Summary
This proposal initiates the tax for all on-chain transactions as first described in proposal 3568 (for the 1.2% burn) and proposal 4159 (distribution of v22). Taxes will be charged and burned for on-chain activity such as sending between wallets and smart contracts that interact with the chain. This parameter change cannot enforce taxes on off-chain activity (like trading on CEXs); however, depending on the mechanisms that these trading exchanges use, such as moving from hot to cold wallets, that activity can and will be taxed and burned. There are many implications to this tax both technically and economically. We would like the community to be fully aware of these pros/cons before deciding to move forward.
Technical Description
In accordance with Terra governance, this proposal is being created to change the tax parameter from its current value of 0 to 0.012 (1.2%). The tax would be applied to all currency denominations currently available on chain (including Luna and UST).
The proposal will set the treasury “rate min” and “rate max” parameters to 0.012 to set the effective tax rate to 1.2%. The tax will be clamped to exactly this number. The cap on the total tax allowed in usdr units will be set to 7667000000000 or approximately $10 million US dollars. There is no such thing as an unlimited cap, and so this number would cover the necessary taxes for the entire market cap of Lunc transacted in a single transaction.
Furthermore, the “change rate max” will be set to 0.0, preventing the tax rate from changing over epochs (approximately a week) of the blockchain. The reward policy “rate min” and “rate max” will be set to 1.0, with a “change rate max” set to 0.0. The reward policy specifies how much of this should be burned, and how much should be distributed. 1.0 or 100% indicates that all of the newly minted Luna should immediately be burned and not distributed.
Transactions affected by the Tax
MsgSend - Sending from one wallet to another
MsgMultiSend - Sending from multiple senders or to multiple receivers (taxed once)
MsgExecute - bundled dApp and smart contract transactions (each bundled is tx is parsed and taxed)
MsgSwapSend - Swapping then send to another wallet
MsgInstantiateContract - Creating a new smart contract
MsgExecuteContract - smart contract transaction
For example, here we describe several txs, to and from wallets:
binance to banance off-chain : no tax (unless this internally forces them to move cold to hot wallet)
on-chain to binance : taxed
on-chain to other CEX: taxed
binance to on-chain: taxed
other CEX to on-chain: taxed
on-chain to on-chain : this is a MsgSend, taxed
Delegate to validator: not taxed
Undelegate from validator: not taxed
Withdraw rewards from validator: not taxed
Vote on governance proposals: not taxed
Propose new governance: not taxed
Swapping from LUNC to UST: currently disabled, but not taxed (other taxes may apply)
Note that transactions related to governance, staking, and swaps (without sending to a different wallet) are not taxed via this mechanism, i.e. MsgSwap, MsgWithdrawDelegationReward, MsgDelegate, etc. Delegating to validators and withdrawing delegation rewards are not taxable events. Swapping from UST to LUNC and vice-versa are not taxable by this mechanism (there is different swap tax).
Implications of taxation on Lunc
Pros
Proof of community driven governance realized on-chain
Deflationary pressure on both LUNC and UST
Potential short term catalyst in attracting new retail investors
CEXs will not consider a burn off-chain, until enacted on-chain
Cons
Taxes are potentially detrimental to long term economic activity and utility on-chain
Existing dApps that do not account for taxes will be unsupported
No guarantee that CEXs will burn-off chain
Tax may push remaining liquidity off-chain to CEXs that do not tax
Potential deterrent in attracting new VC/fund investors
Status of Terra Station Wallet
The official TerraStation, Browser, App does not support the tax. This means transactions that require taxes will fail with “too few fees”. Terra Rebels have coded the necessary changes to the wallets, website, and apps and will issue pull requests to the terra-money github. The path of least resistance would be if TFL accepted and merged these changes.
In the event that TFL does not accept these changes to the official wallet, Terra Rebels is prepared to offer an unofficial website, desktop app, and mobile app to enable these changes. The application store verification process takes an undetermined amount of time. It is not known if the mobile application will be ready in time for the tax change, but the desktop and website will be.
Related Pull Requests for Terra Station
Station Extension: Feature/recover tax rate final by andrexbass · Pull Request #22 · terra-money/station-extension · GitHub
Station Web: Recover Tax Rate in Classic Network by MarventusWP · Pull Request #101 · terra-money/station · GitHub
Finder: Feature/recover tax rate final by sbjohansen · Pull Request #244 · terra-money/finder · GitHub
Status of Critical dApps
Pros
Terraswap and Astroport have committed to supporting the tax.
All restaking apps should work as expected (delegation does not incur tax)
Cons
Status of NFTs are unknown.
Anchor and Bridge have already been discontinued (not tax related).
Timeline
The proposal is open for discussion, and will be submitted after discussions are completed. The timing is contingent upon TFL support. An epoch must pass for the tax rate to be enacted. Each epoch lasts 100,800 blocks. Thus, the potential epoch target is either 93 (block height 9,374,400, approx Sept 13th, parameter proposal submitted Sept 6th) if TFL accepts and merges our pull requests for Terra Station wallet before September 5th. If they do not, our target epoch is 94 (block height 9,475,200), on or around September 20th, with a parameter proposal submitted September 12th. We would release the unofficial desktop and website wallet at this time. The mobile app may or may not be ready at this time.
Analysis and efficacy of the tax will be reported and evaluated every three months.
