About Seigniorag

977Iti

"To understand a Ponzi scheme, you first need to understand the motivation behind designing the scheme. The widespread adoption of UST not only aims to increase the price of LUNA but also has a crucial incentive—seigniorage.

Seigniorage is an economic concept that describes the revenue a government obtains by issuing currency. Specifically, this term is often used to refer to the difference between the face value of a currency and its production cost. For example, if it costs 50 cents to produce a $1 coin, the seigniorage is 50 cents.

In the crypto world, all three types of stablecoins have seigniorage. Fiat-backed stablecoins typically charge around 0.1% in seigniorage during the minting and burning processes. Overcollateralized stablecoins generate revenue from fees and interest paid by holders. As for algorithmic stablecoins, they have the highest seigniorage rates. By introducing mechanisms involving volatility-pegged tokens, stablecoins can convert all funds entering the system into seigniorage, creating something from nothing. This mechanism significantly reduces startup costs, to some extent improves anchoring rates, but also comes with inherent vulnerabilities."