On-chain activity appears to have dried up on the Luna Classic, the network token of the failed and abandoned Terra chain, after it imposed a 1.2% tax on transactions that is burned from supply.
The price of LUNC soared after a governance proposal advocating for the burn mechanism went live on Sept. 1, with LUNC surging 250% over eight days. Some investors speculated the move could render LUNC deflationary, meaning that more tokens are destroyed than issued as rewards to validators.
But critics questioned whether on-chain activity would hold up once users are taxed 1.2% on their transactions. With $162,000 worth of LUNC entering supply each day as inflation, the network needed to maintain $13.5M worth of daily activity to offset LUNC’s staking rewards.
On Sept. 22, Lightcrypto, a popular crypto influencer, posted that only $2,503 LUNC was burned in the seven hours after the tax and burn mechanism went live.
“The LUNC burn is a catch 22 — the token needs usage to support the narrative but no one wants to pay 1.2%,” they tweeted. “You end up with a dead chain… Economic activity on the network has ground to a halt.”
There appear to be other factors at play too though.
FatManTerra, a prominent Terra whistleblower, replied that the upgrade introducing the burn mechanism caused widespread errors for dApps, wallets, and exchanges, further slowing on-chain activity.
They shared a screenshot of Discord chatlogs showing Terra Classic developers confirming that many dApps have not upgraded to support the tax, and that some centralized exchanges have not resumed deposits and withdrawals.
Binance has since restored Terra Classic withdrawals and deposits.
While LUNC traded in a sideways range over the past week, it is down 52% from its Sept. 8 high. Ethereum, which introduced a burn mechanism when The Merge went live last week, destroyed an average of 979 ETH daily over the past seven days, equating to $1.2M worth of ETH burned each day at current prices.