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How Does the Seigniorage Mechanism Fail during a De-Peg?

Governance token price crashes due to mass issuance, making the incentive to burn the stablecoin ineffective.
Greeks.Live22.11.25

How Does the Seigniorage Mechanism Fail during a De-Peg?

The seigniorage mechanism fails when the market loses confidence and the stablecoin price drops significantly below $1. The protocol tries to incentivize burning the stablecoin by issuing the volatile governance token, but the mass selling of the stablecoin causes the governance token's price to crash faster than the burn can restore the peg.

The value of the issued token becomes insufficient to incentivize arbitrage, and the mechanism breaks down.

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