Introduction

Luna (LUNA) and TerraUSD (UST) are two native tokens of the Terra network, a blockchain-based project developed by Terra Labs in South Korea. The Terra blockchain is built on Cosmos SDK; a framework that allows developers to create custom blockchains and build their own decentralized applications on top of Terra for various use cases. As of now, The Terra ecosystem contains more than 100 of these natively built projects. These include non-fungible token (NFT) collections, decentralized finance (DeFi) platforms and Web 3 applications.

How it works

In the Terra ecosystem, users can always swap the LUNA token for UST, and vice versa, at a guaranteed price of $1 – regardless of the market price of either token at the time. This is important to note because it means if demand for UST rises and its price rises above $1, LUNA holders can bank a risk-free profit by swapping $1 of LUNA to create one UST token (which due to a rise in demand in this example, is worth more than $1). During the swapping process, a percentage of LUNA is burned (permanently removed from circulation) and the remainder is deposited into a community treasury. Funds in the treasury are then used to invest in applications and services that expand the utility of the Terra ecosystem. Burning a percentage of LUNA tokens reduces the number of overall tokens left in circulation, making them more scarce and, therefore, more valuable. By minting more UST tokens, it has the effect of diluting the existing tokens in circulation and bringing the overall price back down to its $1 level.

Luna Burning

The amount of lunas burned in the Tera network is shown in the diagram below. This analysis, which started on the first day of 2021, shows the amount of tokens burned daily in the chart below and in aggregate in the table below. This diagram shows the different cycles of making Luna tokens, but in early November 2021, most of the Luna tokens were burned. In this chart, it is clear that the lowest rate of token burning also occurred in December 2020.

The chart below shows Luna's price changes over time since the beginning of 2021. As you can see, Luna's price has changed a lot. Here we are going to examine whether Luna token burning has an effect on its price or not. To answer this question, we must pay attention to the days after Luna's heavy tokens, that is, we must pay attention to the days after November 15th. In the Luna price chart, it can be seen that the price of Luna increased in December 2021, which was exactly the month after Luna's biggest token burning. By comparing these two graphs, it can be easily concluded that token burning increases the price of Luna.

The diagram below shows the daily UST supply. This chart can give us an overview of the status of the UST token supply. In this section we want to know whether Luna token burning has an effect on UST resources. To answer this question, we must pay attention to the days after Luna's heavy tokens, that is, we must pay attention to the days after November 15th. In the UST supply chart, it can be seen that the UST supply has increased in December 2021, which was exactly the month after Luna's biggest token burning. By comparing these two graphs, it can be easily concluded that token burning increases the UST supply.