Financial Information Platform

Terra: Why is the LUNA token taking off by 25%

Up 23% over the past 24 hours, the Terra Project’s LUNA token shows the strongest rise in the top 100 this morning. In question, the reaction of the markets (in two stages) to its fundraising of a billion dollars. 

1 2

Raising nearly $1 billion, the Terra project saw its native token (LUNA) take off. But the Russian military intervention completely ruled out the bullish movement. Today, as the crypto market recovers from its emotions, the token is taking off again.

Fundraising To 1 Billion

Two days ago, the Luna Foundation Guard, at the origin of the Terra ecosystem, finalized a fundraising of up to one billion dollars. This fundraising, concluded in the form of the sale of the LUNA token over the counter, allows the foundation to build up a reserve in BTC. A reserve supposed to stabilize the UST stablecoin of the ecosystem. From a technical point of view, the billion dollars released from the sale of LUNA tokens will be used to create a reserve of UST denominated in Bitcoins. And it is through this reserve that the UST will be able to continue to sustainably maintain a parity of 1:1 with the US dollar.

This fundraising materialized by the sale of tokens would be one of the biggest sales in the crypto sector. It has mobilized many venture capital groups such as Three Arrows Capital, GSR and Tribe Capital.

Why Choose BTC As A Reserve?

To better understand why the project leaders wanted a reserve in BTC, it is necessary to understand how the stablecoin of the ecosystem is articulated. To offer parity with the dollar, the UST is based on a simple principle: that of arbitrage . Indeed, when the UST displays a price lower than 1 dollar, users have an interest in sending UST within the protocol to receive LUNA tokens as a reward and at equal value. With this first scenario, LUNA tokens are created and USTs burned until the return to parity of 1:1

But arbitration also applies in the opposite case. When the UST exceeds the threshold of 1 dollar, the opposite phenomenon applies: creation of UST tokens and burn of LUNA tokens. Although the general framework allows the UST to always be brought back to its parity level, the system may prove to be faulty in the context of a strongly and durably bearish market. In such a scenario, the increase in sales volume could contribute to the rise in the UST which could, in an extreme case, decorrelate the UST from the dollar. In the event of a strong bearish movement, the arbiters may no longer be able to hold their rank.

It is to overcome this scenario that the BTC fund has just been created. This would be used if necessary to buy back the USTs to burn them and allow the token to regain parity with the dollar.

A Rise In The Price Of The Token In Two Stages

The day before yesterday, the news of this fundraising allowed the token to take off by more than 15% in the space of 24 hours. But this positive point was quickly overshadowed by Russia’s invasion of Ukraine. A geopolitical parameter that helped turn the entire crypto market upside down. But after this day of decline, the market recovered today by swallowing almost the entire cap lost the day before. A trend that can also be found on the LUNA token.

The following chart shows the price of the LUNA token over the last 3 days.

 

A rise in the price of the token in two stages 

With this particular scenario, we can speak of a delayed rise in price. Without the Russian invasion, the curve would probably have been much more linear.

 

1 Comment
  1. […] In fact, Terra is one of the few cryptos that performed well during the month of February. According to data provided by Coingecko, the value of LUNA rose 75% in February. While its performance at the end of the month counted for a lot in its monthly growth, the crypto had started to surge since  the announcement of the billion dollar reserve fund.  […]

Leave A Reply

Your email address will not be published.