The LUNA/USD pair dropped 20% between May 7 and May 8, hitting $61, its worst level in three months, after a whale mass-dumped $285 million worth of UST. As a result of this selloff, UST briefly lost its United States dollar peg, falling to as low as $0.98.
Excessive LUNA supply
LUNA serves as a collateral asset to maintain UST’s dollar peg, according to Terra’s elastic monetary policy. Therefore, when the value of UST is above $1.00, the Terra protocol incentivizes users to burn LUNA and mint UST. Conversely, when UST’s price drops below $1.00, the protocol rewards users for burning UST and minting LUNA.
Therefore, during UST supply reduction, LUNA’s valuation should decrease. Similarly, when UST’s supply expands, LUNA’s valuation increases, noted Will Comyns, a researcher at Messari.
The chart below shows an ongoing…