Lower the tax rate to encourage higher on-chain volume

Summary
Lower the tax rate to encourage higher on-chain volume.

Motivation
Historically, on-chain transaction volume on Terra Classic was the highest when 0 taxes were in effect (2.65b UST, 1/27/22) [1][2]. On-chain volume has decreased by -88.61% from the week prior: 198.02m LUNC to 22.56m LUNC. [3] 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.

Proposal
We are not burning nearly enough LUNC at the current tax rate. The tax rewards to-date since implementation of the 1.2% burn tax have totaled 3.67B LUNC [4]. While the relative rate of tax rewards generated from on-chain swaps are higher compared to historical levels when the Tobin and swap tax were implemented [5][6], the short-term gains come at a long-term cost, namely tax benefits in the short-term in exchange for economically unappealing on-chain volume projection for the long-term.

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.

We do not have a full validator set as it is. In fact, the number of active validators has decreased from 90 to 83 in the last several weeks. [7] The ability for validators to issue LUNC rewards diminishes rapidly along with transaction volume, as validators create value by producing blocks, which are generated by transacting on the network. The new set will open near the end of October, but if we cannot make it until then, the tax’s negative effects may already have set in too deep.

The proposal is simple: we lower the burn tax rate from 1.2% to a significantly lower value as a compromise to encourage traders to come back on-chain. We begin by driving the tax down sharply as a way to encourage on-chain volume to occur. If this proves successful, we may reassess the efficacy of taxation on-chain depending on the ecosystem.

The values we use will correlate with the relative reduction in on-chain volume, or -88.61%. The new tax value is 0.2%, or more accurately, 0.16332% using the above raw data. Since we are using a sample of 7 days, and not the entire population of data, to calculate the proposed tax rate change, we must also factor in margins of error relative to our confidence levels before implementation.

The first sample, or the trailing 7 days of tax since implementation, results in a standard deviation of ~9.548m LUNC transacted on-chain, with an average (mean) transaction value of ~22.562m LUNC. Our margin of error is ±31.35% at a Confidence Level of 95%. [8] In comparison, the 7 days of volume prior had a standard deviation of ~80.999m LUNC transacted on-chain, with an average (mean) transaction value of ~198.0243m LUNC transacted on-chain. Our margin of error is ±30.30% at a Confidence Level of 95%. [9] The difference in the margins of error is ±1.05%.

What we can take from this dataset is the relative bands which taxation rates on-chain affects the transaction values on-chain in a regression test. The sample sizes are small, but there are a variety of factors that affect transaction volume on-chain, such as availability of dApps to transact with (use). Therefore, we assume a higher confidence level with a greater margin of error in transaction volume, as it varies wildly. More importantly, we analyze the rate at which transaction volume pre- and post-tax deviates from one another, which is measured in the comparison of margins of error (±1.05% at ±30.30 - ±31.35%).

If we assume post-tax implementation margin of error is on the high end, we add an additional 7.073m LUNC transacted to our mean value, 22.5629m LUNC [8]. This value is 29.6359m LUNC transacted on “a better day.” On the other hand, pre-tax on-chain volume is measured at 198.0243m LUNC transacted on the mean, with a -30.30% deviation to the downside: a value of -60.005m LUNC transacted on-chain using this dataset, or 138.0193m LUNC transacted on “a worse day” - a difference of 108.3834m LUNC in potential transactions not performed on-chain. The important thing to note is how stark the margin of error is between comparable values. At a 95% confidence interval, and assuming tax is beneficial and no-tax is detrimental, the rate at which LUNC is being transacted on-chain is still 78.53% lower by having the tax in-effect on-chain. At the strongest levels of confidence in the samples of data (99.9999%), pre-tax transactional volume hits a low value of 48.2563m LUNC transacted against the mean value [9] and 40.2169m LUNC transacted post-tax implementation in favor of the mean value [8], meaning post-tax implementation has resulted in a decrease of transaction volume of -16.66% at the strongest confidence levels. The margins of error reach to values of ±75.63% - ±78.24% at these intervals due to the low sampling quantity. In short, the burn tax is pointedly punitive for on-chain transaction volume, which is a direct contributor to the desired effects of the burn tax (burning, or removing extra LUNC from the total supply). Instead of appealing to CEXs to adhere to this taxation in efforts to increase volume, we can compromise somewhere in between by lowering the lower tax rate. Tax Rates on Terra ranged historically from 0% to 0.35% + 0.50% (0.85%). We can alter the tax rate by proposing a change to the parameters mentioned in Proposal 3568 and distributed in Proposal 4159 (v22):

Changes

{
  "subspace": "treasury",
  "key": "TaxPolicy",
  "value": "{\"rate_min\": \"0.0002\", \"rate_max\": \"0.0002\", \"cap\":{\"denom\": \"usdr\", \"amount\": \"60000000000000000\" }, \"change_rate_max\": \"0.0\"}"
}
10 Likes

Hi everyone, I am the original author of this proposal. You can comment here or mention me on Twitter @wrapped_dday (I am more active there).

The calculations were done using trailing 7-day statistics before and after the burn tax was implemented. The proposal is to lower the tax rate to potentially increase volume.

We still need dApps to come on-chain, but the reality is that there is very little reason to transact on-chain. There are maybe two dApps working and the tax is so high it makes little sense to use them - as the only ones using the chain are high-frequency traders. (like myself, prior to tax!)

Below are the charts [1 - 7] as referenced in the OP hosted on imgur. They are ordered chronologically. Let me know if you have questions. (I am blocked from links etc as I am a new account here)

imgur[.]com/a/bTFAxfa

7 Likes

I think it would very beneficial to reduce the burn tax number. You can already see the impact it is having on the onchain volume

8 Likes

Some dapps ,cexs ,dexs etc are still not running properly .not because if the 1.2 ,but simply because is a tax,and they have to do adjustment for that. So we still don’t have enough data to suggest that the level of tax is working or not. When we have more data if the figures are still low I will suggest to the community to lower the fees .

18 Likes

Staying wholly reliant on any CEX to make changes in favor of the tax is not advised. Most CEXs are implementing half-assed workarounds for the tax because it is too costly to sustain it, especially if the tax money is not being used for anything.

We cannot wait too long to collect more data. A -89% drop in volume means that validators earn significantly less at that level of proportion — and they’re already running at a net loss playing loss leader. Validators are also reliant on users transacting on-chain and we have no leverage to convince Binance or similar to use the chain itself. Without validators, LUNC full sends to 0.

Convince people to use the chain first. Doesn’t matter if it’s Binance or not. If you can’t think of a reason to use the chain outside of staking and delegating, we have bigger problems to address.

6 Likes

With all due respect, the number of times the goalposts have been moved on this issue makes it difficult to trust comments like this.

It’s been 8 days since “just give [the burn tax] one week.” Devs have been working around the clock to fix problems. I’m not sure how it helps the community to move the goalposts every time the data gives a result you don’t like

Data as of yesterday (to be reported today) will be clean – I would defer to Ed/Marventus on that – in the sense of incorporating around-the-clock work by senior devs concerning the most significant bug fixes. That data can then be compared to the most recent pre-burntax weekday (Wed v. Wed, Fri v. Fri etc) to get an accurate representation of burn tax impact.

As we discussed internally many times, this change would cause a huge number of unintended consequences, and the devs could be chasing bug reports for weeks while you argue that the data isn’t perfectly comparable. This is an endless rabbit-hole, which could’ve been avoided had the pro-tax wing set out clear expectations – something which they declined to do at every opportunity

11 Likes

My opinion is that “resetting” the burn tax will not bring the transaction volume to previous levels. A lot of people are still around just because of this tax. If this gets readjusted to a lower rate, most people will leave

7 Likes

I believe there are errors in the proposal. Namely, in volume, millions should be billions and billions should be trillions. Also the proposal calls for tax of .2% but the code calls in the perimeter change of .02% the red decimal number should be .002 not .0002

I strongly support changing the tax to .2% 1.2 comes across as greedy in which you have seen CZ imply on twitter. If we want to be taken seriously we need to be realistic with our math and not grab numbers out of thin air like the 1.2 was. The data shows that getting our volume back to where we were would burn more at .2 than what we currently have at 1.2. All cex’s have done the same calculations to see that .1 trade fee doesn’t hinder their volume off chain which maximizes their revenue from trades. If we want cex’s to support us, they would be more apt to do so with a tax that is realistic and thought out. I believe .2 does just that.

5 Likes

There is obviously a good argument for a tax of some % - the question is where to strike a balance and obviously any change to the on-chain % will result in any off-chain % being reduced to match.

what is quite clear and the message needs absolutely clear to the community, we cannot expect taxing limited activity to be the driver for revival, it requires applications and innovation to drive utility (therefore increase tax collected) and these two things are the key, everything else is window dressing.

2 Likes

I like this and will vote “yes” on this proposal.
The on-chain volume after the tax burn implementation has been horrendous!

6 Likes

Thanks for this, I am aligned, lets lower or put this tax to zero

6 Likes

Please name all dapps, cex’s and dex’s not running to back your claim. Let’s have an apples to apples comparison of before burn to after burn.

5 Likes

Yes, I agree. 1.2 is too high.

5 Likes

The tax gives hope to those who want to get their money back. And some here want to reduce the percentage or remove the tax itself but they don’t offer any better alternative.

I’m addressing 2 as we speak trustwallet and tip.cc

3 Likes

Your tax/burn idea was excellent. But the tax rate was a bit too high. Imagine once the price can reach 0.0005 usd we will pay 6$ for tax. This problem will push the price get hard to growth.

I don’t mean 0.2% tax is properly. But as per the on-chain volume results. We have > 80% negative even tho Binance promised to support off chain burn from their fee. I don’t think that will get much

Maybe the tax rate can be 0.6% first. There is no best formula right? We can adjust the tax rate if the results wasn’t good.

We are decentralised community. I think we can have room for compromise.

What do you think?

2 Likes

What factual info do you have that would back up this statement…? Looks like nothing but opinion dressed up as a fact, to fit an opinion. Nothing but speculation on your part.
Increasing tax revenue by lowering tax rates has been proven successful on numerous occasions. Taxes go down, compliance/collections go up.
High tax rates just encourages those in the system to seek alternatives to compliance, ways around the tax, or simply leave the system all together to seek a more compatible financial environment.
You stating that “Most” people would just leave if tax rate is lowered is nothing other than an opinion.

6 Likes

I believe it is necessary to reduce the tax, perhaps even facilitate the implementation by the CEX since they claim that the tax is too high.

However, the data is insufficient since not all cex have activated the withdrawal and deposit yet.

I suggest waiting at least a month or at least 15 days after all cex have enabled withdrawals and deposits.

These 7 days are incomplete data, should not be used for Statistics purposes.

2 Likes

What other dapps are there. I have been looking for a list for a while and can only find one that hasn’t been updated so most likely shows projects no longer using the chain.
How can we consider if dapps do not mind the tax at 1.2% when we do not know what is being built?
I have no reason to doubt you but personally can only look at facts to make my own judgment. The only thing i can fully see is the onchain volume comparisons and to me it looks like the tax is having a negative impact?

5 Likes

A tax was always going to have a negative impact at whatever % rate - the key issue was to have a two-strand approach, develop/implement the tax but also ensure apps were operating and new ones would come on stream to mitigate a drop in on chain transactions - the later hasn’t occurred.

I don’t recall this being discussed in any depth in the wider community - now the conundrum is that activity has dropped and there is almost nothing to drive it forward.??

CEXs are a side issue - we need to look at increasing on chain activity and that doesn’t look as if it will increase anytime soon.

Whatever action we take next, we need to ensure the implications are fully explored before jumping in feet first.