The spectacular collapse of the Terra ecosystem in May this year made headlines as investors lost billions of dollars. Within days, Terra's contagion effect had dragged down several top crypto companies, and the shockwave further depressed the already bearish crypto market.
With the crypto market yet to recover from the shock, Terra is back in the news again. This time, the headlines center around the Terra community's new 1.2% transaction tax mechanism to curb the excess supply of the Terra LUNC token and revive the fallen crypto.
This article will dive deeply into the new LUNC Tax Burn Proposal and what it means for investors.
What is the LUNC?
LUNC, or Terra Classic, is the native token of the original Terra Blockchain, renamed after the post-collapse split.
Following the de-pegging of Terra's USD, its algorithmic stablecoin, the platform's native LUNA token, went into a hyper-inflationary death spiral, and the entire ecosystem went down. The embattled Terra founder - Do Kwon, proposed a hard fork in a bid to resurrect the platform. A hard fork is a significant split in a blockchain, usually to resolve community differences.
The hard fork was implemented, giving birth to the new Terra 2.0 without any linked stablecoin. The new chain maintained the LUNA name for its native token, while the original blockchain's native token was rebranded to Luna Classic (LUNC).
At the time of publishing, the current supply of LUNC is 6.9 Trillion, with a circulating supply of 6.1 Trillion.
LUNC Tax Burn Proposal
Terra Classic (LUNC) community member Edward Kim formally proposed the 1.2% tax burn on September 1. The proposal (proposal #3568) will charge a 1.2% fee on all on-chain LUNC transactions, such as USTC and LUNC transfers over different smart contracts and crypto wallets. This transaction tax or fee will be burned or removed permanently from the circulating supply by sending it to a dead address.
The proposal stated that the Tax and Burn mechanism will be on each buy and sell transaction until the total supply of LUNC is slashed to 10 Billion. Afterward, the entire supply remains pegged at 10 Billion and can not be altered.
The tax burn proposal aims to make LUNC a deflationary crypto asset. The Terra community passed the proposal, and it will go live by September 20. The proposal became one of the hottest topics of the day, and LUNC soared by over 250% month-to-date reaching $0.000594 on September 8.
The tax burn can't be enforced on the CEXs. However, exchanges can choose to adopt it voluntarily. Some major centralized exchanges such as Binance, KuCoin, MEXC HGlobal, and Gate.io, have issued public statements supporting the tax burn and plan to implement it once it goes live. Still, the fear of possible rejection by other exchanges is palpable, given that the transaction fees for the token will have to be increased significantly.
Before the Terra community passed the proposal, they considered that Terra Labs could reject it and had already planned countermeasures. They planned to create a new website and app to enable the LUNC tax burn independent of Terra Labs.
Proposal 3568 may be the saving grace for the near-comatose LUNC. But like with everything else, there are arguments for and against it.
Pros
Apply deflationary pressure on LUNC and UST to increase their value
Confirms that the Terra Network has an active community-driven governance
Attract new retail investors
Cons
The cost implication of the tax activity may be adversely impact on-chain utilty and activity.
The CEXs cannot be compelled to burn tax off-chain
Liquidity may flow off-chain to CEXs that don't apply the new tax
DApps that have no accounting mechanism for the tax may lose support.
VCs may be potentially deterred from providing new funds.
What does The Tax Burn Mean for Investors?
Burning tokens seems a simple and effective way to cut the oversupply of LUNC and push the price up if demands remain constant. But in some cases, token burns have little impact on a token price. A case in point is the quarterly token burning of Binance's BNB token, which has failed to increase the value of the token.
Still, token burns make a strong case on paper and, when hyped enough, can cause increased demand and price as people buy, anticipating a massive supply cut. This hopeful narrative has the potential to bring in green investors by the boatload.
The LUNC tax burn may likely not affect its price as expected. The bulk of the LUNC trading is done off-chain on CEXs who may not adopt the tax burn. This means that only a tiny portion of the enormous LUNC supply will be burned, negating the whole idea.
Lastly, with the terra collapse, only a few people still stake their tokens as validators, meaning that rewards will be split among fewer validators. This has pushed the LUNC staking APR above 37%. The juicy returns and the proposed tax burn will offer plenty of bait for new investors who may likely end up holding the bag as the earlier stakers jump ship.
Generally, the proposed tax burn is not enough to push LUNC past $1. The token has no underlying fundaments to be valued that high. No serious developer is willing to build on the chain. That is not to say that the price may not pump again, but any price increase may be primarily due to hype and hence may fall as quickly as it rises.
LUNC: A Crypto Pheonix?
News of the Luna Classic's intended tax burn implementation has seen the price of the struggling digital asset spike by over 200%. The audacious plan hopes to revive the token by cutting the circulating supply and increasing its value.
The recent rally can be attributed to the hype surrounding the proposal, many analysts fear that it won't do much to bring the Terra Cassic back to life. The bitter taste of loss caused by the implosion still lingers, and confidence in the project is generally low. Accordingly, investors shouldn't expect to see a LUNC rising sustainably from the ashes of its massive collapse any time soon.
If you plan to invest in the reborn Terra project, you must exercise due caution and carefully plan your entry and exit.