LUNA’s supply has increased from 346 million tokens to 7.1 billion tokens in just four days. This resulted in a drastic drop in the value of the token.
Price drop accelerates due to huge increase
Luna’s supply has increased by more than 20 times in recent days. This is partly due to the fact that Terra’s UST has lost its peg with the US dollar.
This massive increase in supply has accelerated Luna’s price decline, which has fallen by 99% in the past two days. If the price of Luna continues to fall, the supply will also continue to increase.
Luna is the token used for the UST to maintain its peg to the dollar. If the price of UST rises above a dollar, $1 worth of Luna can be destroyed and exchanged for 1 UST. This was one of the reasons Luna’s price rose during its massive rally earlier this year. However, if the price of the stablecoin UST falls, traders can trade 1 UST for $1 worth of Luna.
Right now, UST’s value is well below its $1 it should be worth. As a result, instead of selling their stablecoin on the market, UST owners try to cash out through Luna. They do this using the mechanism designed to hold the dollar peg in place. When this happens, more Luna will be printed relative to the amount of UST destroyed.
Now that the price of Luna is extremely low, and large investors are cashing out massively, this causes a large increase in the supply of Luna tokens. At Luna’s current price of $0.10, you get 10 LUNA if you trade 1 UST. So if someone wants to trade a large amount say 100,000 UST, that would lead to minting 1 million LUNA.
