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Explained: How Binance LUNA burn mechanism will help revive prices

Explained: How Binance LUNA burn mechanism will help revive prices

Explained: How Binance LUNA burn mechanism will help revive prices
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By CNBCTV18.com Oct 10, 2022 9:18:17 PM IST (Updated)

Following the Terra crash, the price of Luna Classic plummeted from $86.16 on May 5 to $0.00005524 as of June 19. At this point, any hopes of a revival of the Luna Classic seemed bleak. However, the community around the token has been pushing various initiatives to revive the dying project. One of which was implementing a 1.2 percent burn tax on all transactions.

After the Luna meltdown in May, Terra developers decided to hard-fork the network and start afresh. They created a new blockchain which retained the Terra branding and the name of its native cryptocurrency, LUNA. The original chain, on the other hand, was renamed Terra Classic, and its native cryptocurrency adopted the Luna Classic (LUNC) tag.

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Following the Terra crash, the price of Luna Classic plummeted from $86.16 on May 5 to $0.00005524 as of June 19. At this point, any hopes of a revival of the Luna Classic seemed bleak. However, the community around the token has been pushing various initiatives to revive the dying project. One of these was implementing a 1.2 percent burn tax on all transactions.
Essentially, a 1.2 percent tax would be levied on all on-chain transactions, and the amount collected would be burned to drive up LUNC prices. The move seemed to work as LUNC saw a massive spike after devs announced the burn mechanism in early September. It jumped from $0.000438 on September 8 to $0.000576 on September 9, according to data from CoinMarketCap. However, a few days later, LUNC began to decline, eventually falling back to the $0.0001843 mark on September 25.
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This was when Binance, the world’s largest crypto exchange, decided to join the LUNC community by announcing a burn mechanism of its own. Binance would destroy the same amount of coins as the fees it collects from trading LUNC.
"We have decided to begin burning all trading fees collected on the LUNC/BUSD and LUNC/USDT spot and margin trading pairs on Binance. Fees will be converted to LUNC and then sent to the burn address. The burn is paid at our expense, not the users," said Binance CEO, Changpeng Zhao (CZ), in a tweet.
The news pushed the price of LUNC to around $0.00037 on October 2, effectively doubling its price within a week. As per an official blog post, the first batch of LUNC to be burned was calculated on trades from September 21 to October 1, 2022. These tokens were sent to a burner address on October 3, resulting in $1.8 million worth of LUNC being removed from the supply. This practice will continue every Tuesday "until further notice."
While this seems like a massive step for the LUNC community, it is just a drop in the ocean. This is because the $1.8 million worth of LUNC removed from circulation represents just 0.08% of the token's total supply.
"At this rate, assuming the
Therefore, in a recently conducted Twitter Ask Me Anything (AMA), CZ encouraged "other exchanges" to "follow" similar burn mechanisms. If other platforms follow suit, the burn mechanism could be sped up considerably and cause LUNC to retrace its way back to previous highs. CZ also touched upon the 1.2 percent burn tax employed by the LUNC community. He believes that such a high tax could result in lower trading volumes, bringing down the over amount of tokens burned.
"I strongly think that if we try to charge people 1.2% tax per transaction, we will get zero volume, and we actually will burn less," he said. "There's a sweet spot of charging a minimum fee so that we have high volumes, so that the fee revenue is actually the highest, and then we burn all of that," he added.
Binance is one of the largest holders of LUNC. This could be one of the reasons why the exchange is trying to push the burn mechanism. However, by itself, Binance will take years to bring out the desired effect. It would take the efforts of other exchanges and further optimization of LUNC's very own burn mechanism to achieve quicker results.
At the time of writing, LUNC was trading at $0.0003085, up 4.73 percent in the last 24 hours. On the other hand, TerraClassicUSD was trading at $0.04137, up 41 percent in the previous 24 hours and nearly 32 percent for the week. Therefore, the burn mechanism seems to have some effect, but achieving its all-time high and re-establishing its $1 valuation seem like far-off goals for LUNC and TerraClassicUSD, respectively.
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