Governance Token with LST Yield

LST Yield to Governance Token

Governance Token with LST Yield

Governance tokens of DeFi protocols often differ in various aspects, such as revenue sources, governance models and supply emissions. The primary goal of these tokens is to provide voting power, allowing holders to participate in governance and influence protocol decisions, while offering economic incentives. Although different governance and rewards models may be appropriate for other use cases, they all exhibit one shared limitation: they do not provide real yield.

However, since most stablecoins reserves do not generate yield, the protocol has no choice but to charge their users fees for using the service.

Due to their issuance processes and underlying assets, most of today's stablecoin protocols are not equipped to provide a real yield to their governance token.

Stablecoins Backed by Centralised Assets (e.g., FRAX)

Charge their users minting and redemption fees, which results in two major problems. In the first place, arbitrageurs face financial frictions to keep a tight peg of the stablecoin, requiring larger de-pegs to make their actions profitable. Secondly, when these fees are distributed among governance token holders, they yield very low interest rates unless there is high market activity or very large mint volumes to support their staked value.

Overcollateralised Stablecoins (e.g., eUSD)

Using LSTs as collateral charge stablecoin holders annual fixed service fees (i.e., 1.5%) on the amount of stablecoins in circulation. This is highly detrimental to the system since the stablecoin holders will receive less of the initially promised LST's yield.

In conclusion, the lack of native ETH staking yield in governance tokens primarily results from their issuance mechanisms and underlying assets. Chi Protocol solves this problem by distributing the staked ETH yield of the reserves to CHI stakers, compensating them with real revenue . Furthermore, users can lock their CHI to participate in governance and earn additional veCHI incentives, effectively boosting their ETH staking yields.