Terra’s native token, LUNA, has dropped in value over the last week as the decline in the broader crypto market has a big effect on the token. It is one of the worst-performing tokens among the top-10 cryptocurrencies in the past week.
LUNA dropped 4.6% in the last 24 hours to a 9-day low of $85.59. According to Coinmarketcap data, it has also lost about 9% in the last seven days. Despite this, the token is up more than 400% from where it was a year ago.
However, Terra’s reserve for its stablecoin UST has been affected by LUNA’s recent losses. According to data from the Luna Foundation Guard (LFG), LUNA accounts for around 7% of the reserve’s value, which is otherwise dominated by Bitcoin.
Bitcoin accounts for 78.9% of the reserve, while stablecoin USDC accounts for 12.8%.
LUNA pushes UST reserve to near two-month low
Losses in LUNA appear to have brought UST reserves to a near two-month low, given that Bitcoin has been hovering around the $40,000 mark for about a month. The reserve has already reached levels last seen shortly after Terra’s founder began buying Bitcoin to strengthen the reserve.
The reserve’s total value is now $2.13 billion, down nearly 40% from where it was a month ago.
The UST stablecoin has fewer buffers protecting it against price shocks as the reserve value decreases. As a result, the token’s stability could be jeopardized. Still, such a price shock is yet to occur.
UST recently surpassed $18 billion in market capital to become the third-largest stablecoin. However, considering that the majority of the token is locked into DeFi platforms, it still severely lags its peers in terms of the trading volume.
Terra must take caution
With Bitcoin expected to remain in a holding pattern for the near future, the value of the UST reserve could be linked to the movement of the price of LUNA. To boost prices, Terra will most likely need to increase the burn rate of the token.
LUNA had plunged earlier this month after Terra put part of its token reserves into circulation. According to Terra analytics, there are more LUNA tokens locked than in circulation.
Terra will have to be cautious in how it treats LUNA prices moving forward. Buying Bitcoin is also a dangerous prospect, considering the current sentiment of fear in the crypto market.