Lower the tax rate to 0.2% and set aside 10% of tax revenue to finance ecosystem infrastructure and contributors

[Akujiro]

Proposer : Akujiro (@Akujiro2)
Author: Duncan Day (@wrapped_dday)

Declarative Biases

The proposer, Akujiro, owns staked LUNC. The author, Duncan, does not own LUNC or USTC, but manages an account for a firm, primarily in staked LUNC and LUNC liquid-staking derivatives (LSDs), and also is on probation for a Business Analysis position at Terra Rebels.

Notes

The author works with the proposer to develop a cohesive rhetoric for governance voting. There may be nuances in their individual opinions. Before voting, please read the proposal carefully.

All basic statistics, such as on-chain volume, are viewable on the station.terra.money homepage.

Results of Voting

Yes = Lower (but do not remove) the tax, and use some of the revenue to finance necessary blockchain infrastructure, and the teams maintaining the blockchain.

No = Make no changes to the tax percentage, and do not set aside any tax revenue for the teams maintaining the blockchain, or finance infrastructure necessary to upkeep the blockchain through tax revenue.

No with Veto = Make no changes to the tax percentage, and do not set aside any tax revenue for the teams maintaining the blockchain, or finance infrastructure necessary to upkeep the blockchain through tax revenue. Additionally, rescind the 345k LUNC deposit made by the proposer.

Summary

Lower the tax rate to attract more on-chain users, which may encourage greater volume, and therefore the frequency and quantity of burn taxes happening. In addition, set aside 10% of all tax revenue pre-burn (0.02% per-transaction) to fund continued support and development of the Terra Classic blockchain, by financing infrastructure and contributors.

Motivation

This proposal aims to signal to CEXs and other on-chain users that we would like to keep the tax, while using its revenue efficiently by funding the costs associated with development, the LCD endpoint, and costs related to contributions for past-and-present contributors, either individuals or organizations like Terra Rebels.

The burn tax proposed in Prop 3568 and implemented and distributed in Prop 4159 was implemented on 2022-09-21. Since then, on-chain transaction volume for LUNC has decreased by -91.67%, a difference of -3.45% since measurements taken after 7-days for the initial signal proposal [1: Signal Proposal].

The chain has totaled ~367.06b units over a period of 18 days, averaging 20.39B units of LUNC in daily volume in LUNC-only. Prior to the tax, on-chain transaction volume totaled 2,349.06B units of LUNC over a period of 12 days, averaging 195.76B units of LUNC daily.

With the current implementation, stakers, and spot-holding LUNC investors do not pay taxes, and therefore do not incur any burns except of their own volition by sending money to the burn wallet. On the other hand, trading and sending assets over the chain incur burns. If native assets are sent to CEXs, they are only taxed on the send and withdraw.

Each CEX pays a discretionary burn tax in this regard, and differs between CEXs. Additionally, CEXs pay more taxes than on-chain users or voluntary burners. Of the estimated 14.85B LUNC units burned, CEXs account for 6.87B units (46.22% of all burns) [2: Lunc Penguins: Top Burners].

It is estimated that the burn tax will take anywhere between 20 - 60+ years to create a 10B fixed units of LUNC supply [3: Burn Tracker: LUNC Tech], an estimate currently impossible using current numbers due to 676.90B units of LUNC bonded to the network earning yield.

Core Reasoning - 0% use of Tax Revenue

We are not burning nearly enough LUNC at the current tax rate to justify the costs of its implementation. From a high-level standpoint, CEXs creating nearly half of the burns suggest that traders create nearly half of the volume. Additionally, Terra Rebels and similar contributors do not receive compensatory payment for any work they do or have done, including the actual implementation of the tax. Most of this work has been done for free outside of a regular job.

At a static, naive price of $0.0003 / LUNC, the LUNC community has burned approximately $4,470,000 worth of LUNC, either through generated revenue, or voluntarily. None of this money is used to fund the blockchain ecosystem’s growth or compensate its core maintainers.

That is to say, we have successfully generated $4.47mm worth of taxes, and spent it either on ourselves, idly held it to allow the continual funding of perpetual spot trading – such as large short positions – or simply discarded it with the assumption that forced scarcity of the token will increase its native price. The perceived short-term gains come at a long-term cost, namely by dissuading many blockchain developers from building on the chain itself to help facilitate more transactions, or even dissuade current contributors to the blockchains, developers notwithstanding, from continuing to do so.

Core Reasoning - Validators

Validators, who produce blocks for the chain, earn commission by levying fees whenever transactions occur. Validators can only sustain running the blockchain for so long before they become unprofitable to the point where they must shut down. If validators become collectively unprofitable, the blockchain shuts down without new ones taking their place. Any tokens that ‘live’ on-the-chain are not transactable without validators, meaning that users cannot cash out their holdings.

While Terra Classic can fit 130 active validators with voting power, the number of active validators has decreased from our currently incomplete set of 90 to 83 in the last several weeks after the burn tax was implemented. Additionally, six validators are running at <50% uptime, suggesting stronger centralization of the network due to obsolescence. A choice set of 4 validators control at least 51% of the network: Allnodes, Interstellar Lounge, Orion.Money, and LUNC DAO (who also controls USTC DAO). KuCoin controls ~7.33% of the voting power.

The concentration of capital interest to idle on-chain liquidity (staking and delegating) and off-chain discretionary tax avoidance introduces a problem that must be addressed sooner rather than later before the tax’s negative effects set in too deep – potential governance attacks through control of the voting process, and furthering decreases of incentivization to use the chain itself, which determines the value of LUNC investments.

Core Reasoning - Traders

In the current tax implementation, a basic swap incurs a 1.2% tax on the face value of the transaction. For some dApps that incurred multiple transactions through their contracts, the user would be charged 1.2% per-swap. For example, when using the LunaPunksNFT marketplace, the user would be taxed once when making a bid, and again when withdrawing the bid. Regardless of if the bid was filled, they would be taxed. If the bid was filled, they would be taxed.

From a pure profit standpoint, traders who conduct market-making for a living are required to earn profits that exceed a breakeven value of 1.2% + any fees incurred by platforms. This does not factor in any trades that require multiple calls (MsgExecuteContract) or ‘hops’ (the number of times a trade must be routed indirectly, such as through multiple liquidity pools).

Additionally, consumers who make innocuous sends between Terra-native wallets pay 1.2% of any money sent. This means if someone wants to send $100 to their friend, they will pay $1.20 to do so.

Main Proposal

By decreasing the tax rate, CEXs and other off-chain holders may be encouraged to return on-chain to enact trading, sustaining the cost for validators to run the chain by creating an environment where higher demand can succeed with less penalty.

The proposal is simple: we lower the burn tax rate from 1.2% to a significantly lower value as a temporary compromise to encourage traders to come back on-chain. It is not guaranteed that they will return to use the chain. Therefore, we also propose to fund the people who made the LUNC Community and the burn tax possible, as well as fund necessary infrastructure such as an up-to-date LCD endpoint.

The tax outline suggested is as-follows:

1. Immediate decrease of the tax rate to 0.2% on all transactions.
2. Levy 0.02% the calculated tax pre-burn to ecosystem funding.

After implementation, we reassess the efficacy of taxation on-chain depending how the ecosystem has changed. As a general heuristic for future measurements, we suggest the following:

1. Increase taxation if the demand – measured in transaction volume and related statistics – relative to tax revenue generated through demand increases significantly up to a maximum of 1.2%.
2. Decrease taxation if the demand, relative to tax revenue generated through demand, decreases significantly, or further than current measurements, to a floor non-zero value of 0.02%.
3. Reassess the tax every 7 days: the duration which is required to enact a full tax change.
4. Additionally, reintroduce floating or interpolating tax rates before suggesting further increases beyond 1.2%.

Tax code is under TaxPolicy value of rate_min and rate_max. Both rate_min and rate_max will be changed to 0.002 to represent the new tax value of 0.2%.

Furthermore, the RewardPolicy will be altered to a value of 0.9998 to represent the 10% tax revenue adjustment. This money will be sent to the community pool instead of burning.

Pros & Cons - Implications of the Proposal

Pros
Potentially encouraging traders to return to the chain to ‘opt-into’ the burn tax
Setting aside tax revenue for positive ecosystem use and financing to help LUNC regrow
Retaining partial taxation on-chain (at 0.2%), meaning LUNC is still burned
Compensating core developers and contributors to the LUNC ecosystem for the work they have done for free

Cons
Less LUNC burnt overall
No guarantees that users on CEXs will return to the chain, or that they will adhere or change their discretionary tax rates
May not change current on-chain volume at all due to lack of transactional outlets (as there are few dApps left functioning and on-chain)

Neutral Observations
Validators may alter their commission positively or negatively to reflect tax rate changes

Transactional Necessity On-Chain

As mentioned, transactions are necessary for block production, which is how validators are paid. Lowering the tax will not solve the issue of drastically lowered transactions alone, so we encourage people to consider how the community can encourage more transactions to happen on-chain. This can include dApp ideas and implementations, or perhaps something more novel.

[ai_anso]

Yes !!

[theNettleGuy]

finally

[Ambihel]

Yes let’s do that !

[Hankingv]

Support this proposal, please whitelist and thank you for your contribution to the community

[Crypto_BRO]

Great proposal Thanks .

[Muscularman]

Thank you!

[kch2134]

Thank you!!

[theNettleGuy]

you have no clue what you are talking about. Volume on chain has dropped with more than 90%. The 1.2% makes no sense for new investors to come in and makes no sense for people to use the chain. Actually if this proposal fails, the project will fail dramatically. Each day with 1.2% tax its a huge minus for the chain. Vote wisely

[Bikra]

Volume didn’t fall in Terra station it falls in every Cex even their margin pairs , futures pairs , everywhere . So what’s the matter here? How could you confidently say that it’s because of Tax ? Market Pfice is stagnant compare to other crypto in this downturn event. It’s illogical to blame Tax is the main reason for Volume downfall. Those big Volume of last month because of High fomo and people delegated their coins before Tax. Lunc Volume in classic never gonna increase because of Tax decrease. You can’t be full 100 percent sure cause it’s not 1 month yet . Give it Some time man …we are not here for short .

[wrapped_dday]

CEXs don’t use the chain. That is how they dodge the tax. Volume is extremely high, but the tax does not catch any of that revenue.

If there is no reason to use the chain, then why have the chain at all?

[rirahemo]

I dont like it, have not past a month since tax on, and lcd component no have been updated yet, everybody knows this one is slowing down burns. When the chain its running full we’ll check the true data, not half data and sure somes suffer more than others but once again people r here for short term or long run?.

Please. Wait until v23 launch with respective changes and extra 2 weeks to evaluate results. There r still some wallets and cexs charging extra gas fees to use the chain.

[Paolo_D.90]

CEX can already implement any form of taxation even right now, without any need for us to change the tax burn ratio.
Traders aren’t effected by taxation right now, so I don’t really get the real purpose of this proposal.

[Bikra]

Cex Volume also fall significantly because its accumulation phase . Even every trading pairs volumes fall in every cex. Its not because of tax. Volumes downfall in classic chain is becsuse of tax, no body can guarantee its a main reason. Because of last month 4 x price pump …that doesn’t mean every months Volume goin to high. Give it some time. There is no proof cex Volume is high and Terra station Volume is low. …simultaneously both are low even futures and margin pairs volumes also low. It will take some time to regain, lowering tax will cause nothing. Its totally a Myth.

.

[Mysolo]

https://explorer.bitquery.io/terra/transactions?from=2022-05-01&till=2022-10-11

I do not specially see a drop over a month at present.

[Muscularman]

Community didn’t fight for 1.2 tax. Community fought for self-governance. The ability to do whatever it take to revive the chain. 1.2 tax was more so symbolic than anything else. We are now making it better by lowering the tax to a more reasonable rate.
We do what is best for long term holders, for utility and market adoption, not what benefits short term speculators. How do you oppose increasing the utility (lower tax) if you are a long term holder?
Lower tax is essential to the growth of the chain. Ask anyone with common sense and 10 out 10 they will always pick the most efficient payment method - the lowest transaction fee.
There is literally no basis for high transaction fee. Fine, you want to burn. But what do you burn when there is no volume? You can charge 10% for 10 dollars but you only get 1 dollar to burn. Volume on chain has been d.ying. There is no dispute of that.
Increase the utility of the chain by lowering tax, attract projects and fund developers, this is how you eventually increase on-chain volume and only then any rate of tax would become meaningful.

[Mysolo]

It may be more judicious to redistribute 10% of the tax to the Oracle of Reward, and to lower the distribution by 50% of the 40% rewards to the community pool. It would grow more than today but would attract more people in staking. It is to be calculated.
But for the moment, one cannot say by taking the history over several months that the tax leads to the fall of volumes

[marcelo]

Pretty significant changes from the signal proposal: setting aside 10% for the dev team was not part of the discussion and should be a different proposal altogether. In my opinion, this is a dishonest move: it is a consensus that the dev team should be compensated, but using this argument to push forward your proposal to reduce the tax is pretty dishonest.

Now, addressing the other points:

• core reasoning - 0% use of tax revenue

The sole purpose of the 1,2% tax is to burn Lunc. That’s it. It is not a source of revenue. If the community wants another source of revenue, let’s have a discussion about that.

• core reasoning - validators

In the signal proposal, I questioned this, stating that not a single validator voiced their opinion regarding the 1,2% tax hurting their profitability. Moreover, the decrease in the number of active validators is happening since the crash, in May (that is no evidence that they are leaving because the tax is too high). Lastly, only by the end of this month new validators will be able to join the chain.

• core reasoning - traders

It was established that the 1,2% tax would incur in every single transaction. And that is what is happening. dApps had months to adjust their contracts to the tax. Yes, it is expensive to trade in this chain, but this was expected.

Now, everyone here agrees that the reduction in volume is a concern in the long term, but the only solution to this is to have utility in the blockchain. At this point, it makes no sense to try to adjust the tax-to-volume ratio if we have no utility other than high-frequency trades.

Another point is that CEXs can adjust their own fees to retain their users, so even if we lower the tax to 0,2%, Binance can lower it to a 0,1% fee.

And my last point is that having a higher tax now is an advantage: down the road when the time comes to adjust the tax-to-volume ratio to maximize the burn rate, it will be easier to lower the tax than to increase it.

[Bikra]

Then Community should put 0.02 should put tax rate 1st . Tax is not good for utilities that’s true but 0.02 will not increase the volume that is also true. We should wait for few months and see what’s happens .In my opinion it is not the right time for lower the tax. There is no utilities in chain before 1.2 tax also . It’s just 15 days ,like 1 months ago there is 0 tax also 0 utility.The main reason for 0 utility is Higher Tax seems like a funny excuse for no utility. We need to focus on other factor also. Tax can be adjust with time . Utilities not entirely dependent on Chain tax . But major cause of no utility is not tax its some other things . So creating this drama , BS could harm the sentiment of community. It’s so funny , Some people have no work and just trying to messed up with the unity of people.

[Muscularman]

Are crypto currencies, medium of exchange, form of payment, or not?
If you say YES, then there is no arguing that high tax is bad for the chain.
There is NO way to spin it. You are hurting the essential function of a product.

Tax is not good for utilities that’s true but 0.02 will not increase the volume that is also true

If you are a long term holder, then all you need to do is what benefits the chain long term.
Lowering tax is certainly one of it. Or are you gonna say that high tax will attract business? That is purely delusional. Not having enough function businesses (applications) is NOT your excuse to raise the tax! You are contradicting yourself.
Why should anyone build on your chain when you couldn’t lower the tax? You are effectively asking future investors to take on extra risk.

Nobody says there is 0 utility with LUNC. But the current tax rate certainly destroys any future room for development.