The Road Ahead: Red Pill, Blue Pill, or Green Pill?

Twitter: @4lex_4sh4w_TR

Twitter: @4lex_4sh4w_TR

The Burn Tax commenced appx. 48 hours ago. As many in the Terra Rebels senior leadership quietly feared, the burn tax created a slew of unintended consequences, severely impairing the functionality of many dapps on the chain. Some are because the dapps in question are mostly zombie dapps which aren’t being upgraded. Some are unexpected issues faced by up-to-date dapps, like LunaPunks’ various issues and Astroport Classic’s broken LP staking mechanisms (Astroport Classic put out its own update 5 hours after the TR upgrade went out, but pool staking still seems broken).

Although I have heard reports of double taxation too on some traders, my own worst fears of a total breakdown of dex liquidity didn’t materialize.

But it was guaranteed that if you tinker with such a fundamental variable, and make your blockspace significantly less competitive, you would create a ton of unintended consequences, your on-chain volumes would go down, and lots of stuff would break.

Pre-burn, an informal poll I took in the Terra Rebels Discord server suggested that ~5bn LUNC per day (150bn/month, 2.2% of total supply) would be the minimum rate required to call the burn rate a success. Internal testnet results from June suggested around 1.8bn per day, but didn’t factor in any behavioral changes.

Figures for the first full day suggest a very disappointing 380m burned. I don’t know how accurate/representative that is, but I don’t expect the wallet transfers (currently not working as the CEXs figure out what’s going on) to yield that much additional volume.

If most of the current system breakages trace back to 1 or 2 core issues which can be resolved, we can expect a very big spike and subsequent trail-off on subsequent days, as on-chain activity has been artificially suppressed by the 1.2% tax’s widespread collateral damage.

So, those are the negatives. On the positive side, there are four points worth making.

One, the opportunity costs of this experiment are very low, and the community education benefits are very high. Terra Classic runs on an outdated version of CosmWasm, and until TC’s CosmWasm is upgraded, dapp development on the platform will be very muted: nobody wants to do the blockchain equivalent of making GTA VI for Windows 95. So experimenting with a wild burn-tax policy isn’t actively deterring dapp development for now (although it still sends a very negative signal around the unpredictability of protocol policy).

Two, this experiment will provide a valuable cautionary tale to, or allow the TC community to decentralize away from, various personalities who

a) rammed through a drastic policy change they didn’t understand, 
b) rejected any serious public discussion of the 1.2% tax’s plausible costs and benefits, and
c) imposed an impossible burden upon the Terra Rebels’ dutiful-but-badly-overworked senior developers.

Three, as LUNC’s policy decisions have attracted a wolfpack of crypto’s most talented short-sellers (such as GiganticRebirth, #12 on the FTX PnL Leaderboard), LUNC is now arguably the most heavily-shorted cryptocurrency “ticker” in the world. The FTX perp funding rate is 200% annualized. Normally, that’s bad news: heavily-shorted assets are not good investments over time. However, in this case, if the chain executes a constructive governance pivot which shreds the short thesis against it, LUNC will turn into a biblical bloodbath for its short-sellers.

Four, Jacob Gadikian and his team from Osmosis have done us the huge favor of committing to implement the CosmWasm update over the next 1–2 months. So we have a healthy window of time to experiment with things without severe opportunity costs.

Once the burn-tax numbers are in and the CosmWasm upgrade nears completion, I expect that the Terra Classic Community will face a stark choice.

Choice 1: Red Pill — the community doubles down on a failed tax

The community fails to decentralize away from the cults of personality who sold them what Will Chen called a “free LUNC”, and slave-drives senior TR devs into investing months fixing an unfixable deliverable. The TR senior devs’ attention is consumed implementing other half-measures which will barely mitigate, or even aggravate, the initial failure — things like a dapp tax whitelist (which would end Terra Classic as an open protocol) or a modest reduction in the tax. Demand for Terra Classic’s blockspace, ex claims on staking rewards and other basic governance/operational mechanics which aren’t taxed, goes to zero. The proposed USTC debt-to-equity restructuring loses viability as LUNC’s market cap bleeds lower, thus making any swap increasingly dilutive to an increasingly restless community. LUNC’s community of new enthusiasts gradually dissipates in disappointment.

Choice 2: Blue Pill — a modified tax works, or at least doesn’t fail

Through a longshot combination of sufficient outside help, Ed Kim / Zaradar / Marventus each working 48 hours per day, and unexpected CEX quasi-cooperation on tax issues, the 1.2% LUNC tax defies the doomsters while burning enough LUNC to noticeably affect token supply (3–5bn/day). The 1.2% stablecoin tax is removed, nodding to competitive reality in the stablecoin market. TR’s chief quant is found guilty of fomenting excessive FUD (again) and accepts a golden-parachute retirement package of 0 LUNC.

Choice 3: Green Pill — 1.2% hard reversal, stablecoin pivot, shortseller bloodbath, LUNC moons

After a couple weeks of endless operational snafus, a weak LUNC burn rate, and a Binance October 6 AMA that yields more of the same vague promises and fig-leaf tangibles, the community fully repeals the 1.2% tax on both LUNC and USTC and goes all-in on a sustainable restoration of a differentiated Algorithmic Fungible Token (AFT) or fully-collateralized stablecoin offering.

Dapp developers, noting the successful CosmWasm upgrade as well as the quick policy pivot, come to the protocol reassured that LUNC’s horde of memestonk traders are evolving into adaptable, pragmatic, and fast learners. Institutional capital which exited when Binance made their offchain burn tax stance clear pours back in. Retail reloads. Bears get slaughtered. LUNC moons to new highs. Whichever community USTC proposal prevails benefits from LUNC’s significantly higher market cap relative to USTC, reducing community dilution.

LUNA 2’s rich dapp pipeline cross-migrates to co-list on LUNC and sees significantly more adoption there than on LUNA 2, gradually grafting TFL’s best devs back onto the chain via their own dapps. Do Kwon engages very constructively throughout the process, has fun staying less rich, and crawls over broken glass towards a small measure of public rehabilitation. LUNC blasts into 2/3Q23 with massive institutional & retail sponsorship, one of the biggest dapp pipelines of any alt-L1, a truly decentralized stablecoin capable of resilient growth, and the ultimate redemption arc in digital asset history — and easily recaptures its former glory as the brightest star in the Cosmos.