Nothing generates more demand than a reduction in supply. At least that’s what should happen.
Ask Terra, whose community is responsible for maintaining the protocol of the LUNA utility token and stablecoin terraUSD developed by Terraform Labs.
On Tuesday (9), the community voted to burn around 89 million tokens (approximately US$4.5 billion).
After the proposal presented by the co-founder of Terra Do Kwon was approved, the price of the token soared from $50 to over R$54, coming close to its record high of $54.77.
It then went through a mini-market meltdown as nearly the entire crypto market went into the red. Within hours, the price had dropped 14%. LUNA, which has a market capitalization of $23.5 billion, has rebounded to about $48.
1/ The on-chain votes for proposals 133 and 134 to burn the 88.675 million Pre-Col-5 $LUNA in the Community Pool (~$4.5 billion), swapping for $UST using the on-chain swap, and reducing the oracle_rewards_pool distribution window from 3 to 2 years have now passed!— Terra (UST) 🌍 Powered by LUNA 🌕 (@terra_money) November 10, 2021
LUNA is a utility token for decentralized applications (or dapps) developed on the Terra blockchain. One of its main uses is to maintain a 1:1 ballast to Terra’s algorithmic stablecoins.
More LUNA is issued when demand for UST drops; the token is burned when demand for stablecoin increases.
After the successful vote, 520,000 LUNA (equivalent to more than US$25 million) was withdrawn from circulation, as the more than 88 million remaining tokens will be burned over the next two weeks, theoretically increasing the value of LUNA even further. .
This week’s vote matches the larger plan introduced by the Columbus-5 network update at the end of September, which changed the way and timing Terra burns tokens.
After the upgrade, instead of transferring LUNA to a community pool, the LUNA tokens that used to issue stablecoin would be permanently burned. The initiative was created to increase the value of LUNA.
In May, Kwon explicitly considered the Earth Community Pool token burning as a revenue-generating event “to boost initial funding for the Ozone Protocol”.
Ozone is basically insurance for use by Terra’s growing Decentralized Finance (or DeFi) sector.
The term DeFi refers to loan, savings, and trading protocols that suppress intermediaries, primarily banks and brokerages. Ozone helps manage risk.
Although Terraform Labs is headquartered in South Korea, its DeFi aspirations have created problems abroad. Kwon was notified by the US Securities and Exchange Commission (SEC) when he was going to speak at a crypto conference in September.
In October, he sued the agency on account of the subpoena, which is related to Terra’s Mirror Protocol. Mirror allows people to trade synthetic (crypto) versions of real-world stocks, including Tesla.
Terra’s burning strategy, while interesting, is not necessarily new.
Path taken by Ethereum
Ethereum succeeded in burning its own coins.
Fork (or “hard fork”) London implemented EIP-1559, a measure that redirects transaction fees, previously handed over to miners who validate transactions, to an inaccessible wallet, where ethers (ETH) are definitely destroyed.
Since the introduction of this deflationary measure, the price of ether has risen by more than 60%, reaching record highs along the way.
Without a doubt, Terra users expect to obtain similar incomes.
LUNA breaks out to new all-time highs as Terra’s DeFi dollar gains traction
- LUNA price has posted a 56% rally over the last 7 days, hitting a new all-time high at $67.87.
- The algorithmic-backed stablecoin UST is the largest of its kind, driving Web3 adoption.
- Anyswap protocol has announced a partnership with Terra, powering a cross-chain bridge between TerraUSD and Fantom.
As Web3 adoption gathers steam, Terra-powered LUNA hit a new all-time high. LUNA’s daily trade volume has exploded, hitting $2.26 billion today. The Terra ecosystem has announced new partnerships to bridge TerraUSD with layer-2 tokens.
Terra’s LUNA hit a new all-time high
Stablecoins play a key role in the crypto ecosystem. Though controversial, these assets bridge the gap between fiat and cryptocurrencies on exchanges. Terra’s stablecoin TerraUSD (UST) has a market capitalization that has crossed $1.2 billion.
UST is the first algorithmic stablecoin built for e-commerce andhas been dubbed the DeFi dollar. Terra’s ecosystem aims to offer next-generation digital commerce and money through UST and LUNA.
LUNA hit fresh all-time highs three times in the past 30 days, offering holders over 55% gains.
As Web3 adoption increases, Terra’s stablecoin becomes more relevant.
Terra announced the news of its partnership with Anyswap Network. The trustless protocol bridges layer-1 and layer-2 blockchains. UST is now connected to FTM through a cross-chain bridge.
🔵 @Terra_money Partnership with @AnyswapNetwork
🔵 The cross-chain bridge service between Terra and Fantom is available on https://t.co/ova71Pc3I5!
⬇️ INFO :https://t.co/PfpJ7J1K6E#FantomSpacd— 𝐅𝐚𝐧𝐭𝐨𝐦 𝐒𝐩𝐚𝐜𝐞 (@Fantom_Space) December 2, 2021
A new proposal on Injective, a layer-2 decentralized exchange protocol, proposes to enable Terra ecosystem price feeds. The exchange proposes to launch UST pairs for LUNA, Mirror Protocol (MIR) and Anchor Protocol (ANC).
Analysts have a bullish outlook on Terra’s LUNA. @BigCheds, a pseudonymous cryptocurrency analyst, is bullish on the coin.
$LUNA (USDT) though incredibly bullish we must observe:
Note the decreasing size of the real candle bodies of the last 3 completed candles. Representative of decreasing trend strength according to Japanese candlestick theory
Can also argue last 2 candles are high wave pic.twitter.com/r9KJBx4ua5— Cheds (@BigCheds) December 3, 2021
Over 7.2 million LUNA has been burned in the last week of November, fueling the altcoin’s price rally.
Hayden Hughes, CEO of Alpha Impact, a social-trading platform, told Bloomberg,
Luna’s economics are built to be deflationary, and over the past month we’ve seen 100 million Luna tokens be burned, which removes them from supply forever. This reduction in supply combined with the popularity of Luna staking has created a supply shock that has driven up the value.
Terra’s LUNA Eyes A Spot In Top Ten With 60% Weekly Gains and New All-Time High
While the broader cryptocurrency has been showing a sideways movement, Terraform Labs’ LUNA token has significantly climbed the ranks gaining 60% over the last week. Terra’s LUNA token has toppled some of the recent top performers like Polygon (MATIC), Shiba INU, and Avalanche (AVAX).
As of press time, LUNA is trading 9.58% higher at a new all-time high of $69.38 with a market cap of 26.8 billion. LUNA is now looking to make its way into the top-ten crypto-list by surging past the only meme coin – Dogecoin – in this list.
The LUNA price rally comes on the backdrop of the optimism surrounding the potential for decentralized applications (DApps). Besides, the use of the LUNA coin in these blockchain applications is also the reason behind it. As on-chain data provider Santiment explains:
Terra has been on a tear for most of Q4, and is up an astounding +76% against the #Bitcoin‘s price since November 24th. Also encouraging is the upward long-term trajectory of $LUNA‘s development activity rate, with rising #github submissions over time.
Understanding Terra’s Functioning and LUNA’s Use
The Terra protocol works on an algorithm of deploying fiat-pegged stablecoins useful in a decentralized finance (DeFi) ecosystem. Terraform’s DeFi ecosystem includes popular apps like Pylon, Mirror, and Anchor.
Besides, Terraforms recently introduced a governance proposal to destroy and burn nearly 88 million LUNA coins from the community pool, swapping it for Terra’s native stablecoin UST. In less than a month’s time, UST’s market value has surged 3x from $2.9 billion to $7.7 billion. This reduction in supply and scarcity – a deflationary economic activity – of LUNA has pushed the price higher. Speaking to Bloomberg, Brian Curran, head of communications at Terraform Labs said:
“Mostly everything we do as a company supporting the Terra ecosystem and third-party projects that build and develop creates more demand for UST, closing the ‘demand loop’ with many use cases for UST ranging from payments, to savings, and investing.
As a result, Luna’s price dynamics are mostly a function of the demand for UST, and by extension, the demand for using UST across various applications and blockchains.”
Cross-chain bridges like Wormhole can further boost the demand for Terra’s LUNA. This is because they might allow Terra to export UST to other blockchain networks.
LUNA may be in danger of 46% sell-off due to this ascending wedge
LUNA’s ascending wedge has been forming for over a month and it is now, threatening a potential 46% sell-off. Traders must be cautious of a close below the confluence of the 4-hour 200-SMA (green) and 23.6% Fibonacci level, one which could trigger a bearish outcome. Meanwhile, bulls can aim for an early cut-off at the 38.2% Fibonacci level – A zone that held up a reliable support level in October.
At the time of writing, LUNA was trading at $51.5, up by 4.9% over the last 24 hours.
LUNA 4-hour Chart
Three higher highs set up at $41.5, $49.5, and $61, along with three higher lows at $27.2, $41.3, and $48.4, outlined an ascending wedge on LUNA’s 4-hour chart. Based on the highest peak and the lowest valley within the bearish pattern, LUNA eyed a 47% drawdown from the breakout point. Should LUNA forego its streak of higher lows and weaken below the 200-SMA (green) and 23.6% Fibonacci level, sellers can drive the price all the way to $23.52.
Bulls can counterpunch immediately at the 38.2% Fibonacci level- A zone that enabled a reversal following a double top at $49 in October.
On the flip side, an upwards breakout can be possible if LUNA registers an immediate close above $55, backed by strong volumes. Such an outcome would set LUNA on course for $81.
The 4-hour RSI traded within a steady down channel, forming several bearish divergences with respect to LUNA’s price action. Such signals are commonly observed before a retracement takes place.
Having said that, LUNA could extend its wedge over the near term as the MACD and DMI were still within favorable positions.
LUNA can consolidate close to $55 as the MACD and DMI shift to bearish positions. Once sellers respond to such cues, LUNA would break south of its wedge and set up a potential 47% sell-off.
Traders can go short once LUNA closes below the confluence of its 200-SMA (green) and 23.6% Fibonacci level and set take-profits at $23.5.