Thread by @terra_money

For the first time in Terra’s history, seigniorage distribution to the validators/delegators and the community pool has occurred due to the sharp increase in UST demand -- equating to 24 million LUNA. This is NOT newly minted LUNA.

For some context, the Terra blockchain records "decreased LUNA supply during a week" as accrued seigniorage. The seigniorage is spent in two ways:

1. Oracle rewards: distributed to validators + delegators as staking rewards => increase staking rewards (released over 52 weeks).

2. Community pool: the treasury for the community.

The total seigniorage of the current epoch was 24 million LUNA -- half goes to 1 and the other half goes to 2. In the link below, you can find the (RewardWeight) that decides what portion goes to the oracle reward. In this case, it was 50 percent.

lcd.terra.dev/treasury/rewar…

So, 12 million LUNA is distributed as oracle rewards to validators/delegators and the other 12 million is allocated to the community pool -- the latter is locked (non-circulating) until the community governance decides how to allocate the funds.

Theoretically, the community could burn the entire supply, use it for community initiatives to fund other projects on Terra, or determine some other use of the funds. The choice is theirs.

Important note -- Oracle rewards are released smoothly over a 1-year period, so the LUNA is excluded from the circulating supply. If distributed, it is automatically reflected in the circulating supply.

The protocol is functioning as outlined in the whitepaper. There are also two important recent developments to highlight that triggered the event:

1. Demand for Terra stablecoins has never been high enough to instantiate seignorage at this scale.

2. An 18-week probation period that was a governance adjustment from the recent Columbus 4 core update was lifted after the end of last week’s epoch, executing the above events.

The probation period (e.g., temporary tax rate freeze) was implemented to stave off incremental increases in the tax rate until sufficient reward history (pre-Columbus 4) had been established and volume uptrend resumed. Both have now occurred.

The Agora proposal (applied to Columbus 3 too) from last year that was deployed again for the Columbus 4 update is below.

agora.terra.money/t/proposal-to-…

Now that demand for UST is soaring and the probation period is lifted, seigniorage is generating revenue for validators and the community treasury. The virtuous cycle of Terra’s incentives is now fully churning -- seigniorage fueling the community growth of the Terra economy.

To conclude with some TLDR:

Excessive demand for UST created significant incentives to burn LUNA via the riskless arbitrage trade. Since LUNA’s supply decreased by roughly 24 million in the previous week, the protocol applies the large decrease in LUNA as accrued seigniorage.

This rewards LUNA validators for absorbing short-term volatility of Terra stablecoins (released over 52 weeks) and allocating the remaining funds to the community (locked) based on the RewardWeight function of the specific epoch.

The Terra API has been updated to exclude the community pool and oracle rewards from the circulating supply.

For more technical details, you can refer to the Terra whitepaper or formal documentation. For a visual explainer, you can refer to the video in the YouTube link below about how Terra works.

terra.money/Terra_White_pa…

docs.terra.money