Seigniorage
Definition
In crypto, seigniorage refers to the profit a stablecoin protocol makes from issuing tokens that cost less to create than their face value. Algorithmic stablecoins use seigniorage mechanics: when demand increases, new tokens are minted (generating seigniorage profit), and when demand decreases, tokens are burned or bonds are issued to contract supply. This model has historically been fragile.
Example
Basis Cash and Empty Set Dollar used seigniorage models: when the stablecoin traded above $1, new tokens were minted and distributed to holders, but both ultimately failed to maintain their pegs.
Risks to Consider
- Death spiral risk
- Peg instability
- Reflexivity / bank run dynamics
Common Questions
Why have seigniorage stablecoins failed?
Most seigniorage stablecoins (ESD, Basis Cash, UST) failed because the mechanism to contract supply during downturns was too weak. Once confidence breaks, the death spiral makes recovery nearly impossible.
