Importance of USC
Role of USC in the Space
Last updated
Role of USC in the Space
Last updated
Stablecoins are one of the most significant innovations in the crypto space. They serve as a critical liquidity component for both centralised exchanges (CEXes) and decentralised exchanges (DEXes), often forming the trading pairs with the highest volume. Beyond trading, stablecoins bring much-needed stability to DeFi money markets and perpetual exchanges, where their relative price stability acts as a reliable anchor for collateralised loans and margin trading. Although stablecoins have gained over 100 million users and address the largest digital asset market, valued at $160 billion, they still present several limitations.
Chi Protocol’s USC is positioned as a solution to the stablecoin trilemma. USC, along with stUSC and wstUSC, represents novel forms of money designed to enhance DeFi usage through mass adoption. Their effectiveness as a medium of exchange, combined with reward-bearing properties, makes them powerful tools for driving widespread engagement within the DeFi ecosystem.
Decentralised stablecoins, which rely on DeFi infrastructure, have historically been constrained in growth due to capital inefficiencies and a lack of user incentives.
Capital Inefficiencies - Decentralised stablecoins, built on DeFi frameworks, have struggled to scale due to inefficiencies in capital usage and limited user incentives.
Scalability Constraints - Traditional Collateralised Debt Positions (CDPs) are hampered by high collateral requirements and an over-reliance on leverage, limiting their growth potential.
Censorship Vulnerability - Hybrid stablecoins aim to lower CDP collateral ratios by including fiat-backed stablecoins and Real-World Assets (RWAs) as collateral, but this introduces dependence on centralised assets, weakening their censorship resistance.
Fiat-backed stablecoins, such as USDC and USDT, offer a capital-efficient solution but come with significant limitations.
Custody risks - The collateral, often in the form of bonds, is held by banking institutions, making it susceptible to censorship and regulatory intervention.
Internalised returns - Issuers retain the yield generated by the backing assets, while users are exposed to the risks of depegging without benefiting from the returns.
Stablecoins have struggled to offer high rewards due to their issuance methods and hedging mechanisms
Backing assets - Stablecoins backed by non-yield bearing collateral provide little to no incentives for users, as the collateral does not generate income.
Hedging mechanisms—Delta-neutral stablecoins, designed to offset price exposure, often result in low yields. This is because, for each stablecoin minted, the protocol opens a corresponding short perpetual position on a derivative exchange, which eliminates any potential upside from the underlying asset's price movements.
Chi Protocol addresses a critical question: How can one create a trustworthy stablecoin that offers embedded rewards, scalability, and independence from centralised venues?
By utilising Liquid Staking Tokens (LSTs) and Liquid Restaking Tokens (LRTs) as reserve backing assets, implementing well-defined stability mechanisms, and structuring sustainable incentives, Chi Protocol aims to overcome the limitations faced by previous stablecoin protocols.
This approach makes Chi Protocol the first genuine solution to the stablecoin trilemma, offering a stablecoin that is reliable, scalable, and rewarding.
