LUNA has surged by more than 20 times in the previous 4 days

Luna’s price has dropped 99 percent in the previous two days as a result of this large supply increase.

As the consequence of TerraUSD (UST) losing its peg to the US dollar continues to take its toll, the supply of Luna (LUNA) has surged by more than 20 times in the previous few days.

If the price of Luna continues to fall, the supply of Luna will likewise rise.

What is the reason for this?

UST is currently trading at $0.57 per share, much below its peg, as of 8:05 a.m. ET on Thursday.

We need to know the relationship between Luna and UST to figure out what’s going on.

The Luna token is used to help UST maintain its dollar peg.

If the price of UST rises beyond a dollar, one Luna can be burned and redeemed for one UST, a factor that aided Luna’s price rise early this year.

However, if the price of UST falls below the peg, merchants can exchange 1 UST for $1 worth of Luna.

As a result, rather than selling on the open market, UST holders are attempting to cash out through Luna, utilizing the mechanism designed to maintain the peg.

When this happens, the amount of UST consumed causes additional Luna to be minted.

If you redeemed 1 UST for $1 worth of Luna when Luna was much more expensive, say $100, you would only get 0.01 LUNA. As a result, such swaps would not have significantly increased Luna’s supply.

However, now that Luna’s price is substantially lower and huge holders are cashing out, the supply of Luna is rapidly increasing. At the current Luna price of $0.10, swapping 1 UST for 10 LUNA is a good deal.

This has resulted in a decreasing trend. Holders that exchange UST for Luna enhance the quantity of Luna, which they will most likely sell on the market.

This drives the price of Luna further down, as the next person to redeem their UST generates even more Luna, placing even more downward pressure on the market.

It has also resulted in a massive rise in Luna supplies. Luna’s supply grew by 1.2 billion on Wednesday, from 386 million to 1.5 billion. So far today, the supply has risen to 7.1 billion, an increase of 5.5 billion.

Solution

Terraform Labs is currently supporting a few initiatives aimed at saving the ecosystem. One could quadruple the quantity of UST that can be exchanged for Luna per day.

This would accelerate the expansion of Luna’s supply, making the situation even worse for the Luna price.

Theoretically, saving the UST peg would be the quickest method to improve the situation, despite the fact that it would have an influence on Luna.

Terraform Labs is also advancing plans to burn 1.39 billion UST currently held in community and incentive pools. The theory is that this will minimize system pressure.

ALSO READ: Coinbase: Plans To Suspend Trading Of Wrapped LUNA And TerraUSD Following LUNA Crash

Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing