No, Terra Classic is not $1. Here’s why – crypto briefing | Jewelry Dukan

The central theses

  • Luna Classic plans to implement a new transaction tax burning mechanism of 1.2%.
  • The failed project’s native coin, LUNC, is up 171% this 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 burn more LUNC – but traders should be careful not to burn themselves.

The revival of Terra Classic

Terra Classic, thanks to the support of its community, is trying to make another run for relevance.

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 moved on to founding a new Terra blockchain, relegating his failure to the name “Luna Classic” and renaming the new chain’s native coin under the LUNA ticker.

However, since Terra’s untimely collapse, efforts to revive the original blockchain have been slow. In June, a proposal to burn some of Terra Classic transaction fees and increase validator rewards showed that there was still motivation to develop the chain, despite being abandoned by Terraform Labs. Another suggestion to start burning 1.2% of all tokens traded was also voted on by the community, although details on how such an idea could be implemented were missing.

Meanwhile, LUNC, Terra Classic’s native coin, continued trading. Volatility was high, but not entirely unexpected given the 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 cent, LUNC had hopes of one day trading at a single cent, or, for the more ambitious (read: deceived), a dollar. Such a move would take LUNC’s market cap into the trillions, a fact its biggest shills refused to acknowledge.

Fast forward to today, and a recent suggestion from Terra community member Edward Kim helped reignite the excitement for Terra Classic. Kim’s proposal proposes a viable way to implement the 1.2% incineration 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 community members to join in the discussion. In response, LUNC has made a new local high and has been trading at its highest since the collapse in May.

But what exactly is the burning and taxing of Luna Classic transactions supposed to achieve? How will the community be able to enforce the tax on centralized exchanges? These are just some of the questions the Terra Classic community must ask in advance of an event that could trigger significant volatility.

Burn tokens, get money?

Token burning is an easy concept to understand. When the supply of something goes down but the demand stays the same, the price people are willing to pay goes up. It is no coincidence that many of the most popular and widely used crypto projects incorporate a combustion mechanic into their tokenomics. Shiba Inu’s developers routinely burn portions of its supply, and Binance’s BNB also conducts quarterly token burns, much to the applause of holders.

However, in many cases, token burning has little impact on actual supply and demand metrics. In the case of BNB, almost everything that is burned comes from a reserve of tokens that the exchange has held since launch. It is a good headline when Binance advertises that it burned millions of dollars worth of BNB, but in reality these tokens were never in circulation. It is therefore not surprising that such events have not had any impact on the price of BNB in ​​the past.

What Token Burns achieve, however, is creating a powerful narrative that even the most inexperienced crypto investor can understand and get behind. It doesn’t matter if a combustion mechanism will significantly shrink a token’s supply and push up prices. By pushing a token burn up enough, the price will often rise anyway as people buy in anticipation of a perceived reduction in supply.

For Luna Classic, the proposed token burn tax will likely do nothing more than create an excellent narrative to attract naïve investors. The vast majority of LUNC trading occurs off-chain on centralized exchanges such as Binance, Kucoin, and Gate.io. That means even if the Terra Classic community were to successfully implement a 1.2% burn tax on transactions, only a tiny fraction of LUNC would end up being burned. While many members of the LUNC community have called for exchanges like Binance to introduce their combustion tax, it is extremely unlikely that anyone will.

It’s also worth noting that since Terra Classic reinstated staking earlier this year, large holders and validators have benefited from outsized staking rewards. Since few people have bothered to delegate their LUNC to validators since the chain collapsed, the rewards are shared among fewer people, resulting in an average annual return of over 37%. These early stakers now have fully loaded pockets, ready to tip to new investors who are convinced that Luna Classic’s upcoming token burn will shrink the supply and send it down to a dollar.

Ultimately, Luna Classic has little reason to rate it as highly as it is, even when it comes at fractions of a cent. There’s no reason for serious developers to build on the chain, and those currently involved seem to view it more as a hobby than a serious investment. Of course, that doesn’t mean LUNC can’t go parabolic again, but it can crash just as easily if those pushing the price up decide to abandon ship. For gamers out there, 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.

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