LUNA was the talk of the town in early November after breaking through the $50 barrier and setting a new ATH. However, like other altcoins, LUNA was not immune to the broader bearish sentiment. Since November 14, the cryptocurrency has lost more than 20% of its value. It was trading in the $40 range at the time of writing.
The term ‘deflationary’
Aside from its recent performance, it is important to remember that LUNA’s macro-uptrend is still intact. In fact, since Terra’s Columbus-5 upgrade, LUNA has been sailing smoothly.
LUNA backs TerraUSD, Terra’s native stablecoin. As a result, LUNA tokens must be burned in order to increase the supply of TerraUSD. When the demand for UST falls, more LUNA is minted.
It should be noted that the burning strategy is not new. Following the EIP-1559 upgrade, Ethereum has had success in destroying its own coins. In fact, after doing so, ETH also reached new highs before correcting.
While the aforementioned mechanism is fundamentally beneficial to cryptos, it’s important to remember that LUNA would not become deflationary right away.
According to the most recent data, 10% of LUNA’s supply is ‘officially gone’ for good. This comes as no surprise, given that the community voted and agreed to burn nearly 89 million LUNA tokens.
The supply of LUNA will continue to dwindle over time. But that’s only half of the story. Only if demand rises in tandem with supply would the’scarce asset’ narrative make sense.
Can a drop in supply spark a surge in long-term demand?
Yes, theoretically. However, other important factors such as the inflation rate and stock-to-flow ratio must be considered before reaching a conclusion.
Consider this: LUNA’s S2F was seen hovering around the 18-mark in September. In October, the figure crept up to 20. Surprisingly, at the time of analysis, the same predicted a value of 24. The improving state of this metric clearly demonstrates this altcoin’s protected future.
The stock-to-flow model quantifies scarcity by taking into account variables such as total supply and annual production. The higher the value, the better; conversely, the lower the value, the worse.
Similarly, over the same time period, the inflation rate fell from 5.52 percent to 4.1 percent. This means that LUNA’s long-term retention value has only grown stronger over time.
Furthermore, according to Messari’s data, the projected supply in ten years is set to remain 996 million, with an issuance percentage of around 96 percent. If these projections come true, the token will be praised for its deflationary nature.
Furthermore, at the time of writing, nearly 36% of LUNA’s supply was staked. Staking is important because HODLers end up locking up coins for a set period of time in order to earn returns.
According to data, LUNA’s staking yields are currently around 5%, which is sufficient to entice investors to purchase more coins. As a result, the potential increase in demand is expected to drive up the alt’s LT price even further.
Another set of advantages
Terra network’s development activity has recently been quite impressive. At the time of writing, the same was seen revolving around its yearly high. This essentially means that developers are always striving to keep the project relevant. Not only for food, but also for competition.
Simultaneously, at the time of writing, the total value of all assets staked on the Terra protocol was close to its ATH.
Keeping all of the aforementioned factors in mind, particularly the entire burning mechanism, it would not be incorrect to say that LUNA’s future prospects appear to be quite bright.
It’s only a matter of time before the alt gains even more market dominance and climbs even higher up the rankings and price chart.