“The 1.2% tax kills our volume.” Does it, though? A deeper analysis.

Not only after the current proposal 5234 was brought up, there is a discussion about the burn tax on terra classic. Seeing it black or white there are two factions: one think the tax should stay and remain untouched for at least some months, the other think it kills our volume and prevents utility from coming to the chain.

It is only 26 days now that the 1.2% tax is active. During the first week of this period there were major issues with Terra Station (failing transactions), so it would not be fair to take the numbers from that week and compare it. Also there are further issues with simply looking at the volume charts of CMC or Terra Station. They include things that don’t really matter in regards of the tax effects like CEX internal movements (big but few transactions) or sends to the burn wallet.

So I tried to make an analysis of the data we currently have available on-chain and removed some of the mentioned things.

Analysis period

To compare the effects I chose four periods. The first period is September, 7th to September 20th. The second period is September 29th to October 12th. The third period is just to validate the first one (August 31st to September 6th (normalized to 14 days). The fourth period is Oct 13th to Oct 16th (normalized to 14 days).

The first period was chosen because it is pre-tax but long enough after the re-enabled staking. There were some peaks in the volume during that time, but those were mainly caused by Binance moving tons of coins around, consolidating the holdings into one single wallet.

The second period was chosen to exclude the time where the Terra Station was having problems with gas fee calculation (Sept 21st to Sept 26/27th). The last period was added to have a glance on further development of volume and a potential recovery.

Excluded data

As mentioned some data has to be excluded from the analysis as it would most likely distort the results.

In discussions there are some valid points made regarding volume peaks pre-tax. Those include:

Binance pre-tax consolidated most funds into one on-chain wallet, very likely to reduce its tax bill. This way they moved nearly 5T of LUNC in only a few big transactions. It would not be fair taking those into account. So I removed all transactions from the data that happened between wallets owned by Binance (except deposit to main wallet).

In addition the transactions that are not subject to tax (delegation, withdrawal of rewards etc.) should not be considered during the analysis. Same for coins being sent to the burn wallet (which are burnt anyway). So I removed those as well.

Analysis

First we look at the LUNC transactions and volume.

The transaction number decreased a lot at first and recovered a bit during the last period. But sadly that does not help the volume.

This is far more obvious when looking at the volume development. It has decreased by more than 95% and still is decreasing (-20% from beginning of October).

The reason why the transactions did not decrease as much as the volume is the average transaction size.

This has decreased by more than 91%. You can see that many entities are avoiding any bigger transactions on the network (remember Binance internal movements were excluded from the data already).

Now let us look at the USTC transactions and volume in the same way.

The decrease here is obvious. The numbers do not differ much (93% decrease in volume), but there is a considerable difference to the LUNC transactions. The average transaction size did not change as much (-50%) as it did for LUNC (-91%). Instead the number of transactions went down (-81%) and did not recover.

Interpretation

The following is my personal interpretation and is neither financial advice nor is it meant to be the one and only way to look at the numbers.

From what I see in the data, the tax has a big influence of how the chain is used. People are avoiding the tax and for me that means that especially the smaller holders have the burden of burning their coins to benefit the whole chain (including big holders). In addition the tax hurts those the most that bring most value to the chain (contracts/dApps and their users). That is not how it should be, I think.

While we have no data yet of how the volume might or might not recover after lowering the tax to 0.2% (as it seems the mentioned proposal will be passing), I will compare those data once I have them available.

I do not expect a sudden recovery immediately after the tax is lowered. This is mainly because of the fact that CEXs will not necessarily change their current way of handling their on-chain wallets. But I think it is the right step to do now.

I get the point of people saying it is too early, but currently I see no signs of recovery in the data I have. Contrary it seems the relevant transactions are currently still decreasing a bit.

Update 1: Oct 17th

To further eliminate the argument of only using “peak volume periods” before the tax introduction, I added further periods to the volume graphs.

First I added a “random” (without looking at the volume beforehand) period in July. Second I took two periods in August before and around when the staking was re-enabled because this led to some volume when people moved their coins on-chain to stake.

But what we can clearly see here, especially when comparing the LUNC and USTC graph (USTC cannot be staked on-chain): In my opinion the peaks are rather caused by new use-cases on-chain (like LunaPunks, LunaBurningKnights etc.) than by unusual peaks caused by people preparing for staking. Even if(!) you would compare the period back in July, when less use-cases were on-chain and a tax would have had less effects on them (e.g. no staking rewards swapped through terraswap etc.), the volume is down by more than 85% for LUNC and 87% for USTC.