Sustainable Reward Sources

Sustainable, Decentralised and Transparent Sources of Rewards

Chi Protocol is a revenue-generating platform with a transparent reward distribution mechanism that benefits all stakeholders. The rewards generated within Chi Protocol come from two primary sources:

1) ETH Staking and Restaking Rewards:

The protocol earns yield from staking and restaking ETH, which contributes to the overall revenue and is distributed among stakeholders.

2) Internalised Arbitrage through the Dual Stability Mechanism:

The DSM enables profitable arbitrage opportunities within the protocol, generating additional revenue that is shared among stakers.

This dual-source revenue model ensures that all participants in the Chi Protocol benefit from the system's growth and stability.

Reward Sources & Distribution

As of today's date, the LST and LRT rewards generated by the protocol's reserves are allocated as follows:

• 80% to CHI/ETH LP Stakers

• 15% to veCHI Holders

• 5% to USC/ETH LP Stakers

These allocations ensure that the rewards are distributed among the key stakeholders in proportion to their contributions to the protocol's stability and liquidity.

Example

Suppose the protocol's reserves are worth $5 million, and the average annual yield of the protocol's LSTs and LRTs is 3%. This means that the protocol is currently generating $150,000 in yearly rewards from the USC reserves, which are distributed as follows:

• $120,000 to CHI/ETH LPs (80%)

• $22,500 to veCHI Holders (15%)

• $7,500 to USC/ETH LP Stakers (5%)

By providing liquidity in CHI/ETH, USC/ETH, and locking CHI, users benefit from the growth in the protocol's reserves. This strategy not only gains from the increase in Total Value Locked (TVL) but also provides a sense of predictability and stability for the users' positions within the protocol.

Staking

Staking ETH and holding Liquid Staking Tokens (LSTs) enables the generation of rewards through the following mechanisms:

1) Inflationary Rewards at the Consensus Level:

These rewards are generated from the protocol's issuance of new ETH to stakers as part of the consensus mechanism. This component is predictable and forms the base of the staking rewards.

2) Transaction Fees Paid at the Execution Layer:

Stakers also earn a share of the transaction fees paid by users on the network. The amount of these rewards depends on the level of transactional activity on the blockchain, making it a variable component.

3) MEV Rewards Captured by Stakers:

MEV (Miner/Maximum Extractable Value) rewards are earned by stakers who capture additional value from the ordering and inclusion of transactions in a block. This component depends on the opportunities available within the network and adds an extra layer of potential rewards for stakers.

These components combine to provide a comprehensive reward structure for ETH stakers and LST holders, balancing predictability with the potential for higher returns based on network activity.

stETH Historical APR

Throughout mid-2023, APR remained relatively stable, with occasional peaks reflecting high network activity. By late 2023 to mid-2024, APR demonstrated a steady trend towards 3-4%, showcasing a mature PoS environment with consistent rewards for stakers.

Restaking

Restaking has gained substantial attention since late 2023. It involves using staked ETH to secure additional protocols, thereby earning extra rewards. This process allows stakers to leverage their staked ETH not only to support the Ethereum network but also to secure other protocols, such as EigenLayer, and earn protocol-specific rewards or points in return.

This approach enhances the utility of staked ETH, enabling stakers to maximise their returns by participating in multiple layers of the ecosystem, further driving the adoption and evolution of decentralised finance.

LRT TVL Breakdown

Restaking enhances Ethereum’s security features by extending them to a wide range of network applications, including decentralised applications (dApps), oracles, and layer-2 sidechains, collectively known as Actively Validated Services (AVSs). EigenLayer has played a pivotal role in implementing this mechanism, significantly transforming Ethereum’s crypto-economic security landscape. By enabling staked ETH to be reused for securing AVSs, restaking not only strengthens the security of these services but also maximises the utility of staked assets, making Ethereum more robust and versatile.

Arbitrage revenue from DSM

When USC trades below 1 USD and there is a mismatch between the protocol's reserves and the outstanding stablecoins in circulation, an arbitrage opportunity arises, allowing the protocol to earn a real source of revenue denominated in USC. This arbitrage revenue in USC is generated in the following scenarios:

Arbitrage Revenue Generation & Distribution

Once the arbitrage is executed, the rewards are preserved within the arbitrage contract. The protocol retains the flexibility to allocate these rewards in various ways, including:

1) Reward Distribution for stUSC Holders:

A portion of the rewards can be distributed to stUSC holders, incentivising users to stake USC and participate in the protocol's stability and growth.

2) CHI Buybacks:

The governance may decide to use the rewards for CHI buybacks, which can help support the price of CHI, reduce its circulating supply, and enhance its value for holders.

3) Initialising New Incentive Programs for LPs:

The protocol can allocate rewards to launch new incentive programs for liquidity providers (LPs), encouraging them to provide liquidity to USC-related pools and further strengthening the protocol's market presence.

These options provide the protocol with strategic tools to enhance its ecosystem, reward stakeholders, and maintain a healthy, sustainable environment for growth.

In the initial phases of the protocol, the primary focus is on growing Total Value Locked (TVL), leading to high incentives for stUSC holders. This strategy aims to attract more users to stake USC, thereby increasing the protocol's liquidity and overall market presence. By offering substantial rewards to stUSC holders during these early stages, the protocol encourages participation and helps establish a strong foundation for future growth and stability.

More on DSM Scenarios More on Rewards Generation & Distribution More on Arbitrage Revenue Analytics