That’s a very clear explanation and a strong argument for keeping the fundamentals stable. Thanks for writing it out Nick.
- Allocation of excess tx value is passively going to supposedly indifferent merchants; tx fees ultimately affect usage
I’m trying to tease out the fact that under a .1% tx rate, there is .9% of available tx fee value that is passively going to merchants who are supposedly indifferent to this value; however, there are other members of the economy who are not indifferent to this value. It doesn’t have to be distributed to stakeholders in the form of rewards, so you can keep Luna cash flow stable still, but I’m sure if the .9% was given to someone else, say consumers buying on the e-commerce platform, or a payment gateway using Terra (Chai), their behavior would change.
This proves that even if merchants are indifferent to the .9%, the economy as a whole is not indifferent, and thus fluctuations in tx fees do, in fact, have an impact on use and behavior. This is the ultimate point I’m trying to make, and if this is the mechanism holding it all together, Luna and Terra are quite vulnerable to the downward spiral you mention, especially when Terra’s adoption expands beyond e-commerce partners—a 1% tx fee isn’t exactly competitive for the future of digital cash.
- Misaligned voter incentives and unnecessary voting
Furthermore, as we discussed in our previous posts, if the system already calibrates fees to the optimal level, why do you need voting? It only creates systemic downside risk.
- Vulnerabilities even within current scheme
Even for the current phase where adoption is dominated by e-commerce, there are significant vulnerabilities. For example, some competitor might see that they could make terra collapse by undercutting the Terra tx fee during a Terra recession and steal market share. Terra and Luna become vulnerable to a downward spiral as the system is not able to offer stable rewards. The cherry on top is if that same competitor is simultaneously shorting Luna, making this attack even more profitable.
- Luna trades on more than fundamentals, and its value is not easy to determine
Luna’s discounted cash flow in a vacuum may be fairly straightforward to value, but Luna has and will continue to trade on more than fundamentals. There is always unseen upside and downside that fluctuates temporally. What if a competitor undercuts Luna like in the above example? What if Do or Dan suddenly quits? What if the Korean government outlaws Terra or defines Luna as a security? How do people price in the fact that Luna can have additional value as a programmable asset that anyone can write their own smart contracts on? What if Luna takes on Bitcoin’s title of a speculative “store of value” asset that can’t be seized by a central authority? No one knows the answer to these questions, but investors can and will speculate .
Then, my question is what does it mean for the system if Luna’s valuation is not as straightforward as you think?