Seigniorage and Nebula Finance's Expansion Rewards
In economic terms, seigniorage is the profit a government makes from issuing currency, particularly the difference between the face value of coins and their production costs. However, in the context of decentralized finance and specifically the Nebula Finance protocol, seigniorage takes on a slightly different meaning.
In Nebula Finance, seigniorage is the process by which new NSH tokens are minted and distributed to stakers (the Conclave) during the Expansion phase, when the price of NUSD is above the target peg of $1. This process rewards users who stake their tokens, providing them an incentive to participate in the system.
However, to prevent shock to the system, the amount of seigniorage rewards distributed daily is capped at a certain percentage based on the NUSD market cap. The following table outlines the distribution limits:
under $1M
4%
$1M+
3%
$2M+
2.5%
$5M+
2%
$10M+
1.75%
$20M+
1.50%
$50M+
1.25%
$100M+
1.00%
$200M+
.75%
$500M+
.50%
$1B+
.25%
This mechanism ensures a smooth distribution of rewards over time, maintaining the stability of the protocol while still providing substantial incentives for stakers.
As an example, say on Day 1, the initial minting of NUSD was worth $30k, marking the initial market cap of NUSD. Once the protocol is live, many users begin to purchase NUSD for staking and farming. As a result, the market cap increases to $50k in the first day. This increase of $20k in market cap indicates that the protocol has entered the Expansion phase.
In the Expansion phase, seigniorage rewards are triggered. In this case, the seigniorage rewards would be equivalent to the increase in the market cap, which is $20k. This $20k will then be used to mint new NSH tokens.
However, to prevent any shock to the system and maintain stability, these newly minted NSH tokens will not be distributed all at once. Instead, they will be distributed gradually to the Conclave stakers at a rate of 4% of the market cap per day, given the current market cap is under $1M.
So, on the first day of the Expansion phase, Conclave stakers would receive seigniorage rewards worth $2k (4% of $50k), in the form of newly minted NSH tokens. This process would continue daily, with the amount of rewards adjusting as the market cap changes, until all the seigniorage rewards are distributed.
It's important to recognize that in the early stages of a stablecoin launch, rapid growth in market cap is common. This growth is typically fueled by the initial excitement and interest around the new protocol, as well as the early adoption incentives such as farming and staking rewards.
As a result, the market cap can increase significantly day by day, leading to an increase in seigniorage rewards. This means that early Conclave stakers stand to benefit greatly from these seigniorage rewards, as the amount they receive daily can increase along with the growing market cap. Moreover, as the market cap crosses certain thresholds, the daily percentage payout will also increase, leading to even more substantial rewards for Conclave stakers.
If on the second day the market cap of NUSD hits $100k, the seigniorage rewards for that day would be calculated as follows:
The increase in market cap from the first day to the second day is $100k - $50k = $50k.
However, since the rewards are distributed at 4% of the total market cap per day when it's under $1M, the total amount of seigniorage rewards distributed to Conclave stakers on the second day would be 4% of $100k, which equals $4k.
The rewards to continue to pile up and be paid out daily according to the current distribution rate based on market cap.
It's worth noting that this is the total amount of seigniorage rewards distributed to all Conclave stakers. The individual amount that each staker receives would depend on the proportion of the total staked amount that they have staked.
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