How Does the “Seigniorage” Concept Apply to Algorithmic Stablecoins?
Seigniorage, traditionally the profit made by a government by issuing currency, is applied to algorithmic stablecoins through the mechanism of token burning and minting. When the stablecoin is above its peg, the protocol profits from minting new coins at a value higher than the cost of creation.
This "profit" or seigniorage is often used to buy back or burn a supporting token, thus creating value for the ecosystem.
Glossar
Algorithmic Stablecoins
Architecture ⎊ Algorithmic stablecoins represent a class of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency, through the use of algorithms and smart contracts rather than relying on collateralized reserves.
Seigniorage
Profit ⎊ Seigniorage, within cryptocurrency ecosystems, represents the difference between the cost of producing a unit of digital currency ⎊ primarily computational power and validation fees ⎊ and its nominal value or exchange rate.
Seigniorage Profit
Concept ⎊ Seigniorage Profit, in the context of digital assets, is the economic gain realized by a protocol or issuer when the cost of creating a new unit of currency or token is significantly lower than its face value or market price.
Seigniorage Model
Mechanism ⎊ The Seigniorage Model, within cryptocurrency and derivatives, represents the profit a central entity ⎊ typically a central bank or protocol ⎊ realizes from issuing currency or tokens above the cost of production, a concept extending to the minting of stablecoins and the creation of synthetic assets.