Current Situation
When I made the proposals about IBC reactivation to CosmosHub I had in mind to bring off-chain assets to Terra Classic so they could be traded against LUNC in a decentralized fashion - increasing the on-chain volume and therefore speeding up the burns while being independent from CEXs burning LUNC for us. The first thing I did after connection to CosmosHub was reestablished, was to transfer my ATOM to Terra Classic. I wanted to deploy it in a USTC/ATOM liquidity pool on Classic Astroport. I immediately noticed that the transaction failed because I was not submitting IBC ATOM in the “Fee” field of the transaction.
Why did I not do that? It’s because I was not expecting it. The narrative of the original proposal from VegasMorph was to reduce LUNC supply (and probably USTC - although it’s not explicitely mentioned) - not the supply of off-chain assets. So I digged out the tax code from Ed and it became very clear to me that the network was indeed charging taxes on assets like ATOM/OSMO et al.
Technical Background
What does “taxation” mean exactly in this context? Every transaction (tx) on Terra Classic has a field called “SendAmount”. This field determines which assets and how much of it we want to transfer or send to a contract along with the tx. The network evaluates all coins in that “SendAmount” field and charges taxes on it. The amount that the networks charges on a specific coin needs to be added to the “Fee” field of the tx by the sender of the tx. If the amount of taxes that the network charges is not fulfilled by the “Fee” field, then the tx gets rejected.
The current situation is that the network does not make any differences between transactions that contain lunc in the “SendAmount” field vs. transactions that contain IBC assets in the “SendAmount” field.
Proposed Changes
It is proposed to remove the taxation from off-chain assets (assets that were transferred to Terra Classic via IBC and then could be traded/used on-chain). For my reasoning please refer to the Pros/Cons section. The required code changes are publicly available in the Terra Rebels core repository:
Effects of Voting
Vote “yes” if you feel like off-chain assets should NOT be taxed when used in on-chain transactions (like MsgSend, MsgExecute). This would mean, that the chain would not collect taxes on those assets and therefore would not burn them or add them to the community pool, respectively. This proposal does not affect IBC transactions (transferring assets from chain A to chain B)
Vote “no” if you want to keep on-chain taxes for off-chain (IBC) assets. This reflects the current situation.
Discussion
The main argument against removing tax from IBC assets is that we are going to miss out on an opportunity to help funding the chain (i.e. filling the community pool). The current tax is not only burning the assets but depending on how governance sets the “RewardPolicy” parameter 50% of the taxes on IBC assets will be redirected to the community pool (current reward policy).
The narrative of burning LUNC is very strong. Since the original proposal from VegasMorph this narrative has mainly pushed the chain revival, reactivation of staking, governance restoration and attraction of outside attention. It’s so strong, that CEXs like Binance are willing to burn their profits for it. Even Osmosis may be willing to implement burn mechanisms. This strong narrative makes tax avoidance for LUNC nearly impossible. Which is absolutely fine, because the community stands strongly behind LUNC supply reduction and can justify it.
On the other hand the narrative of burning assets other than LUNC is not nearly that strong. If the Terra Classic chain taxes and burns off chain assets, this will create a strong pull towards tax avoidance. Why would you ever want to trade your OSMO, ATOM et al. on DEXs on Terra Classic if you need to pay these taxes? We - as a community - pushed IBC reactivation, because we wanted to attract on-chain utility and volume. But taxing IBC assets will make any DEXs on Terra Classic not able to compete with DEXs on other chains. So we are going to see and net outflow of capital.
Another aspect to consider is that the “RewardPolicy” parameter is applied to all taxed assets no matter what asset that is. If we for some reason decided to burn all LUNC that was collected via taxes (setting the “RewardPolicy” parameter accordingly), then the collected IBC assets would be burned as well. This makes the “collecting funds via IBC assets” narrative nearly obsolete.
Additionally, the current tax on IBC assets breaks a lot of L2 applications, mainly Classic Astroport. This does not mean, it cannot be fixed. But most of these Apps are not maintained anymore, because the teams migrated over to LUNAv2. So it might be very difficult to incentivize these teams to fix their apps on the Classic chain.
Let’s have a discussion on this! Looking forward to hear your opinions.
