Basic Features

Chi's Fundamental Concepts

Decentralised, capital-efficient and sustainable stablecoin protocol

Protocol Core Principles

Decentralisation, capital efficiency and sustainability are at the core of Chi Protocol. Users mint USC in a permissionless fashion and, by staking USC, earn rewards on their notional at par with the same value of collateral deposited in the protocol's reserves. The rewards generated by the LST and LRT reserves are distributed among all stakeholders, including LPs and veCHI holders.

Below are the basic features and concepts:

1. Collateralisation

To mint USC, users must deposit ETH, LSTs and LRTs in the protocol’s reserves and mint USC at 1:1.

Minting USC

Example: Bob deposits $1,000 worth of ETH as reserves and, in exchange, receives 1,000 USC

2. Reserve Backed Stablecoin (Not CDP)

By minting USC, users are not borrowing against their collateral. Instead, they deposit assets in the protocol's reserves and receive USC in exchange. Minting USC is also interpreted as a zero slippage swap with Chi Protocol's AMM.

Minting & Redeeming USC

Example: Bob deposits 1 ETH as reserves and receives 3,500 USC in exchange. Assume one month has passed, and the price of ETH has doubled. By redeeming 3,500 USC, Bob receives 0.5 ETH.

Alternatively, assume that after one month has passed, the price of ETH has halved. Bob receives 2 ETH by redeeming 3,500 USC. Note: The price of ETH is assumed to start at $3,500

More on Reserves Analytics More on Minting and Redeeming USC

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3. Dual Stability Mechanism (DSM)

A dual stability mechanism is implemented to maintain the peg of USC at $1 and preserve the system's solvency.

The mechanism considers the price of USC ( > $1, = $1, < $1) and the state of the protocol's reserves with respect to the USC market cap ( CR > 100% = in excess, CR = 100% = in equilibrium, CR < 100% = in deficit) to define an arbitrage opportunity.

Dual Stability Mechanism Scenarios

Once the arbitrage is identified, the stability mechanism is triggered, bringing the system back to an equilibrium level (USC = $1, CR = 100%). More on DSM More on Collateral Risk Management

4. Rewards Generation

Each time the protocol stabilises the price of USC at the peg and restores the system’s collateral ratio, arbitrage revenue is generated and preserved within the protocol. The revenue in USC derives from four scenarios:

Rewards Generation in USC

Below is a detailed visual description of each arbitrage scenario generating revenue in USC.

Below $1 and Excess Reserves

The protocol uses the system’s reserves to repurchase USC from the Uniswap pool, brings the price back to $1 and retains the repurchased USC within the arbitrage contract.

Below $1 & Excess Reserves

At $1 and Excess Reserves

The protocol mints the excess collateral in USC and preserves it within the arbitrage contract.

At $1 & Excess Reserves

Below $1 and Deficit Reserves

The protocol mints the necessary amount of CHI to bring the price of USC back to $1 and retains the arbitrage revenue in USC within the arbitrage contract. The protocol arbitrages the difference between $1 and the USC market price in this specific scenario.

Below $1 & Deficit Reserves

Below $1 and Equilibrium Reserves

The protocol uses the system’s reserves to repurchase USC from the Uniswap pool, brings the price back to $1 and retains the arbitrage revenue in USC within the arbitrage contract. The protocol arbitrages the difference between $1 and the USC market price in this specific scenario.

Below $1 & Equilibrium Reserves

While a fraction of the USC in the arbitrage is distributed to stUSC, the rest is kept within the contract and used as excess liquidity to defend the protocol’s solvency in cases where the collateral ratio falls below 100%.

More on Sustainable Rewards Sources More on Rewards Generation & Distribution

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5. Yield-bearing Stablecoins

A user staking USC receives stUSC - the yield-bearing version of USC- a rebasable ERC-20 token. In addition, stUSC can also be wrapped for wstUSC - value accruing ERC-20 token. A few characteristics of stUSC and wstUSC:

stUSC vs wstUSC

For both yield-bearing tokens, all staking rewards are received by users and Chi Protocol takes zero fees on rewards.

More on Staking USC More on stUSC More on wstUSC

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6. Reserves Rewards Distribution

LST & LRT Rewards Distribution

The LST /LRT rewards generated by the reserves are distributed to various protocol stakeholders:

• 80% of the total rewards to CHI/ETH LP stakers

• 15% to veCHI holders

• 5% USC/ETH LP stakers

More on Sustainable Rewards Sources

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7. veCHI

Users have the ability to lock CHI, the governance token of Chi Protocol, in exchange for veCHI (voted escrowed CHI), which entitles its holders to the following benefits:

• Voting power - The veCHI amount received by users is subject to the lock duration - the longer the lock period (between 4 weeks and 4 years), the greater the amount of veCHI, the higher the voting power

• stETH and weETH rewards - veCHI entitles its holders to a fraction of the stETH and weETH yield generated by the protocol's reserves

• Locked CHI incentives - In addition to stETH rewards, veCHI holders receive additional locked CHI incentives

More on veCHI