2. Native swaps (btw LUNA and stablecoins) & their fees (gas + spread)

The following chart shows the number of daily UST swaps for the past month (UST on either side of the swap), and the fees in UST that they incurred on Terra:

Introduction to Terra fees

On the Terra network, there are 3 types of fees: gas, spread, and Tobin tax. (Source.) This is how they work:

• All transactions are charged gas to cover the cost of validating and processing a transaction. Gas rewards get distributed to delegators (stakers) by validators at the end of each block.

• In addition, swap transactions are also charged either spread (for market swaps between stablecoins and LUNA, aka native swaps), or Tobin tax (for market swaps between stablecoins only). Market swaps are swaps on Terra Station that use the Terra protocol’s market function (source). Terra stablecoins are algorithmically-generated tokens that are each pegged to one of the world's currencies (e.g. UST to represent the value of USD, KRT for South Korean won, INT for Indian rupee, etc.). Tobin and swap rewards are also distributed to stakers by validators at the end of each block.

Terra-nomics: The economics of spread vs. Tobin tax

Gas is neutral in its intent, its only purpose is to enable the transaction's overhead. But spread and Tobin tax are more nuanced. Both spread and Tobin tax are references to traditional (pre-blockchain) financial economics.

A spread in trading refers to the difference between the the seller's and buyer's price of an asset (a stock, bond, a currency in forex trading, etc.), and therefore it is a cost/fee necessary to finalize a transaction. The spread helps the seller and buyer meet.

Tobin tax (also known as the Robin Hood tax) is named after Nobel-winning economist James Tobin who first proposed it, and represents a tax on all short-term currency trades. Tobin tax was intended to disincentivize short-term currency speculations the goal of which is to earn arbitrage or hedge, in order to return more control over currency prices to their issuers and away from short-term speculators whose investments are by definition brief and fickle and dependent on the margins they can get. On Terra, a fixed Tobin rate gets assigned to each stablecoin. When a swap happens between two stablecoins, the higher of the two % rates gets charged.

One can interpret the economics of these two types of fees in a way that spread fees are necessary (they are unavoidable to help the seller and buyer meet and make the trade), while Tobin tax is more of a regulatory instrument designed to influence investor behavior.

Why does Terra levy a tax on speculative swaps?

Terra's use of spread and Tobin tax echoes traditional economics. Terra is conceptualized as a remittance vehicle disrupting the existing remittance space, and cross-token speculation is a byproduct of providing that vehicle (source). When speculative actors make a profit on a swap in a closed ecosystem like Terra, other Terra users are the ones losing money.

Moreover, when a profitable trader issues extra Terra coins (getting back more of the token than they initially put in), this disrupts the coin's supply and price, undermining the 'stable' of Terra stablecoins. Here one can see a parallel with the reason that traditional currency exchanges had come up with a mechanism like Tobin tax. Terra's Tobin tax represents taking control over the currency's supply and price pegging from traders back to its issuers.

Method

This analysis takes a deep dive into the origin of fees charged by Terra and paid to stakers. Using the on-chain data from Flipside Crypto, we calculate the following for the last 30 days:

• The number of (non-swap) transactions and the corresponding fees (aka gas).

• The number of market swaps that generate spread, and their fees. These are the 'native swaps', aka from LUNA token to one of 20+ Terra stablecoins, and vice versa from a stablecoin to LUNA. The available data doesn't allow to split total swap fee into gas and spread. This might be the result of how Terra users declare the total cost they are willing to pay for a swap - users typically commit an amount of total fee, which includes the gas amount X gas price, and any potential spread (source). Therefore we will look at average daily fees as a sum of gas + spread.

• the number of market swaps that generate Tobin tax fees (and the amount of Tobin tax) - these are swaps among Terra stablecoins. Again, the available data doesn't allow us to split the total swap fee into gas and Tobin, therefore we will look at average and total daily fees as a sum of gas + Tobin tax.

Results

1. Non-swap transactions and their gas

The chart below shows the number of daily UST transactions (non-swap) on Terra for the past month, and how much fees in UST they incurred in total. (Because these transactions aren't swaps, they only got charged gas.) This visualization only tells us that more transactions per day resulted in more total gas, which is self-explanatory. To gain more insight, we will proceed to compare the number of daily transaction to average gas fees on that day, seen in the following graph.

The graph below reveals the relationship between the number of transactions on Terra and average gas per tx. It appears that much of the time average gas fee increases when there are more transactions. The two metrics don't always go hand-in-hand, but often they do. This suggests that in times of transaction overload, a number of users are willing to estimate higher minimum gas value to ensure their transaction does not get declined.

(Gas on Terra works in the following way: Validators set their own minimum gas fees (gas amount X gas price), and may prioritize transactions based on higher gas unit price promised by sender. Transactions that don't commit enough total gas fees will fail and not be written to the block at all (source).

From the graph above we can see that the relationship between transaction load and transaction fee is different for swaps, compared to non-swap transactions we examined above.

Because native swaps incur the cost of spread (i.e. they cover the difference between token price of seller vs acceptable price for buyer), a larger pool of swaps generally means that a larger proportion of swappers can meet in the middle - find a transaction at a price closest to them, with less spread. Therefore, more native swaps implies a smaller spread charged to swappers.

But while this appears to hold true for LUNA <-> stablecoin swaps, the same inverse relationship between number of swaps and fees might not necessarily be true for all types of swaps. The other possible type of swap on Terra - from a stablecoin to another stablecoin - incurs a different type of fee, Tobin tax, as described in the Introduction above. How do fees fluctuate for this type of swap? We answer below by examining the data.

3. Swaps between stablecoins & their fees (gas + Tobin tax)

The graph below represents the number of stablecoin swaps on Terra and the average fee for this type of swap.

Here too, like with LUNA swaps above, we see that a larger swap load corresponds to lower fees per swap, and vice versa. The reason here is less clear. Tobin tax, at least in its original economic theory form, was intended to be a flat % fee to discourage speculative swapping. With this logic in mind, more Terra swapping would have seen a higher Tobin tax amount. Does this relationship visualized above perhaps change if we look at the total amount of fees instead of per transaction?

It turns out that the inverse relationship between stablecoin swap count and fees (gas + Tobin tax) still persists when we look at total fees instead of average fees per transaction. From our analysis, it is not yet clear why Tobin tax (aka Robin Hood tax) doesn't spike alongside increasing swaps. Further analysis is needed to unpack this aspect.

Takeaways

• On Terra, all transactions are charged gas fees (gas amount X gas price) to enable the processing of the transaction.

• In addition, swap transactions incur one of the two kinds of fee: spread (for swaps where LUNA is swapped for a stablecoin or vice versa), or Tobin tax (first introduced on financial trading markets by economists; levied by Terra onto speculative swaps that happen just among stablecoins).

• After transactions are written to the blockchain, gas fees, spread, and Tobin tax all form staking rewards.

• Terra aims to be a platform that empowers cross-border remittances, and Tobin tax is a form of discouraging speculation on the ecosystem, as an activity that would financially hurt the remitters.

• The analysis of transaction and swap load on Terra, and the corresponding fees, shows that:

• Gas fees increase when non-swap transactions increase. This is consistent with the expected sender behavior where senders commit higher gas fees upfront, even though extra gas fee is not refunded, in order to reduce the chances of their transaction failing.

• Transaction fees (gas fee + spread) fall when the number of LUNA-stablecoin (or stablecoin-LUNA) swaps grows. This is consistent with the expectation that a larger pool of swaps reduces market spread (the gap between the seller's and buyer's price of a token).

• Transaction fees (gas fees + Tobin tax) also fall when the number of stablecoin-stablecoin swaps increases. This is surprising, because the expectation is that more swaps would result in more Tobin tax amount charged. This may potentially be explained by the types of stablecoins swapped, because Tobin tax rate varies among stablecoins, or by other reasons. Further inquiry can shed more light on this remaining question.