Terra Tax Rate
The Treasury module acts as the "central bank" of the Terra economy, measuring macroeconomic activity by observing indicators and adjusting monetary policy levers to modulate miner incentives toward stable, long-term growth.
Observed Indicators
The Treasury observes three macroeconomic indicators for each epoch (set to 1 week) and keeps historical records of their values during previous epochs.
- Tax Rewards: Income generated from transaction fees (stability fee) in a during the epoch.
- Seigniorage Rewards: Amount of seignorage generated from Luna swaps to Terra during the epoch that is destined for ballot rewards inside the Oracle rewards.
- Total Staked Luna: Total Luna that has been staked by users and bonded by their delegated validators.
These indicators can be used to derive two other values, the Tax Reward per unit Luna represented by , used in Updating Tax Rate, and total mining rewards , simply the sum of the Tax Rewards and the Seigniorage Rewards, used in Updating Reward Weight.
The protocol can compute and compare the short-term (WindowShort) and long-term (WindowLong) rolling averages of the above indicators to determine the relative direction and velocity of the Terra economy.
How Tax is Changed
The changes in tax rate are calculated based on the following formula:
(MiningIncrement parameter
* Current Tax Rate
* Rolling average of Tax Rewards per unit Luna over the last year
) / Rolling average of Tax Rewards per unit Luna over the last month
As such, the Treasury hikes up Tax Rate when tax revenues in a shorter time window is performing poorly in comparison to the longer term tax revenue average. It lowers Tax Rate when short term tax revenues are outperforming the longer term index.
Analysis
If we use the terra.transactions
table as a proxy for Tax Rewards generated on the Terra network, we can use that as a trend to explain the tax rate changes.
- As the short-term revenues were outperforming the long-term revenues in the bull market, the tax rate kept going lower and lower each week.
- The number of transactions hit a peak on March 22, 2021 and then in the epoch starting 30 days later i.e. April 25, 2021 — we see the first minor change in tax rate week over week.
- By May 3, the tax rate change has flipped and has now started increasing.