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. Their primary goal is mainly to have voting power so their holders or lockers can participate in governance and influence the decisions of the protocol while having economic incentives for doing so. Although different governance and rewards models may be appropriate for other use cases, they all exhibit one shared limitation: the absence of earning 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 real yield to their governance token.

Stablecoins backed by centralized 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 distributed to the governance, the fees yield very low-interest rates since they need high market activity on the stablecoin or extremely large mint amounts to satisfy their staked/locked value.

Overcollateralized 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 absence of native ETH staking yield in governance tokens of stablecoin protocols primarily arises from their issuance mechanisms and underlying assets. Chi Protocol solves this problem by distributing the entire staked ETH yield of the reserves to CHI stakers, compensating them with the highest returns. Furthermore, if users wish to participate in governance, they can lock their CHI for a period of time and earn additional veCHI incentives which effectively boost their ETH staking yields.

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