Billions of Luna minted as supply grows 20-fold in four days

Bartu bozkurt

Published in

Coinmonks

3 min readMay 13, 2022

The supply of Luna has increased from 346 million to 7.1 billion in just four days.

This has decimated the value of the token, which has fallen from $63 to less than $0.10.

This massive supply increase has accelerated the fall in Luna’s price, which is down 99% in the last two days. And if the price of Luna continues to fall, its supply will also continue to increase.

Why this happening?

To understand what is going on, we need to know the relationship between Luna and UST.

Luna is the token used to help UST meets its peg with dollar. If the price of UST goes above a dollar, $1 of Luna can be burned and redeemed for 1 UST, a factor that helped push Lunas’s price up during its epic rally earlier this year. Yet there’s a counterweight: if the price of UST falls the peg, traders can swap 1 UST for $1 worth of Luna.

At present, the value of UST is way below its peg, trading at just $0.57 as of 8:05a.m ET

on Thursday. AS a result, rather than sell on the market, UST holders are trying to cash out through Luna, using the mechanism designed to keep the peg in place.When this happens, more Luna is minted in response to the amount of UST being burned.

When Luna’s price was much higher, say $100, if you redeemed 1 UST for $1 worth of Luna you would only get 0.01 LUNA. As a result, such swaps wouldn’t have increased Luna’s supply by very much.

Yet now Luna’s price is much lower and large holders are cashing out, it’s causing a big increase in Luna’s supply. At Luna’s current price of $0.10, swapping 1 UST gets you 10 LUNA. So if someone wants to swap a large amount, say 100.000 UST, that would lead to the minting 1 million LUNA.

This has led to a downward spiral. As holders redeem UST for Luna, they increase the supply of Luna and likely sell these tokens on the market. This puts the price of Luna down even further, meaning the next person to redem their UST creates even more Luna.

It has also led to an exponential increase in the supply of Luna. On Wednesday the supply of Luna increased from 386 million to 1.5 billion — up by 1.2 billion. So far today, the supply has already increased to 7.1 billion — up a further 5.5 billion.