Key points to remember
- Luna Classic plans to implement a new transaction tax reduction mechanism of 1.2%.
- The failed project’s native coin, LUNC, rose 171% on the week.
- However, new investors should temper their expectations of the coin eventually reaching a dollar.
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The Terra Classic community plans to start burning more LUNCs, but traders should be careful not to burn themselves.
The revival of Terra Classic
Terra Classic is trying to make another relevance race, thanks to the support of its community.
When the UST stablecoin collapsed in May, many thought there was no hope for Terra. Do Kwon, the infamous CEO of Terraform Labs, had quickly decided to establish a new Terra blockchain, relegating his failure to the name “Luna Classic” and renaming the new chain’s native coin under the ticker LUNA.
However, since Terra’s premature collapse, efforts to revive the original blockchain have progressed slowly. In June, a proposal starting to burn some Terra Classic transaction fees and increasing validator rewards showed that there was still motivation to grow the chain despite being abandoned by Terraform Labs. Another proposal to start burn 1.2% of all tokens traded also passed a community vote, though details on how such an idea might be implemented were absent.
All the while, LUNC, the native Terra Classic coin, continued to trade. Volatility was high but not entirely unexpected given its low level of liquidity. The few active developers in the Terra Classic ecosystem were enough to fuel speculation. As is often the case with crypto tokens that trade at a fraction of a penny, hope has arisen for LUNC to one day trade at a single penny or, for the most ambitious (read: deceived), a dollar. Such a move would put LUNC’s market capitalization into the trillions, a fact his biggest accomplices have refused to acknowledge.
Fast forward to today, and a recent proposal Terra Community member Edward Kim helped rekindle the excitement for Terra Classic. Kim’s proposal offers a concrete path to implementing the 1.2% tax on all on-chain transactions. In his post on the Terra Classic forums, he explains the possible pros and cons of such an update and invites other members of the community to discuss. In response, LUNC hit a new local high, trading at its highest level since the May meltdown.
But what exactly does the Luna Classic engraving and transaction taxing hope to accomplish? How will the community be able to enforce the tax on centralized exchanges? These are just a few of the questions the Terra Classic community needs to answer in the run-up to an event that could trigger a significant amount of volatility.
Burn chips, make money?
Token burning is a simple concept to understand. When the supply of something is reduced, but the demand remains the same, it follows that the price people are willing to pay will increase. It is no coincidence that many of the most popular and widely adopted crypto projects incorporate a burning mechanism into their tokenomics. Shiba Inu’s developers regularly burn chunks of its supply, and Binance’s BNB also conducts quarterly token burns, to applause from holders.
However, in many cases, token burning has little impact on actual supply and demand metrics. In the case of BNB, almost all of what is burned comes from a pool of tokens that the exchange has held since its launch. It makes for a good headline when Binance boasts that it burned millions of dollars worth of BNB, but in reality, those tokens were never in circulation. It is therefore not surprising that such events have never had an impact on the price of BNB.
What token burns accomplish, however, creates a strong narrative that even the most novice crypto investor can understand and follow. It doesn’t matter that a burn mechanism drastically reduces the supply of a token and drives up prices. By increasing the consumption of a token enough, the price will often rise anyway because people are buying in anticipation of a perceived reduction in supply.
For Luna Classic, its planned token burn tax will likely do nothing more than create a great narrative to attract naïve investors. The vast majority of LUNC trading takes place off-chain on centralized exchanges such as Binance, Kucoin, and Gate.io. This means that even if the Terra Classic community were to successfully implement a 1.2% tax on transactions, only a tiny fraction of LUNCs would end up being burned. While many members of the LUNC community have called for exchanges like Binance to implement their burn tax, it seems extremely unlikely that they will.
It’s also worth noting that since Terra Classic re-enabled staking earlier this year, large holders and validators are taking advantage of its outsized staking rewards. Since few people have bothered to delegate their LUNC to validators since the chain collapsed, the rewards are distributed among fewer people, resulting in an average annualized return of more than 37%. Those early stakers now have fully loaded bags ready to dump on new investors who are confident that Luna Classic’s next token burn will reduce the supply and send it to a dollar.
Ultimately, Luna Classic has few fundamental reasons to be as beloved as it is, even at fractions of a dime. There’s no reason for serious developers to start building on the channel, and those currently involved seem to view it more as a hobby than a serious investment. Of course, that doesn’t mean that LUNC can’t go parabolic again, but it can just as easily drop when those raising the price decide to jump ship. For gamers, be warned: don’t get caught holding the bag when the music stops. And it will stop.
Disclosure: At the time of writing this article, the author owned ETH and several other cryptocurrencies.