Proposal to burn all seigniorage 🔥

Proposer: Do Kwon (Founder, Terraform Labs)

Background

To first define nomenclature, when Luna is burned to mint new Terra stablecoins, the amount of Luna burned is “seigniorage” as described by the treasury module in Terra Core.

Currently, every treasury epoch, roughly 1 week, a portion of the seigniorage is routed to:

  • Fund the community_pool: goes to a keyless on-chain wallet that is controlled by Luna governance to fund various initiatives in the Terra ecosystem.
  • Reward Luna stakers: goes to a reward pool, which is distributed over 1 year to delegators to validators that vote within a certain reward_band from the elected median of stablecoin oracle votes.

More details on how this mechanism works are here: Treasury | Terra Docs

As discussed by the community, given the rapid pace of seigniorage generation, too much seigniorage is being routed to the community pool and oracle reward pools, leading the community pool and the oracle reward pool to be overfunded, and this trend is likely to continue unless something is done about it.

High Level Proposal

This proposal will be a series of several on-chain proposals to:

  • Burn all remaining funds in the community pool
  • Route all future seigniorage to be burned instead of being routed to community / staking reward pools
  • Amortize the distribution of the existing oracle_reward_pool to 3 years instead of the current 1 year

Execution

  1. TIP 42: Allow reward_weight to be changed to 0
    Initiate a ParameterChangeProposal to set RewardPolicy.RateMax = 0, RewardPolicy.RateMin = 0. This will allow us to set the reward_weight to 0 in prop 43, which will route all future seigniorage to the community pool.

  2. TIP 43: Update reward_weight to 0
    Initiate a RewardWeightUpdateProposal to set reward_weight to 0.

  3. TIP 44: Burn the community pool
    Initiate a CommunityPoolSpendProposal to burn all remaining funds in the community pool. The funds will be sent to a contract which will send tokens to a burn address, namely: 0000000000000000000000000000000000000000 = terra1qqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqq486l9a

  4. TIP 45: Amortize oracle reward distribution to 3 years from 1 to slow down oracle reward emissions
    Initiate a ParamChangeProposal to change the RewardDistributionWindow of the Oracle to 5256000 * 3

Impact

The intended impact of these changes are:

  • Will simplify the narrative of Luna economics to all the fees goes to staking returns for Luna, and minting 1 UST stablecoin burns $1 worth of Luna.
  • Will leave the community pool well funded, as new distributions will occur as the proposals are in voting period, while preventing it from becoming overfunded.
  • Staking rewards will be kept attractive but not insane.

Housekeeping to follow

After Columbus-5, additional logic will be introduced to route swap fees for stablecoins to the oracle reward pool instead of burning it - this will keep Luna staking attractive, while the narrative of burning all seigniorage and routing all fees to Luna staking will help the system become much easier to understand.

After this proposal, all seigniorage will start to be routed to the community pool - regular proposals to burn proceeds will need to occur, which I am happy to initiate. After Columbus-5, code changes will need to occur to burn all seigniorage automatically without involving governance votes.

This proposal will go live in a few hours.

16 Likes

Just fantastic. Love the focus on simplicty and buring.

3 Likes

“Staking rewards will be kept attractive but not insane” sounds very sensible.

But is there an economic explanation on why staking rewards shouldn’t/can’t remain extremely attractive (insane is a loaded word) if it is feasible to do so?

Another Q is, wouldn’t it be interesting to use (at least part of) the community pool as over collateral for keeping the UST (and others) peg in case of shocks?

PS: I wish there was at least a couple days for discussion here before being put up for vote.

4 Likes

I think the 800m SDR remains on hand to deal with system shocks.

Personally, I don’t think reducing seigniorage rewards to “simplify the narrative” is too important.

“Rewards go up” is a fairly strong narrative already.

I’m going to discuss this with a few of my newer to crypto friends and see what jives with them best.

Also, spreading the oracle rewards to 3 years should smooth rewards if Chai fees are not yet at their potential. Very much agree here.

3 Likes

Keep in mind that funds will continue to go to the community pool until columbus-5 - we could debate what to do with funds as they come in then

5 Likes

At the end of the day if the king has proposed it, enough said

I think it’d be a good idea to give some rewards to those staking their LUNA

21 days is like 4 lifetimes in crypto, giving people a little extra nudge to lock their LUNA up is not a bad idea I think especially for further down the road

Maybe something like 70% burn → 20% to oracle rewards → 10% community pool

Although, I must agree, I do like simplicity of the narrative as stated.

1 Like

The proposals to burn all LUNA from seignorage has reached quorum so there is a high likelihood to pass.

Note that columbus-5 could make LUNA staking will yield 10% as swap fees will not be burned but given to LUNA stakers.

1 Like

The original proposal of Terra was to leverage seignorage to help bootstrap demand for wallets that use Terra currencies as a backbone, such as Chai.

While I agree that the landscape has changed a bit, I don’t understand why we should burn all seignorage. Will there be no need to fund spending inside the Chai wallet or other wallets eventually? I still think these kinds of promotions are super attractive and will continue to be an amazing driver of users and volume to Terra.

4 Likes

Its not so much that we want to burn all seigniorage, but that it has become too much. With luna at 10 dollars, the community pool will be well funded even after the latest props pass (hundreds of millions), and arguably do not need to be further funded for some time.

What do you think?

2 Likes

What if we burn that LUNA seignorage (or a small percentage of it) by minting UST or KRT for the community fund which then, in turn, could use these funds to incentivize spending in wallets/frontends that use Terra?

Just burning all of it for good feels like a missed opportunity.

On the other hand, it would also be pretty cool if we would’ve burned almost 10% of the total supply then.

1 Like

We will have 200M usd worth in the community pool

Any more is too much imo

2 Likes

Definitely think it’s a good balance. Keep some dry powder for initiatives while burning excess.

Hrmm if the community pool is over funded might there not be other creative ways to use it to expand terra network or bring others in? Not saying don’t burn it now, does seem it is rather over (and voted to burn it already :wink: ). One little thought I had was using over funds to somehow discount gas prices at cross overs to terra from eth or btc (eth.mirror.finance being one place), maybe even give miners on those chains the option of how they’d like their fee covered or partially covered such as in a terra stable coin or luna. Might make it easier, cheaper for users and devs of all the various dApps on etherium to support terra protocol. A gas promotional fund. Haven’t thought it out well enough for a proposal or any such, just this proposal regarding over funds triggered it.
Speaking of miners and their fees and eth… wonder if there is a way to encourage them to board starship terra that will give them a bit of an exit strategy / welcome place for when eth goes proof of stake and a way to utilize / repurpose their computing power without creating energy crisis.

Hi Do,

We would have to monitor the staking ratio because the effect of a buy-back and burn model is that the benefit of seignorage rewards will now benefit all LUNA holders, instead of just LUNA stakers. This proposal reduces the incentives to stake LUNA.

That leaves swap fees and fees earned from tax rate as the main drivers of LUNA staking rewards. If the proposal to amortise oracle rewards over 3 years instead of 1 year is also passed, the staking yield might be drastically decreased over the first 3 years.

LUNA staking enhances the security of the ecosystem, and also increases the velocity of money for LUNA, which ultimately benefits LUNA in a virtuous cycle.

Ultimately though, i would vote to pass this proposal. We can experiment with a 100% seigniorage burn and see what happens to staking ratio. If it works out (i.e. staking ratio remains stable), that is the best outcome because we get the clear narrative (that 100% of seignorage is burned). In the event that we do see staking ratio decrease, we can consider reducing from 100% to something like 80% seignorage burn, with 20% going to LUNA stakers.

2 Likes

You’ll need to put some numbers behind that claim though
Do mentioned that Terra tx fees + Terra / Luna swap fees were estimated to set the Luna staking yield at 10/15% roughly.

Is there a reason why TIP 42 and TIP 43 are in voting again? Weren’t both passed last week?

Looks like there was a parameter error, so they’ve been resubmitted - it’s the same proposals with the same intended effect, please vote again!

I miss the good old days when the fudsters could clearly articulate objections.

1 Like

Not at all lol not sure what improved here - it’s the same incomprehensible text dump.

A quick tip is to run things through a spellcheck & cut out clutter before posting