• After Terra votes to burn $4.5 billion in tokens, the price of LUNA fluctuates

  • Terra has decided to burn nearly 89 million LUNA tokens in the coming weeks.

    Nothing sparks demand like dwindling supply. That is, at least, what is supposed to happen.

    Just ask Terra, the community in charge of maintaining Terraform Labs’ LUNA utility token protocol and terraUSD stablecoin.

    On Tuesday, the community voted to burn approximately 89 million LUNA tokens (approximately $4.5 billion). After Terra co-founder Do Kwon’s proposal was approved, the token’s price skyrocketed from $50 to nearly $54, approaching its all-time high of $54.77. Then it became engulfed in a mini-market meltdown, with nearly the entire crypto market turning red. Within a few hours, the price had dropped by 14%. LUNA, which has a market capitalization of $23.5 billion, has since stabilized at around $48.

    LUNA is a utility token for Terra blockchain-based decentralized applications. One of its primary applications is to keep a 1:1 peg with Terra’s algorithmic stablecoins. When UST demand falls, more LUNA is minted; when stablecoin demand rises, more LUNA is burned.

    Following the successful vote, 520,000 LUNA (worth over $25 million) were removed from circulation, with the remaining 88+ million to be burned over the next two weeks, theoretically increasing the value of LUNA even further.

    Yesterday’s vote fits into the larger plan outlined by the Columbus-5 network upgrade in late September, which altered how and when Terra burns tokens. Instead of transferring LUNA to a community pool after the upgrade, the LUNA used to mint the Terra stablecoin would be permanently burned. The move was intended to boost the value of LUNA.

    Kwon explicitly stated in May that the Terra Community Pool token burn would generate revenue “to bootstrap the initial funds for the Ozone Protocol.” Ozone is essentially insurance for using Terra’s rapidly expanding decentralized finance (DeFi) space. DeFi refers to lending, savings, and trading protocols that eliminate the need for intermediaries, such as banks and brokers; Ozone assists in risk management.

    Terraform Labs is based in South Korea, but its DeFi ambitions have landed it in hot water in the United States. The SEC served Kwon while he was on his way to speak at a cryptocurrency conference in September. He sued the agency last month over the subpoena, which was issued in connection with Terraform’s Mirror Protocol. Mirror enables users to trade synthetic (i.e., crypto) versions of real-world stocks such as Tesla.

    Terra’s burning strategy, while notable, isn’t particularly novel.

    Ethereum has had success in destroying its own coins. In August, the London hard fork implemented EIP-1559, a measure that redirects transaction fees away from miners who validate transactions and into an inaccessible wallet, where the ETH is effectively destroyed. Since the deflationary measure was implemented, the price of Ethereum has increased by more than 60%, setting new record highs along the way.

    Terra users, no doubt, are hoping for similar results.

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