Summary

The Basics

Overview

Empowering USC and CHI

Chi Protocol introduces the first permissionless and capital-efficient stablecoin with embedded sustainable rewards. USC represents a new form of DeFi-native money that operates without reliance on centralised venues and offers top-tier scalability, providing users with an advanced, frictionless experience.

The core components of Chi Protocol are supported by LST and LRT reserves, dual stability mechanisms, and automatic risk management practices to mitigate collateral price risk. These mechanisms ensure that holders of USC, stUSC, and wstUSC benefit from stability, sustainable yields, and censorship resistance, while also accessing enhanced liquidity through their composability across the DeFi ecosystem.

In addition, our well-structured logic rewards governance token holders. CHI is backed by real value, as reflected in the protocol’s reserves. By staking CHI/ETH LP tokens and holding veCHI, users can earn rewards generated by the LRTs and LSTs within the stablecoin reserves, aligning their interests with the long-term success of the protocol.

Dual Stability Mechanism

USC maintains relative price stability to USD through the Dual Stability Mechanism (DSM).

The DSM logic is embedded within the arbitrage contract, which detects arbitrage opportunities whenever the price of USC deviates from $1 or when the USD value of the protocol's reserves does not align with the total circulating supply of USC.

This mechanism ensures that USC remains stable and fully redeemable, even under varying market conditions.

Unlike delta-neutral stablecoins, Chi Protocol does not hedge the price risk of the underlying collateral. Instead, it employs the Dual Stability Mechanism (DSM) with embedded risk management practices to maintain USC's value at $1 and ensure the system's solvency.

Various Market States

As dictated by market conditions, the Dual Stability Mechanism (DSM) plays a crucial role in different states, actively influencing the protocol's operations to maintain stability and solvency.

USC > $1

Arbitrage is executed only when it is profitable. When USC trades above $1, the profitability of the arbitrage is calculated as follows:

Arbitrage Profitability (above $1) = ethAmountReceived - deltaInETH

• ethAmountReceived: The amount of ETH received by swapping the delta USC for ETH.

• deltaInETH: The value of DeltaUSC measured in ETH terms.

For example, if deltaInETH is equivalent to 0.5 ETH worth of USC and the ethAmountReceived through swapping USC for ETH is 0.6 ETH, then the arbitrage is profitable.

USC = $1

TotalMintedUSC represents the amount of USC sitting idle in the arbitrage contract, which accumulates when USC trades at $1 and the protocol's reserves are in excess. In scenarios where USC trades at $1, there is no rewardAmount.

USC < $1

In scenarios where USC trades below $1, the reward amount from arbitrage is calculated based on the reserve status:

• When Reserves are in Excess:

  • rewardAmount = uscAmountReceived - uscAmountToFreeze - uscAmountToBurn

• When Reserves are in Deficit:

  • rewardAmount = uscAmountReceived - uscAmountToBurn

These calculations ensure that the rewards are adjusted according to the current reserve status, incentivising the stabilisation of USC's price while managing the system's overall balance.

Definitions

Excess Reserves = Reserves Value ≥ USC Total Supply Deficit Reserves = Reserves Value < USC Total Supply Equilibrium Reserves = Reserves Value = USC Total Supply Delta = Amount of USC to be added or removed from the liquidity pool to make USC = $1 Reserve Difference = Reserves Value - USC Market (if excess), USC Market Cap - Reserves Value (if deficit)

More on DSM More on DSM Scenario Analysis

Protocol Revenue

Chi Protocol generates revenues from two sustainable sources:

1. LST and LRT Rewards

The revenue generated from Liquid Staking Tokens (LSTs) and Liquid Restaking Tokens (LRTs) is both variable and scalable, primarily denominated in ETH. As the protocol's reserves grow, this yield source has the potential to increase over time, providing a significant revenue stream.

The yield from LSTs and LRTs is primarily distributed to CHI lockers and CHI/ETH LP stakers, making CHI the first governance token tied to real, tangible value. As the USC market cap expands, the incentives to buy, stake, and lock CHI grow, driven by the increasing yield resulting from larger protocol reserves.

2. DSM Arbitrage

The internalised arbitrage revenue generated by the Dual Stability Mechanism (DSM) is also variable and primarily denominated in USC. As the protocol’s Total Value Locked (TVL) increases, the arbitrage revenue rises, though it remains influenced by ETH volatility and USC demand.

The arbitrage revenue serves two main purposes:

• Incentivising Rewards: Rewards are provided to stUSC and wstUSC holders, enhancing their balance and values.

• Building Protocol-Owned Liquidity: Additional protocol-owned liquidity is created to mitigate the volatility risk of the underlying collateral, ensuring greater stability for the protocol.

More on Sustainable Reward Sources More on Rewards Generation & Distribution

Collateral Risk Management

Since our priority is censorship resistance over centralisation, Chi Protocol does not back USC with fiat-backed stablecoins, nor does it rely on centralised exchanges for delta hedging. As a result, the protocol retains exposure to the volatility of ETH. To mitigate the risk of potential defaults, Chi Protocol automatically distributes ETH's volatility risk across various protocol stakeholders, a process integrated into the logic of the Dual Stability Mechanism (DSM). Multiple layers (or tranches) of risk with calibrated rewards are established, operating on a simple principle: higher risk equals higher rewards.

The protocol stakeholders include the protocol itself, governance token holders, and stablecoin holders. The seniority of tranches is characterised by several key factors:

1st Junior Tranche

The protocol gains additional liquidity when the price of ETH appreciates, as USC is minted and deposited into the arbitrage contract. Conversely, it is the first to lose liquidity when the price of ETH declines, as USC is burned from the arbitrage contract. This dynamic allows the protocol to effectively manage protocol-owned liquidity in response to ETH price fluctuations.

2nd Junior Tranche

CHI/ETH liquidity providers are next in line after the protocol. They earn the highest percentage of LST/LRT rewards due to the risks they undertake. However, if the protocol exhausts its USC liquidity within the arbitrage contract, CHI/ETH LPs are responsible for absorbing the protocol's bad debts. This arrangement offers substantial rewards to LPs while also placing them in a position to help stabilise the system during adverse conditions.

Mezzanine Tranche

The reserve fund accumulates revenue from multiple sources, including arbitrage rewards from the Dual Stability Mechanism (DSM), ETH staking/restaking yields, and protocol fees. In situations where CHI liquidity is insufficient to cover the protocol's bad debts, the reserve fund acts as a last-resort mechanism, stepping in to ensure the stability and solvency of the system. This structure provides an additional layer of security, safeguarding the protocol against potential liquidity shortfalls.

Senior Debt

USC token holders enjoy the highest seniority and the lowest risk within the protocol. USC is secured by collateral in the form of ETH, LSTs, and LRTs. Additionally, by staking USC, holders receive a portion of the protocol's revenue generated through DSM arbitrage. This structure provides USC holders with both security and a share in the protocol's earnings, making it a stable and rewarding asset within the ecosystem.

More on Collateral Risk Management More on Reserve Fund More on CHI/ETH LPs