LUNA is the native token of the Terra blockchain. The seigniorage is the profits for issuing a currency, which comes from the difference between the coins’ face value and production costs. When the seigniorage is positive, the government makes an economic profit. On the other hand, if there is a negative seigniorage, the yields will be negative.

The open financial infrastructure facilitated by the Terra blockchain protocol supports stable programmable payments.  There is a basket of fiat pegged stable coins providing for the seigniorage of the network.  LUNA algorithmically provides for the price stability of the Terra stable coins. LUNA is the foundational asset for the entire Terra Ecosystem.

The mechanisms which secure the price stability of the Terra stable coins set the controlling model for the incentives for the validators.

Those who stake their value in LUNA risk the process of maintaining a long-term position in a fluctuating asset.  Thus, LUNA holders and delegators are provided with staking rewards and incentives to maintain long-term ownership by holding LUNA.  LUNA holders get their rewards from gas fees, a.k.a. computing fee, taxes, and seigniorage rewards.

The protocol mints and sells Terra to the market based on the demand.  Terra Network has algorithmic mechanisms in place to sustain the price stability of stable coins. The supply of stable coins is adjusted according to the fluctuations in demand.  When there is an increase in the transactional volume, the extra demand is provided by the process of “expansion.”

One newly-minted Terra SDR has more value than its peg.  Individual arbitrageurs make profits by buying 1 Terra SDR for 1 SDR of Luna. Thus, they will be gaining risk-free profits from the difference.

When there is an increased demand for newly minted TerraSDR, the value is collateralized by LUNA.  LUNA is used to purchase the TerraSDR.  Since LUNA is used to buy the TerraSDR, the value of the TerraSDR is stored in LUNA, and it is, therefore, the seigniorage owned by the Terra Network.  Thus, it represents the profit gained from minting Terra.

When there is a decline in the need for Terra, there is a decrease in transactional activity. Decreased transactional volume means decreased price.

The protocol level market maker for the “Terra/Luna swaps” facilitates the elastic monetary policy. The balancing act in the protocol is the process of exchanging value back and forth across the “stable currency” and “collateral.”    The balancing act provides stability to provide for the protection against volatility; however, a perfectly stable asset requires a certain level of demand to persist through extreme circumstances of volatility.

If there is no demand to uphold the peg and there is an exceptionally large fall in demand for Terra and the LUNA dips below – the system fails.  Therefore, incentivizing the miners through times of booms and busts becomes imperative.