The supply of Luna has increased to more than twenty times what it would normally be as a direct result of USDT failing to keep up with its peg. The significant rise has resulted in an equally speedy decrease in the value of the coin.
The value of the coin has suffered greatly as a result of a decline that is equivalent to 99 percent in just two days. Since the supply of Luna is moving in the opposite direction of its price, this means that if the price keeps falling, then the supply will keep rising.
What is Causing This?
What is taking place is essentially the opposite of what Luna did to get to the point it was before the most recent downslide.
The connection linking Luna and UST can be understood by considering the fact that Luna is employed to guarantee that UST maintains its parity with the dollar. If the value of UST grows to be greater than that of the dollar, then it will be possible to exchange one Luna dollar for one US dollar’s worth of UST. The price that Luna was able to achieve at the beginning of this year was due to this process.
It does not stop there; rather, it also works in the other direction. When the value of UST sinks below one dollar, one UST can be exchanged for one dollar of Luna.
At this time, the value of UST is lower than its peg, which is currently $0.61. UST owners are looking to make a profit through Luna rather than engaging in trades on their existing market.
They can accomplish this by utilizing a system that is intended to maintain the value of the UST. As a consequence of this, new Luna will be produced whenever a value of UST is depleted.
If you were to use this strategy earlier, when the price of Luna was higher, you would not have gained very much; however, due to the decreased price of UST, exchanging large amounts of it can result in almost 10 times the amount of Luna.
This has resulted in a decrease because as more UST is used up for Luna, the supply of Luna keeps increasing and the newly obtained Luna will most likely be sold on its market. Since more UST has been used up for Luna, the supply of Luna has increased.
This pattern continues as the subsequent person also trades his UST for Luna, thereby contributing to an increase in the supply of Luna and, as a consequence, adding to the level of competition in the market.
What Options Do They Have to Save This Situation?
Terraform labs is investigating the most effective means by which it can resolve the problem and help Luna escape its predicament. One strategy would be to increase the amount of UST that can be exchanged for Luna in a single day by up to four times its normal level.
Alternatively, they could choose to increase the minting level from $293 million to somewhere around $1.2 billion. Because of this, holders would have an easier time exchanging their tokens. It is intended to bring UST closer to its peg, and it may also result in the supply of Luna becoming significantly higher than it is right now.
Terraform has proposed additional emergency solutions to resolve this problem, but in the meantime, Luna holders have no choice but to wait and watch while holding out hope for the best possible outcome.