Perhaps the most powerful and exciting part of designing a stablecoin is the allocation of seigniorage — the profit generated from growth in money supply. It is the “budget” that the system receives to achieve its goals, and it is where the game is won or lost. Many stablecoins never have to face this question — fiat-backed stablecoins have no seigniorage, for instance, since there is no profit in money creation. We happen to think that seigniorage, if used wisely, is what makes stablecoins potentially very powerful.
The Terra protocol leverages seigniorage to achieve its twin goals of stability and adoption. Seigniorage allocated to mining rewards is a means of funding stability — it creates more stable demand for mining and thus stronger defense against Terra’s volatility. Remaining seigniorage is funneled to the Treasury, whose mandate is to stimulate Terra’s growth and adoption. National governments use expansionary fiscal spending with the goal of achieving a multiplier effect on the money spent and thus stimulate growth. The Treasury is tasked with doing the same for Terra’s economy, in a fashion that is more focused and hopefully more effective.
One of our core objectives in designing the Treasury’s funding mechanism has been to make it lean and transparent, relying on the discretion of stakeholders only when necessary. DApps building on Terra’s platform need to register with the Treasury with a specific funding proposal, subject to an approval vote from miners (and a potential blacklist vote if they are deemed to behave dishonestly). This is where the control that miners exercise ends: the funding itself is determined programmatically using what we call a “funding weight” — a measure of how effective the Treasury expects spending on that dApp to be. Funding weights are determined to reward (1) robust economic activity and (2) efficient use of funding. The motivation behind funding weights is to maximize the impact of the stimulus on the economy by rewarding the dApps most likely to instigate growth. As an example of what a funding program might look like, in an earlier post we laid out a design for efficient use of seigniorage by a payments dApp built on the Terra platform. Funding weights are more formally defined in the white paper.
A key advantage of distributing funding in a programmatic way is that it is simpler, more objective and more transparent compared to open-ended voting systems, such as in one of our earlier designs. Decentralized voting systems are notoriously hard to design and have a wide attack surface, including collusion and pork barrel spending. Our Treasury mechanism is narrower in scope and less susceptible to those attacks. It also requires less trust in miners, whose only authority is to screen dApps for honesty and legitimate use of funding.