Can the combustion mechanism drive up the price of LUNA in the long run?

LUNA was in the spotlight in early November after its price broke the $ 50 mark and hit a new ATH. Like other altcoins, however, even LUNA couldn’t isolate itself from the broader bearish sentiment. Since November 14th this cryptocurrency has lost more than 20% of its value. At the time of writing, it is trading in the $ 40 bracket.

LUNA 4-Hour Price Chart | Source: Tradingview

deflation

However, it should be noted that LUNA’s macro uptrend is still intact. In fact, after Terra’s Columbus 5 upgrade, the LUNA ran pretty smoothly.

TerraUSD (UST) is Terra’s native stablecoin, which is supported by LUNA. In order to increase the supply of UST, LUNA tokens must be burned. In contrast, more LUNAs are minted when UST demand falls.

It should be noted that the burning strategy is not new. Ethereum got lucky when it destroyed the coin after the EIP-1559 upgrade. In fact, after that, ETH also hit new highs before the corrections began.

While the above mechanism is basically great, it should be remembered that LUNA does not immediately drain.

follow data at the latest 10% of the LUNA offer are “officially gone” forever. That’s no surprise, especially given the community poll and agreed to burn nearly 89 million LUNA.

follow tweets Official on November 10th:

“On-chain votes for proposals 133 and 134 to burn 88,675 million LUNA in the community pool (~ 4.5 billion US dollars), exchange it for UST with on-chain swaps and reduce the distribution to the pool 3 up to 2 years old oracle rewards! “

The supply of LUNA will continue to decrease over time. But that’s only half the equation. Only when demand increases at the same time does the whole story of “scarce assets” make sense.

Can a reduced supply boost demand?

In theory, the answer is yes. However, other key factors such as inflation rate and stock-to-flow (S2F) ratio need to be considered before jumping to conclusions.

In September, LUNA’s S2F was hovering around 18. In October it rose to 20 and is now 24. The increasing consecutive numbers clearly underline the promising future of this Altcoin.

The stock-to-flow model essentially quantifies scarcity by looking at parameters such as total supply and annual emissions. The higher the value, the better and vice versa.

The inflation rate also fell from 5.52% to 4.1% over the same period. This means that the long-term value of LUNA is growing stronger every day.

In addition, according to Messari data, over a 10-year period supply is expected to remain at 996 million while the emission rate is also around 96%. If these forecasts come true, LUNA will be praised for its deflationary character.

Emission rate and inflation | The source: Messari

Additionally, at the time of writing, nearly 36% of LUNA’s offering is staked out. Staking is an important factor as the HODLer locks the coin for a period of time in order to generate profit.

Currently, LUNA’s staking returns are around 5% according to the data, which is good enough to encourage investors to buy more. As a result, potentially increased demand will drive prices even higher.

Other positive factors

The growth performance of the Terra network so far has been quite impressive. At the time of writing, the indicator is hovering around the highs for the year. Basically, what this means is that developers are constantly working to keep the project alive, not just to improve but also to compete.

In parallel, the total value of all assets staked on the Terra Protocol is close to ATH at the time of writing.

Development activities | The source: mood

With all of the above factors, especially the overall combustion mechanism, it would therefore not be wrong to say that LUNA’s future prospects are quite bright.

It is only a matter of time before this altcoin increases its dominance in the market and climbs even higher on the charts and price charts.

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Minh Anh

According to AMBCrypto

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