> For the complete documentation index, see [llms.txt](https://chi-protocol.gitbook.io/chi-docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://chi-protocol.gitbook.io/chi-docs/introduction-to-chi-protocol/importance-of-usc.md).

# Importance of USC

## Why is USC Needed?

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.

<figure><img src="/files/8ySuDmLxdO2yqN2i23fu" alt=""><figcaption><p>The Stablecoin Trilemma</p></figcaption></figure>

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**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.
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## Challenges of Existing Stablecoins

### 1. Inability to scale&#x20;

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.

### 2. Centralised fragilities&#x20;

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.

### 3. Low Yields&#x20;

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.

<figure><img src="/files/zd9jON7adYkvwpWovGRd" alt=""><figcaption><p>USC vs Existing Stablecoins </p></figcaption></figure>

## Chi Protocol as the all-in-one Stablecoin Issuer

Chi Protocol addresses a critical questio&#x6E;**: 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.&#x20;

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This approach makes Chi Protocol the **first genuine solution to the stablecoin trilemma**, offering a stablecoin that is **reliable, scalable, and rewarding**.
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