Coupon Mechanism in TSD
What is a coupon?
Coupon is the method used to shrink the money supply. Simply, the protocol offers an incentive for users to voluntarily burn their TSD, and in return an amount of coupons, the amount of TSD burned multiplied by the premium, are issued in place of the burned TSD. When the money supply grows again the coupon holder may redeem their coupon for TSD at a one-to-one ratio. The risk associated is that if that coupon is not redeemed within a certain amount of time, (720 epochs under current protocol) that burned TSD is gone.
What are the current mechanics?
The coupon premium is based on the ratio of debt vs supply within the protocol. As the debt ratio increases the premium will increase along a curve. The current maximum for debt is 35% of the total supply and the maximum premium is 45.56%.
For clarification purposes, each epoch that passes with the TWAP under $1 the debt will grow, and in turn, the premium will too. Under the status quo, the debt increase maxes out at 4% per epoch, for a total maximum 35%. If the TWAP price is over 1 at the advancement of an epoch then coupons will be redeemable, and the debt is reverted back to 0, and with it the premium.
By burning the TSD for coupons the supply is shrinking and in it’s place coupons are created. These coupons will be redeemable if/when TSD’s goes back up over $1. The premium as a function of the debt ratio (R = debt/supply) is given as follows:
Example: Let’s say you own 100 TSD. The TWAP drops to .30 during an epoch, and hovers around that area for a few epochs until enough debt accumulates such that there is a 20% premium available as an incentive to burn your TSD. You decide to burn your 100 TSD and in it’s place you would be given 120 coupons that are redeemable for 120 TSD within 720 epochs.
Do Coupons Expire?
Currently, 720 epochs after coupons are created they expire, rendering them unredeemable.