To build stablecoin reserves, the Terra Community burns 4 million LUNA tokens

The Luna Foundation Guard (LFG), a Terra-centric blockchain group, said that it had burned 4 million LUNA tokens to create 372 million TerraUSD stablecoins (UST). The UST revenues will be used to increase the foundation’s non-LUNA reserves by acquiring more collateral.

The decision comes as the market’s increasing volatility has pushed more traders into UST. Rising UST demand threatens to destabilise the token’s 1:1 peg to the US dollar, prompting the community to burn LUNA to manufacture UST and meet demand. 1 UST can be made by burning $1 worth of LUNA.

To help UST’s legitimacy, the Terra community has been accumulating reserves. The LFG said last month that it had raised $1 billion in Bitcoin as a UST reserve.

With today’s burn, the LFG’s total non-LUNA reserves will be $2.2 billion, according to the company. It also has a total of 8 million LUNA tokens in hand. The reserves provide as a buffer against volatility, allowing the LFG to keep the UST peg in place even when there is a lot of buying or selling pressure.

As a result, the LUNA pricing benefits

 

Given its usage in UST minting, the token’s price has risen in recent months. The constant burn rate of LUNA has also reduced supply, boosting its price. According to Terra Analytics, around 27 million tokens have been burned in the last month, reducing the overall circulating supply to 371 million.

The success of LUNA has far exceeded that of the broader crypto market in the last month. It has gained 75% in the last 30 days and is currently trading at $92, slightly below a record high. In comparison, the whole crypto market value has dropped 15% in the last month to $1.71 trillion.

The increased popularity of the Anchor Protocol (ANC), a DeFi money market programme developed on the Terra network, has further boosted UST demand. The protocol provides UST depositors with a nearly 20% yield, which is far more than any other major stablecoin.

 

 

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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