No, Terra Classic is not coming to $1. Here’s why

The Terra Classic community plans to start burning more LUNC – but traders should be careful not to get burned themselves.

Terra Classic’s Revival

The Terra Classic is trying to make another race relevant, 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, Terraform Labs’ infamous CEO, had moved quickly to establish a new Terra blockchain, relegating his failure to the name “Luna Classic” and rebranding the new chain’s original 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 start burning a portion 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 proposal to start burning 1.2% of all tokens transacted also passed a community vote, although details on how such an idea could be implemented were absent.

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 at a fraction of a cent, hopes set in for LUNC to one day trade for a single penny or, for the more ambitious (read: clever), a dollar. Such a move would put LUNC’s market cap in the trillions, a fact its biggest shills refused to acknowledge.

Fast forward to today, and a recent suggestion from Terra community member Edward Kim has helped rekindle enthusiasm for Terra Classic. Kim’s proposal lays out an actionable path to implement a 1.2% incineration tax on all transactions in the chain. In his post on the Terra Classic forums, he explains the possible pros and cons of such an update and invites discussion from other community members. In response, LUNC has hit a new local high, trading at its highest since the collapse in May.

But what does burning and taxing Luna Classic transactions hope to achieve? How will the community be able to enforce the tax on centralized exchanges? These are just a couple of the questions the Terra Classic community must address ahead of an event that could trigger a significant amount of volatility.

Burn tokens, get money?

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

But in many cases burning tokens has little effect on actual supply and demand. In the case of BNB, almost all of what is burned comes from a reserve of tokens the exchange has held since launch. It makes for a good headline when Binance says it has burned millions of dollars worth of BNB, but in reality these tokens were never in circulation. It is therefore not surprising that such events historically have not affected BNB’s price.

What token burns achieve, however, is to create a strong narrative that even the most inexperienced crypto investor can understand and get behind. It doesn’t matter if a burning mechanism will significantly reduce a token’s supply and push prices up. By hyping up a token burn enough, the price will often rise anyway because people are buying in anticipation of a perceived reduction in supply.

For Luna Classic, the planned token burn tax will probably do nothing more than create an excellent narrative to draw in naive investors. The vast majority of LUNC trading occurs off-chain on centralized exchanges such as Binance, Kucoin and Gate.io. That means that even if the Terra Classic community successfully implemented a 1.2% burn tax on transactions, only a small fraction of LUNC would end up burning. 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 is also worth noting that since Terra Classic reactivated staking earlier this year, large holders and validators have taken advantage of the large staking rewards. Because few people have bothered to delegate their LUNC to validators since the collapse of the chain, the rewards are shared among fewer people, resulting in an average annual return of over 37%. These early stakers now have full bags ready to dump on new investors who are convinced that Luna Classic’s upcoming token burn will shrink its supply and send it to a dollar.

Ultimately, the Luna Classic has little fundamental reason to be valued as highly as it is, even at fractions of a cent. There is no reason for serious developers to start building on the chain, and those involved seem to see it more as a hobby than a serious investment. Of course, this doesn’t mean that LUNC can’t go parabolic again, but it might as well plunge when those who are pumping up the price decide to jump ship. For 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.