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As of April 28, the supply of Terra (LUNA) has dropped to an all-time low, forming an important driver for the upside. Cryptocurrency analysts see this as an indicator of a project’s popularity, despite concerns about the sustainability of the protocol’s operating model.
LUNA’s circulating supply has dropped to 346 million, down from 355 million a month earlier. In addition, the amount of coins available in the market that is not locked for first bets is reduced to 90 million.
The reduced supply of LUNA has given the price of tokens in the crypto market a boost again.
Dustin Teander, analyst at blockchain data platform Messari said:
This resulted in large price swings for the LUNA asset, as there was not only a significant amount of buying but also a significant decrease in supply.
The price fate of LUNA has each closely linked with UST. Thanks to LUNA’s good performance in the past time, the platform’s stablecoin TerraUSD (UST) has become the 3rd largest stablecoin in the crypto market.
LUNA’s token is essential to keeping the price of UST stable at 1 USD. The exchange rate maintenance mechanism is built through an algorithm that incentivizes investors to participate in transactions. At the same time, it returns the price to the fixed exchange rate by permanently canceling and creating LUNA tokens to balance supply and demand for UST.
When UST is above the 1 USD anchor, LUNA is burned to UST. Similarly, if the demand for UST is low and the price falls below 1 USD, the UST will be burned to create LUNA.
Demand for UST exploded, its market cap growing from $2 billion to $18 billion in a year as investors flocked to the Anchor protocol. Terra also allows users to deposit UST savings on Anchor Protocol (ANC) with annual interest rates up to 20%.
A difficult problem poses, if UST activity weakens and investors withdraw from Terra, UST will be burned to keep the price fixed, diluting the supply of LUNA, leading to a decrease in price. Finding a solution to a long-term financial problem with 20% interest on Anchor Protocol is also a dilemma for Terra. That is why many market analysts consider Terra’s growth rate to be unsustainable.
The solution that Terra offers to solve the above problem is to build investor confidence. Terraform Labs has established the Luna Foundation Guard (LFG) to support the Terra ecosystem through the purchase of BTC as collateral for the UST coin. In addition, Terra also aspires to make the platform the second largest holder of BTC in the world.
To make AVAX the UST’s second reserve, Terraform Labs and Luna Foundation Guard purchased $200 million in AVAX. Even Terraform Labs “donated” $880 million in tokens to Luna Foundation Guard to strengthen the organization’s resources to build reserves.
Currently, LFG’s UST escrow reserve holds more than 42.5 thousand BTC, worth about 1.65 billion USD, the rest is allocated to LUNA, USDC and USDT.
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