Modeling LUNA based on UST Adoption

Many analysts have tried their best to model LUNA’s price action based on many different metrics. Here, I try to model UST adoption as a catalyst for LUNA’s price moves, as new UST minted requires the buying and burning of LUNA. This may become too technical for some people, but I try my best to break it down as simply as possible. At the end, I provide the spreadsheet with which I did my analysis for anyone to check my work, play around with other values, and potentially add on if they have a different model worth discussing.

Adoption Curve

So what is the best way to model the growth of UST? It’s best to first look at through the entire stablecoin market as a whole. It’s clear that stablecoins, and crypto as a whole, are following the standard adoption curve of new technology. Below is an example:

http://www.business-planning-for-managers.com/main-courses/marketing-sales/marketing/the-adoption-curve/

This growth curve has been seen throughout a number of technologies of the past and present. Innovators and early adopters push progress and adoption at an exponential level, until growth slows down as a majority of the population has already grown accustomed to using the technology in their day-to-day lives. This can be tough to model exactly, but the closest mathematical model with a curve like this is known as Simple Logistic Regression. One form of this model looks like this:

Where:

  • “t” represents the time. This could be in whatever unit you’re measuring growth. For this model, we will use days
  • “k” represents the growth factor. As k increases, the overall acceleration in growth increases. In a graphical representation, this causes a steeper adoption curve. The same is true vice versa.
  • “a” is a little more complicated. It represents a factor that changes the shape and acceleration of the curve. As “a” increases, the graph has decreased incline in the early stages and decreased decline in the later stages, while also pushing to midpoint (the point with highest acceleration) later in time. And the same is true vice versa.

But given that UST is just a fraction of the entire stablecoin market, we can expect it to follow its own path within the wider adoption curve. It goes exponential as new protocols enter the ecosystem, bull market price action brings a large amount of people into the space, or there becomes an escape from other stablecoin options. But eventually, demand stalls as there are no new catalysts for large growth, then this cycle repeats again. So rather, UST adoption will likely follow many iterations of adoption. In this case we can actually use multiple logistic regression, essentially adding many simple logistic curves on top of one another.

Let’s look at UST’s growth so far as it’s first iteration of adoption.

I used Excel to chart the market capitalization of UST since its inception on Nov 25, 2020. All data was gathered on August 10th, 2021, so any data past that point has not been regarded. Here is the graph below:

Using the equation mentioned above, I was able to use Excel’s Solver function in order to find the values for “N”, “k”, and “a” that reduced the sum of the squared residuals with respect to the real market capitalization values. Rounding for easier representation, the equation came out to roughly:

Here’s how that came out graphically:

LUNA Price

In order to extrapolate this growth curve to LUNA’s price we can use the growth metrics of UST’s adoption curve, variables “k” and “a”, and once again use Excel’s Solver function to minimize the sum of the squared residuals from LUNA’s actual price. Here is the equation and how the graph looks

It’s clear that there is a large discrepancy between projected price and actual price. But after toying with certain numbers I came across a very strong correlation. What actually drives LUNA’s price increase is not only the amount of UST being created but the rate at which UST is growing. Let’s take a look at the LUNA price and UST velocity (The derivative of UST curve).

We see that the rate of change of UST has a strong effect on the price, with a delay of roughly 21 days (LUNA’s staking removal period). This makes intuitive sense because a large amount of UST being create requires large market buys in a short amount of time, as well as increased attention from speculators due to hyper growth. When we add this velocity with a factor of 0.0000004 and a delay of 20 days here’s how this graph comes out.

A lot more representative right? Now that we have the tools to extrapolate UST adoption to LUNA’s price, we can try to do so predicting $10b in UST creation by the end of 2021, since this has been Do Kwon’s goal and assumption for quite some time now.

I decided to look at three scenarios

  • Scenario 2: We see an average amount of growth over the next few months before reaching $10b by the end of the year
  • Scenario 3: This is a hyper-growth scenario. This assumes that after the Col-5 release in September, we may see a large explosion in UST adoption that results in getting towards are $10b target a lot quicker.

Simulation

For each scenario I decided to use a “price value” of LUNA at $60. This represents the top value of the growth curve. This value was chosen due to the 5x increase in UST market cap, and the previous LUNA curve had a value of $12 (5 x 12 = 60). This may be on the low end of possible values given LUNA’s decreasing supply, but will serve as a nice base case.

In the first scenario I chose to keep the values of “k” and “a” the same, and used Excel’s Solver function to ensure $10 billion of UST will be achieved on 12/31.

This resulted in a peak price of $110.41 on December 6th. In total just about 137,000,000 LUNA was burned and ended with a LUNA market cap of around $25,900,000,000.

In the second scenario I chose a different value for “a”, using 10 rather than 45, and once again used Excel’s Solver function to ensure $10 billion of UST will be achieved on 12/31.

This resulted in a peak price of $103.07 on October 30th. In total just about 136,000,000 LUNA was burned and ended with a LUNA Market cap of around $19,000,000,000.

In the third scenario I chose a different values of both “k” and “a” in order to more accurately reflect super high growth at around the time period where Columbus-5 will go live. I used .07 for k and 18 for “a”.

This resulted in a peak price of $150.70 on October 10th. In total just about 146,000,000 LUNA was burned and ended with a LUNA Market cap of around $16,200,000,000.

Conclusion

All three of the scenarios point towards a $100 or more LUNA as a likely scenario. Obviously these are based on my personal assumptions reflective of past data, and may not be truly accurate representations of what we will see. However, I would venture to say that these assumptions are likely on the conservative side in terms of LUNA’s price and ambitious for LUNA’s supply burn. Given that all of these scenarios require a very large portion if not all of the current liquid circulating supply of LUNA to be burned.

If you would like to test other numbers, the spreadsheet is attached below. Here are the certain numbers I would tweak given your specific assumptions:

  • UST market caps. If there is a different current UST market cap at the moment or that you see as a goal, I would change these numbers. You will also need to use Excel’s Solver function if you have a specific UST market cap to reach on a specific date.
  • LUNA price. This applies to current LUNA price as well as the LUNA price value assumed. I set this number as 60 given the assumption there would be an equal assumed price as the relative growth in UST market cap, but there’s a valid argument as to why it should certainly be higher.
  • Growth and velocity factor. One would represent a different assumption in how steep the adoption curve will be, and the other represents an assumption on how the rate of UST change affects the price. I assumed this number would be the same as the previous cycle, but given slimmer order books it’s possible this could be on the low end.

I hope this has provided valuable insights. Rather than this being a flat-out prediction, it is best as a simulation of what could be a likely result for LUNA’s price and total supply burn as an effect of UST adoption. One thing is certain, don’t bet against the moon.

File: https://www.mediafire.com/file/bpo13gy2l76a5jd/Luna+Burn.xlsx/file

If you enjoyed the content, consider following my Twitter @WestieCapital, and if you have any questions my DM’s are always open. Cheers.

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Crypto currency investor and researcher. Focus on DeFi, Layer 1s, and the Terra ecosystem

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Westie

Crypto currency investor and researcher. Focus on DeFi, Layer 1s, and the Terra ecosystem