New article on Substack tonight: $LUNA supply shock timing and pricing model. It's a long one, so here is the summary thread ๐งต
The model addresses questions:
When might a LUNA supply shock happen?
How high might LUNA price rise during a supply shock?
When might a LUNA supply shock happen?
How high might LUNA price rise during a supply shock?
I set the model up with 4 main components: UST demand; LUNA supply; LUNA demand / price; and LUNA burn
Two things to note re. the structure:
(1) UST demand is isolated from LUNA supply, demand and price determination (there is no feedback from LUNA price to UST demand)
(2) there is a circular feedback between LUNA burn, LUNA supply, and LUNA price
(1) UST demand is isolated from LUNA supply, demand and price determination (there is no feedback from LUNA price to UST demand)
(2) there is a circular feedback between LUNA burn, LUNA supply, and LUNA price
UST demand change determines what amount of LUNA needs to be burned; LUNA burn reduces supply; supply reduction increases LUNA price; and on it goes...
To handle that circle in a model, there needs to be a lagged variable. In the model, I used price from the prior day to calculate burn needed in the current day (this caused some odd results, as you will see below).
I used as much market data as possible to ground the model and had 3 scenarios for UST growth rates to drive the LUNA supply and price changes. Full details re. assumptions are available in the Substack piece.
First chart of results is for daily LUNA burn. In all scenarios, burn scales up, peaks, and then drops sharply as LUNA price starts to rise
LUNA supply is exhausted in each of the scenarios, as early as early-2023 for the more aggressive UST growth trajectory
Wait! I know you are right now saying that supply cannot go to zero. That's right - going to, rather than approaching, zero is due to that 1-day lag in the model. A daily time step is too coarse - eventually current burn surpasses available supply. It should look like this:
Doing a model in Excel with variable time steps would be a huge pain, and I don't think that adds much to understanding about when the supply shock hits.
Prices go parabolic for each scenario just prior to the supply shock. But prices also head up steadily after supply is reduced under 100-m LUNA
Before tallying up how much your LUNA bag may be worth in the future, please keep in mind how much LUNA needs to be burned to reach a $10,000 price level.
For example, in scenario 3 of this model, LUNA price went 100X (to $9,214) by 31 March 2023. On that day, circulating supply was 516,190 (0.14% of 31 December 2021 circulating supply).
Remember, however, model projections are based only on supply-side LUNA burn dynamics. Demand will increase when the broader market awakens to LUNA price appreciation potential. So there is a double-barrel effect brewing.
I feel, even after the modeling, that I do not have a good handle on the implications of what a full-on supply shock might bring. Very quick price appreciation will come with its own challenges.
$2.5-b growth in daily UST demand 9from the final days of scenario 1, 5-yrs out as UST approaches $1-t market cap) illustrates how much LUNA would need to be burned each day at varying prices to sustain the burn. Note that this chart uses log scale on both axes
The UST/LUNA price dynamic cycle suggests that astronomical prices are inevitable when there is nothing but moon dust left to burn. Not this year or next, but think of a decade from now.
All of the discussions I have seen around holding the UST peg address the challenge of a market crash. Now may be a good time to shift focus to also ensure that the peg can hold during violent upward LUNA price movements, prior to the day when that protection is really needed
Full article (long read) is available on Substack: murrayrudd.substack.com
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