Seigniorage

Seigniorage is an economic concept describing discrepancies in the face value of a money and the cost required to produce it. Mechanisms based on seigniorage underly most algorithmic, non-collateralized stablecoins and are used to manipulate supply and influence market forces such that an asset’s market price stays within a target range. For example, suppose the price of a USD-pegged stablecoin falls to $0.95. In that case, a seigniorage-based cryptoeconomic system may allow users holding this stablecoin to burn it in exchange for $1 worth of another cryptoasset and realize the $0.05 discrepancy as profit. Such a mechanism reduces the supply of, and places buy pressure on the stablecoin, theoretically increasing its market price and restoring its peg.