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LUNA developers are now proposing to finally take a strong step and burn its tokens
The price of Terra LUNA cryptocurrency fell by almost 99% overnight, erasing almost 95% of the investors’ wealth. Terra, which was one of the largest cryptocurrencies in the market dropped below US$1, having peaked around US$120. It is mainly a snowball effect as the TerraUSD got de-pegged twice within a period of 48 hours. As UST lost its value, it brought down the LUNA token along with it. Terra’s current market conditions have literally shocked investors. Its volatility is scaring away more potential investors who previously thought that the crypto market would soon stabilize. But Terra’s recent complications have left investors in turmoil, making it even more difficult to retain their tokens. To alleviate this situation, the developers are proposing a token burn. They are preparing to manage the supply for LUNA by burning UST and increasing the available pool of terra LUNA.
According to reports, since algorithmic stablecoins like TerraUSD are automatically pegged to the dollar, traders can exchange LUNA for UST at US$1, regardless of its current market value, since the algorithms that are backing the Terra ecosystem can also manage LUNA, creating sufficient scarcity to justify the US$1. In this position, it would probably be a good idea to burn the Terra tokens in this condition to create more value for the existing tokens. But the real question is after such a drastic downfall, will investors ever be able to completely trust Terra again?
Why did the Terra UST cause LUNA to fall such drastically?
The current condition of TerraUSD has caused deliberate sell-offs of the token among investors and is rapidly spreading negative sentiments about the asset in the crypto market. Experts are trying to predict the obvious reason for how UST pushed LUNA towards a freefall. Since the UST is pegged to the US dollar, Terra is able to maintain a collateral reserve in the form of the LUNA tokens. So, when the TerraUSD token exceeds US$1, the users are incentivized when they mint UST and burn LUNA tokens. This maintains stability in the ecosystem. So, when the UST contradicts, it brings down LUNA’s valuation.
Currently, the condition of Terra is so bad that the LUNA investors are tweeting that most of them lost their savings and hoped that they had cashed out their profits when there was still time. But unfortunately, the volatility of the crypto market is quite uncertain. Nobody can actually predict beforehand the cryptocurrency movements. The fact that a stablecoin lost its dollar peg is scary, as these tokens were supposed to be the safest investment option in the market. To alleviate these inconveniences, Terra LUNA developers proposed to burn nearly 1 billion UST in the community pool while increasing the Base Pool of LUNA availability to 100 million, which is supposed to enhance the minting capacity to over US$1 billion.
This dwindling condition of Terra is also affecting Bitcoin and other cryptocurrencies. The Terra Founder plans to buy US$10 billion worth of Bitcoin with the help of a non-profit foundation named Luna Foundation Guard. These funds will provide support in case there is another dramatic fall in the value of Terra. The idea is that BTC would act as ‘reserve currency’ for Terra, in a similar way, central banks hold large quantities of dollars. The concern is, that owing to the current market situation of Bitcoin, it might not be a safe plan to re-establish the value of LUNA. This might not only tumble the Terra ecosystem but might also cause challenges for the entire crypto market. The Terra Founder is focusing on eventually allowing UST holders to redeem their tokens in exchange for Bitcoin. But this is still weeks away from being implemented, and the steps as to how the investors can carry out this initiative are also obscure. But burning 1 billion LUNA seems like a good plan to re-establish its market position, given the investors once again trust in it as an investment option.