LUNA Classic Burn - Will LUNC Rally Last?

The ill-famed Terra crash of May 2022 that tanked the price of LUNA from $86.16 to $0.00005524 overnight cast a dark cloud on the token's previously bright prospects. This article investigates the outcomes of the Terra community's LUNA Classic burn initiative.

The LUNA Classic burn occasioned by Proposal 5234, which initiated a burning tax of 1.2% and later to 0.2% to increase the token's scarcity, is now the most talked about subject within the crypto community.

The burn, seen as an integral part of the Terra recovery plan, was the community's scheme to reduce the number of LUNA Classic (LUNC) coins in circulation to keep the Terra ecosystem alive. This is possibly one of the reasons the coin's market value has remained at number 47 in the CoinMarketCap at the time of writing.

The reason behind the LUNA Classic burn

The Terra crypto crash saw the supply of LUNA coins in circulation skyrocketing to over 6.5 trillion coins. The community initiated a Terra LUNA burn to try and reduce the supply and potentially increase its value. The token’s recovery plan launched LUNA 2.0, meaning that while the LUNA burn would not necessarily save the ill-fated token, it would technically have the same effect in reducing the supply.

Crypto burning refers to removing tokens from circulation by sending them to a crypto address not controlled by anyone. This technical removal from the circulating supply of coins is expected to impact a token’s price action positively. The goal was to launch 1 billion LUNA to drive the token’s price toward $1.

The new token taking over as LUNA 2.0’s main form, Luna Classic (LUNC), is driving the burning desire with LUNC holders hoping it will help push up the price. As the list of exchanges accepting LUNC increases, statistics indicate that the Terra Classic community recently burned more than 16 million LUNC tokens within a week, even as it aims to still burn billions more in 2023, having already burned over 37.717 billion LUNC tokens.

How the LUNA crash affected the crypto market

The woes that led to the collapse of LUNA cryptocurrency can be traced back to TerraUSD (UST), the algorithmic stablecoin supported by the Terra ecosystem. Unlike other stablecoins pegged to actual cash reserves, the algorithmic stablecoin UST was run by a computer program supporting the preservation of its price equilibrium. LUNA/UST must be burned or produced to stabilize the price of this coin. However, UST started to depeg after a significant amount of its tokens were dumped. This led to more UST being dumped in panic selling, thereby increasing the supply of LUNA, which led to a knock-on effect that crashed the price.

After the crash, the inflation of the token circulation supply rose significantly from at least 345 million tokens in circulation to 4.47 billion on May 12, 2022, and 6.5 trillion as of July 2 the same year. The LUNA Foundation Guard (LFG) worked hard to avert a crisis and prevent UST from being depegged by purchasing almost $3 billion worth of Bitcoin (BTC).

Still, the unfolding crypto crisis poured cold water on the strategy. An effort by LFG to sell their BTC reserves of more than 80,000 BTC in an attempt to save UST is thought to have affected the larger crypto market causing BTC to fall below the $30,000 level.

Will the burn help LUNA crypto recover?

Holders of LUNC had hoped that the LUNA Classic burn would mop up excess liquidity and begin the work towards pushing its price towards the $1 mark. However, there’s a need for a significant burn before that goal can be achieved. With numerous LUNA supporters calling for LFG to buy out the burning supply, there are questions on whether TerraForm Labs has the resources to facilitate such massive burns.

LUNA's chance of returning anywhere near its previous highs of close to $100 is still tied to its ability to burn a significant portion of its current circulating supply and come down to close to 350 million tokens. While that remains the goal of the UST and LUNA's rehabilitation plan, how that can be accomplished remains a mystery. The recent announcement by Binance Exchange that it would support the Terra Classic LUNC upgrade could create a positive impact and revive the decreasing on-chain burn rate of the LUNC tokens experienced during the last few weeks.

Conclusion

The Terra Classic community recently, through governance proposals 11242 and Proposal 11243, effectively increased the burn rate while reducing contributions to the community pool. Still, the massive rally at the beginning of January didn't quite hold. There's still a remote possibility that LUNA Classic could rise eventually and reach a desirable market cap and become a worthwhile investment.