Seigniorage and Chai

I feel that there has been a lot of confusion about how seigniorage works in the context of chai.

Here is my take, trying to explain the key mechanics that allow Chai to benefit from from seigniorage and provide on-going benefits to consumers and merchants.

Looking forward to any feedback.
Chai_Terra.pdf (420.8 KB)


This is great!. For BD purposes with non-crypto potential partners I think need something shorter and simpler. No formulas, can’t look like an academic paper, and need a short and long version. Short is one paragraph for the body of an email. Long should feel more like an infographic than a paper.

I dmed you!

Thanks for the write up, but could you get more specific on these questions:

  1. You mention how users access Chai, but what happens to the KRW that is transferred from a bank account?
  2. How does the relation between Chai and Terra work when new KRT are minted? What kind of proofs does Chai need to provide for Terra to mint KRT? I imagine its done in a centralised way for now, but what are ways to create these proofs in a decentralised and trustless manner?
  3. You mention the demand for KRT and a weekly 8% growth rate. But if I look at the total KRT supply it has remained pretty much constant around 76bn KRT since end of January. Have there been any seignorage discounts given out in this time? If so, how where they financed when the supply remained constant?
  4. When merchants want to withdraw their KRT and have KRW in their bank account, do they have to use an exchange for that or does Chai convert it for them? If so, how does Chai convert it?

I am asking these questions mainly because we will need transparent and decentralised ways to answer these if we expect more companies like Chai to use Terra.

  1. I believe Chai buys KRT mostly from exchanges, but since I don’t work for Chai I can’t know exactly what chai does.
  2. For now, Terraform Labs provides seigniorage to chai, under the condition that either transaction volume grows or that the amount of KRT locked at chai increases.
  3. The 8% growth rate refers to the historical average since genesis. You are correct that since chai reduced discounts in January, growth has been affected. As a natural implication seigniorage has also beed reduced (but its not zero since topups have increased). So the amount of KRT being locked with chai has been rising at pretty high rate).
  4. I believe how this is handled varies from merchant to merchant. Most merchants eventually liquidate to KRW. I am unaware of the exact details per merchant.

Your points are excellent and we fully agree that for the Terra ecosystem to truly flourish seigniorage should happen in a decentralised and transparent way. Hopefully soon the whole process will be algorithmic, so there will be no room for discretion and centralisation.

I’m trying to understand where seigniorage comes from.

As stated in the article, it’s basically the increase in Terra supply, minus the cost of issuing new Terra.

However, if 1 dollar’s worth of Luna needs to be burned to mint 1 TerraUSD stablecoin, the cost of issuing new Terra would equal the increase in Terra supply, making the seigniorage 0.

Can you please comment on this.

Thats not what seigniorage means. Seigniorage only occurs in perspective of the mint, not the user. In the case of USD, the cost of acquisition is always 1 dollar or equivalent value of some good or foreign currency, but that is not to say the USD has no seigniorage.

That doesn’t make any sense to me.

The Fed prints money at a cost of 0. They literally click some buttons and print the money. Then they go to the market and buy some bonds from investors. Those bonds end up in their balance sheet. Thus, they bought some bonds at a cost of 0.

In the case of Terra it doesn’t work this way. Let’s say Terra prints 1USD. To do so, Terra would need to buy 1USD worth of Luna and burn it. Thus, Terra ends up with nothing (because they burnt the Luna they bought).

While the Fed ends up with the bonds in their balance sheet, Terra ends up with nothing.

What am I missing here?

Terraform Labs nor the terra blockchain discretionarily mints stablecoin. Only when users elect to mint stablecoin (for which an equivalent value luna must be spent as cost) the system (analogous to the mint) earns seigniorage in the form of the luna the user has paid.

You are confusing the agency of the mint and the user.

And its factually inaccurate to say the Fed prints currency at zero cost.

It’s factually correct Fed prints USD at zero cost. This is nowadays called QE. In fact all central banks have the power to simply add some currency to their accounts which they later use to buy foreign currency assets. This is indeed what is traditionally meant as seigniorage.

In the whitepaper seigniorage is described as Luna burn. It sounds like the concepts are different. Luna must have value for seigniorage happen, and the value surely can only come from the payments economy. So I also do not get why the Chai paper makes it sound like the Chai system can continue pay out rewards which are earned from seignorage. Surely the rewards are only temporary and in the long run in fact the Chai system needs to generate fees, otherwise value of all Luna will go to zero. Am I right?

What are your thoughts

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Hey votya, welcome to the Terra community.

  • There is a parameter in the treasury module of Terra Core called reward-weight - this parameter controls the proportion of Luna that is swapped to mint new Terra that is burned, while the remainder is 1) rewarded to validators that vote stablecoin prices accurately in the on-chain oracle, and 2) airdropped to the community pool to fund apps like Chai. Currently the reward-weight is 0.5, meaning that half the swap is burned and the other half used for onchain subsidies.
  • The only point being argued on the paper above is that 1) there is natural stickiness to payments that makes it easier to reason about long-term, low-volatile steady growth, 2) such growth allows seigniorage to be used in constructive ways. this is perhaps also helpful to read.

Now that we will be burning all seignoirage with C-5. Will Chai be able to maintain discounts for users without the seignoirage being used to fund additional discounts?