promises to push the price even higher.
YEREVAN (CoinChapter.com) – Terra stablecoin issue protocol’s governance token LUNA rocketed to an all-time high of $35.6 on August 19, followed by a slight correction. The LUNA/USD exchange rate clocked at 33.5 in the European session Tuesday, after Terra burnt $185 million worth of governance tokens in the past month.
In detail, to foresee LUNA’s future price action, it is crucial to picture how the Terra protocol works and produces new stablecoins.
LUNA burn vs. UST
As mentioned, Terra is a stablecoin issuing protocol. Its most used product is UST, a stablecoin pegged to the US dollar. However, the platform also produced other currency stablecoins like the KRT, pegged to the Korean won, and MNT pegged to the Mongolian tugrik.
Regardless of the stablecoin variety on the network, the LUNA governance token remains the central tool in their creation. To produce or mint UST (or any other stablecoin), Terra burns LUNAs. As the popularity of UST grows, the users require more coins. Subsequently, Terra has to burn more LUNA tokens to keep the supply uninterrupted and prices stable.
As a result, burning creates a supply shortage, that positively affects the price of Terra’s governance token. Thus, as burning becomes more extended, LUNA gains in value. During the past month, partially due to the $185 million worth of burns, it put on a whopping 518 percent. The digital asset went from $5.68 on July 21 to 33.8 on August 24.
The Terra network promises LUNA holders even more gains, as it prepares to launch a major blockchain upgrade, dubbed Columbus-5.
In the current version of the Terra protocol, LUNA is burnt only partially during stablecoin minting. The burnt part is called seigniorage. A portion of the seigniorage is returned to the community pool and the oracle reward pool. After Terra launches the Columbus-5 upgrade, the minting process will burn up the seigniorage completely.
The extra burn becomes significant as it further shifts LUNA’s demand-supply balance, creating an additional supply squeeze. In addition, as the utilization of UST and other stablecoins grows, the network will burn more LUNA tokens, further cutting the supply.
Terra tweeted a thread on August 17, describing the main advantages of the Columbus-5 upgrade, along with details regarding wallet and contract migration. The network scheduled the mainnet launch on September 5.
…gained 31.5 percent in the past week. After hitting an all-time high of $35.6 on Thursday, LUNA traded at $33.5 and rose on Tuesday. The digital asset sought support from the $26.5 price level for the past few days. It retested the support once again on August 23 and managed a bullish 2-day run.
While the price action shows no signs of consolidation, the high relative strength index (RSI) could be problematic for traders. In detail, the RSI (purple graph at the bottom of the chart) is a momentum indicator. It reflects the traders’ attitude towards a digital asset.
If the RSI is higher than 70 (80 on the LUNA chart), they might pull their bets to secure their profit against an overbought coin. Terra governance token’s RSI has been “overbought” for almost a month now, which is noteworthy. Even if there is a possible downward correction ahead, the reasons behind LUNA’s rally remain substantial.
The ubiquitous recovery across the altcoin market, paired with the supply squeeze and the upcoming protocol upgrade, did the trick and drove Terra’s LUNA up 518 percent in the past month. As the upgrade will burn even more LUNA to mint stablecoins, the governance token looks primed for more gains in the future.
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