Supply from stablecoin, UST, has more than doubled in the past nine days, reaching $6.4 billion. This puts the $2B coin behind the DAI, the stablecoin produced by the Maker protocol, as of November 18th.

Fans of the Terra ecosystem, which produces stablecoin UST, may need to contain their joy because the increase does not stem from user demand, but rather from a governance proposal.

BURN on LUNA

Here’s what happened: The governance voted to burn 88.68 million LUNA tokens, worth $3.5 billion at a price of $40.21 on November 18th. These LUNA tokens came from “rewards”, deposited in Earth’s treasury when users exchanged them for UST tokens when demand pushed the value of stablecoin to over $1.

Exchanges will continue for two weeks in total, as per the proposal.

As the demand for Earth’s 19 stablecoins increases, the price of those stablecoins increases. Terra provides a module that allows users to exchange LUNA for the desired price. Therefore, if demand raises the UST to $1.01, Terra provides a module that allows users to exchange the LUNA for UST at $1.00. Users can then sell UST on the open market for $1.01, arbitrating the stable currency up to a price of $1.00

When users made this exchange, LUNA accumulated in the treasury. An update called Columbus-5, sent out on September 30th, changed it so that LUNA is now burned, but still leaves the treasure with billions of LUNA dollars.

Now the question is what to do with all this UST. “Initially, the plan was signaled in prop 44 was to use $1 billion to initialize the ozone,” wrote Terra co-founder Do Kwon in the proposal to burn the 88.68 LUNA.

Ozone is an insurance protocol that has not yet been released, but will provide coverage for technical failures in the Terra DeFi ecosystem. Risk Harbor, risk market manager for decentralized finance along with AngelList co-founder Naval Ravikant, recently took over the helm of Ozone.

Rewards for Stakers

Another effect of LUNA being burned is that stake rewards should increase to more than 10%, as per Kwon’s proposal. This is because, according to the changes implemented in the Columbus-5 swap rates in Terra, like the LUNA to UST rates made in bulk now, go into a pool that rewards the stakers.

In fact, the staking rose to 7.94% per year. Almost doubling since Terra started trading LUNA for UST.

Annualized 30-day staking returns.

All in all, UST supply is heading towards the moon, although demand has not steered the trajectory. Still, with an insurance protocol underway and stake rewards increasing, things are looking up at Earth’s protocol.

Warning: The text presented in this column does not necessarily reflect the opinion of CriptoFácil.

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