Terra (LUNA), the native token on the eponymous blockchain, sank to an over one-month low this week as the release of 10 million tokens into circulating supply caused a price shock.
The token dropped 14% this week, and trading near a one-month low of $81.34. It is also one of the worst performing cryptocurrencies this week.
LUNA supply shock?
A bulk of the token’s losses stem from a donation of 10 million LUNA tokens to the Luna Foundation Guard (LFG). The donation was made by lead Terra developer Terraform Labs, and, is intended to be deployed towards bolstering the LFG’s stablecoin reserves.
LFG’s reserves, which back the stablecoin UST, are worth about $2.45 billion, of which nearly 70% is Bitcoin (BTC). The community recently applied the LUNA donation towards buying more BTC for the reserve.
But the 10 million tokens were also from Terraform’s non-circulating LUNA reserves. Their release into active, circulating supply had a deflationary effect on LUNA prices. The token’s price slid by over 6% in immediate reaction to the donation.
LFG’s reserves are an attempt to lend UST further credibility as a completely decentralized algorithmic stablecoin. The reserves are set to act as a buffer for any extreme liquidity shocks.
But Terra’s heavy concentration of BTC in its reserves has drawn criticism, and also spurred some LUNA selling. BTC tends to log large price swings, making it unsuitable to use as a reserve currency.
Tracking BTC, the value of Terra’s reserves recently hit a one-month low.
Terra has more locked tokens than in circulation
LUNA has been criticized over the fact that its non-circulating supply, held by Terraform Labs, is far more than the token’s circulating supply. The release of these tokens could further rattle LUNA prices.
Data from Terra Analytics shows that 383 million LUNA tokens are locked, compared to 358 million tokens in circulation.
Terraform, and the LFG have attempted to offset this supply difference by regularly burning LUNA to mint UST. The move is inflationary for the token’s prices, and also generates more of the stablecoin for circulation.
Prior to the donation, nearly 132 million tokens were burnt in LUNA’s lifetime. But the token is still prone to shocks if more LUNA is released from Terraform’s reserves.
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