The Terra community on Tuesday night passed a popular proposal to burn about 88.7 million terra (LUNA) tokens, worth roughly $4.5 billion at current prices, and mint about 4 million to 5 million terraUSD (UST) stablecoins, a decision that should further boost the Terra project, according to analysts.
The “burning,” or permanent removal of the tokens from circulation, will be executed over the next two weeks, with an initial burn of 520,000 LUNA that already took place Tuesday night. At press time, LUNA was changing hands at $53.74, up 7.03% in the past 24 hours, according to TradingView and Binance. Its price set a new record high $54.95 at around 11 a.m. ET (16:00 UTC) Wednesday.
Initiated by Terra’s co-founder Do Kwon, the measure aims to fund new services in the Terra ecosystem, including Ozone, an insurance protocol that “facilitates levered coverage of technical failure risks” in any decentralized finance (DeFi) protocol built on Terra, according to a community post by Kwon. It also marks one of the largest burns of a major layer 1 token in crypto history, according to Terra’s official Twitter account.
“A large portion of the burn – $1 million and more – will go towards capitalizing a new insurance protocol for the Terra ecosystem called Ozone,” Ryan Watkins, research analyst at Messari, said. “This is an important piece of the ecosystem that should promote more safety for users.”
The decentralized finance (DeFi) sector has been facing a growing number of hacks of late. Data from Rekt shows that DeFi protocols have suffered more than 50 hacks worth over $1 million in the past two years.
Terra blockchain is the fourth largest smart contract platform by total value locked (TVL) at $11.36 billion, according to data from DeFi Llama. TVL is the total value of the cryptocurrency committed to DeFi protocols that are built on a layer 1 blockchain.
LUNA is part of an algorithmic balancing system that helps stablecoins running on the Terra blockchain maintain parity with fiat currencies.
There were some initial doubts among those in the Terra community around the burning proposal, as shown in the proposal’s page. Some users asked whether burning nearly 89 million LUNA was too much.
Terra’s Kwon told CoinDesk that the burning proposal was also intended to reduce the amount of wealth in Terra’s community pool.
“At the [fully diluted market value] of the network at almost $40 billion, I think having a community pool that is too large is actually a systemic risk,” Kwon said in a Twitter message to CoinDesk. “I believe community funds should be just large enough to pay for public services. … But a DAO [decentralized autonomous organization] doesn’t need billions of dollars to operate.”
Before Terra’s Columbus-5 upgrade at the end of September, the community pool was set to receive $1 worth of LUNA from users when UST traded above $1. In return, users would receive 1 UST. The Columbus-5 upgrade also shifts the design to burning LUNA: Whenever UST is minted, LUNA with the same amount of value is burned instead of going to the community pool.
The burning will also ultimately benefit LUNA stakers, said Jeremy Ong, vice president of business operations at crypto research boutique firm Delphi Digital.
“LUNA stakers have less competition as [they] don’t have to compete against the community pool,” Ong said.
Source: Coin Desk