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:
- Immediate decrease of the tax rate to 0.2% on all transactions.
- 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:
- 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%.
- 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%.
- Reassess the tax every 7 days: the duration which is required to enact a full tax change.
- 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.