# Rewards Generation & Distribution

The dual stability mechanism of Chi is highly effective at preserving both stability and solvency, resulting in rewards being generated each time an arbitrage is executed. The protocol's arbitrage rewards are generated in USC, CHI, and ETH from the following scenarios:

<figure><img src="https://679438959-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FWSJjW0RbNohJTdo1T9uY%2Fuploads%2FNRcS3ucerJCZVgTXYPHo%2FFrame%2036981.png?alt=media&#x26;token=89d5c214-3c95-4482-8313-3db72f8f9bcd" alt=""><figcaption><p>Arbitrage Rewards Currencies </p></figcaption></figure>

{% hint style="info" %}
According to the specific target levels of incentivisation, the protocol allocates a portion of the USC rewards to USC holders. The current incentive levels are determined by the protocol's governance. To learn more about the current incentives program for USC stakers, visit our [Medium](https://medium.com/chi-protocol) article series.
{% endhint %}

[More on DSM ](https://chi-protocol.gitbook.io/chi-docs/concepts/dual-stability-mechanism-dsm/dsm-scenario-analysis)\
[More on Sustainable Reward Sources ](https://chi-protocol.gitbook.io/chi-docs/concepts/sustainable-reward-sources)

## Examples

{% hint style="info" %}
**It is important to note that `DeltaUSC` is proportional to the USC/ETH liquidity and the deviation of the USC price from the $1 peg.** Greater liquidity and larger price deviations from $1 result in the generation of higher arbitrage rewards, as these conditions create more significant opportunities for profitable arbitrage within the protocol.
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{% hint style="info" %}
Note that all the above calculations assume no slippage and zero trading fees.
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### &#x20;1. Above $1

Assume that USC is trading above $1, the reserves are in excess, the `DeltaUSC` is 1,000, and the price of USC is $1.01 on the Uniswap pool against ETH. The arbitrage revenue is calculated as follows:

{% hint style="info" %}
Note that the protocol always values USC at $1, so a `DeltaUSC` of $1,000 means that 1,000 USC must be minted and exchanged for ETH in the USC/ETH Uniswap pool to bring the market price back to exactly $1.
{% endhint %}

<figure><img src="https://679438959-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FWSJjW0RbNohJTdo1T9uY%2Fuploads%2FCscxhee7N8oNcCr31owk%2FFrame%202095585173.png?alt=media&#x26;token=b9551946-2f1b-43ba-a573-c8044ec6f799" alt=""><figcaption><p>Above $1</p></figcaption></figure>

{% hint style="success" %}
**In this scenario, the arbitrage revenue is generated in ETH, as the protocol's smart contracts swap USC for ETH.** The USD value received in ETH from the swap is greater than the `DeltaUSC` minted, since the price on Uniswap is above $1. After the arbitrage is executed, the USC price is brought back to its $1 peg.
{% endhint %}

### 2. At $1

Assume that USC is trading at $1, the reserves are in excess, the `reserveDiff` is $10,000, and the price of USC is $1.00 on the Uniswap pool against ETH. The arbitrage revenue, which is categorised as `totalMintedUsc,` is calculated as follows:

{% hint style="info" %}
The minted USC is deposited into the arbitrage contract and serves as an additional liquidity buffer to protect the protocol against potential future ETH price depreciations, specifically in scenarios where reserves are in deficit and the price is at $1.\
\
[More on Collateral Risk Management](https://chi-protocol.gitbook.io/chi-docs/concepts/collateral-risk-management)
{% endhint %}

<figure><img src="https://679438959-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FWSJjW0RbNohJTdo1T9uY%2Fuploads%2FmjUKYHSVs09Z1sUqcGDw%2FFrame%202095585172.png?alt=media&#x26;token=fcb78058-8ee6-451f-9d6a-0805adc148fd" alt=""><figcaption></figcaption></figure>

{% hint style="success" %}
**In this scenario, arbitrage revenue is generated in USC, as the protocol’s smart contract mints additional USC.** Additionally, there is no direct interaction with the USC/ETH pool on Uniswap since the USC price is at $1.
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### 3. Below $1

Assume that USC is trading below $1, the reserves are in equilibrium, the `DeltaUSC` is 1,000, and the price of USC is $0.99 on the Uniswap pool against ETH. The arbitrage revenue in this scenario is calculated as follows:

{% hint style="info" %}
Since the protocol always prices USC at $1, a`DeltaUSC` of $1,000 means that 1,000 USC must be repurchased from the USC/ETH Uniswap pool to return the price to exactly $1.
{% endhint %}

<figure><img src="https://679438959-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FWSJjW0RbNohJTdo1T9uY%2Fuploads%2F2lXs5cgUrhDMljSwAA4c%2FFrame%202095585130.png?alt=media&#x26;token=13c8dd46-cff4-445b-b0eb-2a935081e6aa" alt=""><figcaption><p>Below $1</p></figcaption></figure>

{% hint style="success" %}
**In this scenario, the arbitrage revenue is generated in USC, as the protocol's smart contracts swap ETH for USC.** The USC amount received from the swap is greater than the `DeltaUSC` since the price on Uniswap is below $1. Following the execution of the arbitrage, the USC price is brought back to its $1 peg.
{% endhint %}

[More on on DSM ](https://chi-protocol.gitbook.io/chi-docs/concepts/summary)\
[More on Arbitrage Revenue Analytics ](https://dune.com/quackery/chi-protocol-usc)<br>