Try Quests to earn cryptoTerra Q154: Pleasure to Burn
Terra's monetary policy
Terra's monetary policy is elastic, responding to price variations. Algorithmic stablecoins retain their peg using game theory incentives, with arbitrageurs serving as balancing factors. Demand fluctuations are reacted to by adjusting supply to maintain price stability. Due to the lack of collateral, UST is stabilized via arbitrage. On the one hand, a decline in UST demand leads in less transactional activity and a price decline. To restore the target price, a supply contraction in UST is required. What happens if the price of UST falls to 0.9? An arbitrageur purchases a UST for 0.9, mints $1 worth of LUNA by burning 1 UST, and then sells the LUNA for $1, earning a ten-cent profit. By burning 1 UST, $1 worth of LUNA was minted in this activity.
On the other hand, a rise in transaction volume and price would result in an increase in demand for stablecoins. It would be essential to mint and introduce the stablecoin into the market, therefore increasing the supply of UST and ensuring that the price remains fixed. When the UST price reaches $ 1.10, the arbitrageur will have an incentive to burn LUNA to mint UST and sell it on the market, hence boosting supply and decreasing the price to the desired level. LUNA is destroyed when UST is coined. Thus, UST demand encourages the burning of LUNA, lowering supply and thus increasing its scarcity and value. As a result, the continuous minting of UST might result in a deflationary cycle for the value of LUNA. As a result, LUNA is different from other stablecoins in that it is meant to capture value.stablecoins.
As indicated in the result, both daily burning LUNA and UST supply are increasing in lockstep, which makes sense given that LUNA would be burned to mint UST under Terra's monetary policy, which explains why both burned LUNA and UST supply are increasing over the same time period. Interestingly, a minor amount of burnt LUNA and UST is discovered prior to February 10, 2022. However, beginning on February 11, 2022, we can observe that both charts exhibit rapidly growing patterns. The market capitalization of UST has topped $13 billion at the time of this writing. According to this, Terra seems to be on the verge of surpassing its previous all-time high (ATH) of $103 achieved in December of last year.
As seen above, the circulating supply of UST has grown significantly (6.8% increase) over the previous 30 days, which is consistent with the rapid increase in burning LUNA (660% increase) during the same time period. When LUNA's price changes over the last 30 days are considered, this finding confirms that the token has a chance to surpass its previous all-time high (ATH) of $103 set in December of last year.