No, Terra Classic Isn’t Going to $1. Here’s Why

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Key learning points

  • Luna Classic plans to implement a new transaction tax burn mechanism of 1.2%.
  • The original currency of the failed project, LUNC, is up 171% this week.
  • However, new investors should temper their expectations that the currency will eventually hit a dollar.

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The Terra Classic community plans to burn more LUNC, but traders should be careful not to burn them themselves.

The Revival of Terra Classic

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

When the UST stablecoin collapsed in May, many thought there was no hope left for Terra. Do Kwon, the infamous CEO of Terraform Labs, had quickly moved on to setting up a new Terra blockchain, relegating its failure to the name “Luna Classic” and renaming the new chain’s original coin under the LUNA ticker.

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

All the while, LUNC, Terra Classic’s original coin, continued to trade. 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 for a fraction of a cent, hopes for LUNC started one day trading at a single cent or, for the more ambitious (read: misled), a dollar. Such a move would put LUNC’s market cap in the trillions, a fact the largest shills refused to acknowledge.

Fast forward to today, and a recent proposal from Terra Community Member Edward Kim helped rekindle enthusiasm for Terra Classic. Kim’s proposal provides a viable path to implementing the 1.2% burn tax on all on-chain transactions. In his post on the Terra Classic forums, he explains the potential pros and cons of such an update and invites discussion from other community members. In response, LUNC has hit another local peak, trading at its highest point since the May collapse.

But what exactly does burning and taxing Luna Classic trades hope to achieve? How can the community 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 generate significant levels of volatility.

Burn tokens, get money?

Burning tokens is an easy concept to understand. When the supply of something decreases, but the demand remains the same, the price people are willing to pay will increase. It is no coincidence that many of the most popular and widely accepted crypto projects incorporate a burning mechanism into their tokenomics. Shiba Inu’s developers routinely burn chunks of its stock, and Binance’s BNB also conducts quarterly token burns, much to the applause of the holders.

In many cases, however, token burning has little impact on the actual supply and demand metrics. In the case of BNB, almost everything burned comes from a stock of tokens that the exchange has kept since its launch. It makes for a good headline when Binance announces that it has burned millions of dollars worth of BNB, but in reality those tokens were never in circulation. It is therefore not surprising that such events in the past have not affected the price of BNB.

However, what token burns do achieve is to create a strong story that even the most novice crypto investor can understand and stand behind. It doesn’t matter if a burning mechanism will significantly reduce a token’s supply and drive up prices. By raising a token sufficiently, the price will often increase anyway because people buy in anticipation of a perceived reduction in supply.

For Luna Classic, the planned token burn tax will probably do no more than create an excellent story to attract naive investors. The vast majority of LUNC trading takes place off-chain on centralized exchanges such as Binance, Kucoin, and Gate.io. That means that even if the Terra Classic community were to successfully implement a 1.2% incineration tax on transactions, only a small portion of the LUNC would end up being incinerated. While many members of the LUNC community have petitioned exchanges like Binance to implement their burn tax, it seems extremely unlikely that anyone will.

It’s also worth noting that since Terra Classic re-enabled staking earlier this year, major holders and validators have taken advantage of the outrageous staking rewards. Because few people have bothered to delegate their LUNC to validators since the collapse of the chain, the rewards are distributed among fewer people, resulting in an average annual return of more than 37%. These early strikers now have fully loaded bags ready to dump on new investors who are confident that Luna Classic’s impending token burn will shrink the supply and send it to a dollar.

Ultimately, Luna Classic has little fundamental reason to be rated so highly, even for a fraction of a cent. There is no reason for serious developers to start building the chain and those involved seem to see it more as a hobby than a serious investment. Of course, this doesn’t mean LUNC can’t go parabolic again, but it could just as easily plummet when those inflating the price decide to disembark. For the gamblers 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 piece, the author owned ETH and several other cryptocurrencies.

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The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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