Is a Higher On Chain Tax on Terra Classic Really a Good Thing?

The recent decision to increase the Terra Classic on chain tax to 1.5 percent has sparked debate across the LUNC community. Supporters believe that a higher tax will burn more LUNC and accelerate the reduction of the circulating supply.

At first glance, this idea sounds reasonable. If every transaction pays a larger tax, more LUNC should be burned.

However, blockchain economics are not that simple.

The real question is not how much is burned per transaction. The real question is whether people are still willing to make those transactions in the first place.

Higher Costs Reduce On Chain Activity

Every blockchain competes for users, developers, liquidity providers, and investors. One of the biggest factors they consider is transaction cost.

When on chain taxes become expensive, users naturally look for cheaper alternatives. Traders may reduce the number of swaps they perform, while projects may avoid building products that require frequent transactions.

The result is simple.

Higher transaction costs usually lead to lower transaction volume.

A blockchain with fewer transactions becomes less attractive to both users and businesses.

Whales Want Efficient Markets

Large investors, often called whales, move significant amounts of capital.

While a 1.5 percent tax may not seem large for a small transaction, it becomes extremely expensive when moving hundreds of thousands or even millions of dollars.

For example:

• A transaction worth $1,000,000 would incur a tax of $15,000.
• Multiple transactions could quickly add tens or even hundreds of thousands of dollars in additional costs.

Professional investors compare costs across many blockchains. If they can execute the same strategy elsewhere with significantly lower fees, there is little incentive to choose Terra Classic.

This reduces the likelihood of large capital flowing into the ecosystem.

Less Volume Can Mean Less Burn

One of the biggest misconceptions is that increasing the tax automatically increases LUNC burn.

The current model directs 1.2 percent of the 1.5 percent tax toward burning LUNC.

However, the total amount burned depends on two factors:

• The tax rate.
• The total transaction volume.

If transaction volume falls significantly because users avoid the network, the total amount burned can actually decrease despite the higher tax rate.

For example:

Scenario A

• Tax: 0.5 percent
• Daily transaction volume: 100 billion LUNC
• Burn: 500 million LUNC

Scenario B

• Tax: 1.5 percent
• Daily transaction volume falls to 20 billion LUNC
• Burn: 360 million LUNC

Although the tax rate is three times higher, the total burn becomes lower because far fewer transactions occur.

This demonstrates why transaction volume is just as important as the tax percentage itself.

Liquidity Is Essential for Growth

Healthy blockchain ecosystems depend on active liquidity.

More liquidity leads to:

• Better trading conditions.
• Smaller price spreads.
• Faster trade execution.
• Greater confidence from investors.

If high taxes discourage liquidity providers and traders, the network becomes less efficient.

Lower liquidity often leads to reduced trading activity, making the ecosystem less competitive.

Developers Also Consider Transaction Costs

Developers building decentralized applications want users to interact with their products frequently.

If every interaction carries a high tax, users may avoid using the application altogether.

This makes Terra Classic a less attractive destination for new projects compared to blockchains with lower operating costs.

In the long term, fewer applications mean fewer users and fewer transactions.

Sustainable Growth Requires Balance

Burning LUNC is important because reducing supply can strengthen the ecosystem over time.

However, burning should come from increasing economic activity rather than making each transaction more expensive.

A healthy blockchain encourages:

• More users.
• More applications.
• More liquidity.
• More transactions.

When transaction volume grows, burn naturally increases without discouraging participation.

This creates a stronger and more sustainable economic model.

Conclusion

Increasing the Terra Classic on chain tax to 1.5 percent may increase the amount burned from each individual transaction, but it also raises the cost of using the network.

Higher costs can discourage whales, reduce liquidity, lower trading activity, and make Terra Classic less attractive for developers and investors. Since only 1.2 percent of the 1.5 percent tax is allocated to burning LUNC, a significant decline in transaction volume could result in fewer total tokens being burned over time.

For Terra Classic to achieve sustainable growth, the ecosystem needs to attract more capital, more users, and more on chain activity. A lower transaction cost that encourages greater network usage may ultimately produce higher daily burn than a high tax that discourages participation.

The long term success of Terra Classic depends not only on the tax rate, but on creating an environment where people actively choose to build, trade, and invest on the network every day.