How can USC Stability be Ensured?

Mantaining USC Peg and Protocol's Solvency

USC stability is maintained through 100% collateralization, arbitrage opportunities, and solvency triggers. These factors work together to ensure that the value of USC remains as close as possible to its 1 USD peg.

Full Collateralization

LSTs and ETH fully back USC at a collateral ratio of 100%. Full collateralization helps to maintain stability by ensuring that the expansion of USC supply can only occur with more collateral backing the outstanding stablecoin debt. This reduces the risk of insolvency and provides security for USC holders while preserving capital efficiency for those who wish to mint USC.

Arbitrage Opportunities - Dual Stability Mechanism

Arbitrage possibilities emerge when the USC price deviates from its intended 1 USD peg. The arbitrage contract can exploit these price divergences to earn profits and contribute to the re-stabilization of the USC price at its desired value of 1 USD. As a reward for covering gas costs, external users who interact with the arbitrage contract are entitled to receive the arbitrage profits.

The following points describe the stability mechanisms of USC depending on its price and solvency state:

  • USC Price Above 1 USD: When the USC price surpasses 1 USD and the reserves are in deficit (reserveValue ≤ uscTotalSupplyValue), users have the opportunity to interact with the arbitrage contract which mints delta new USC to buy ETH and deposit it in the protocol’s reserves. Assuming the reserves are in excess(reserveValue > uscTotalSupplyValue) and the price of USC is above peg, the arbitrage uses the newly delta minted USC to buy CHI and burn it. In either case, the supply grows as more USC gets introduced to the market, causing the price to revert to the 1 USD target. In the first case, the protocol’s reserves are expanded with more ETH, and in the second case, CHI is burnt, making its supply more scarce.

  • USC Price Below 1 USD: In instances where the USC price falls below 1 USD and the reserves are in excess (reserveValue > uscTotalSupplyValue) , users can interact with the arbitrage contract, which buys delta USC using deltaInETH. On the other hand, if the reserves are in deficit (reserveValue ≤ uscTotalSupplyValue), the arbitrage contract mints deltaInETH in CHI to buy USC. In the first case, the reserves are lowered, while in the second case, the USC debt is reduced by burning USC following the buyback with CHI. As the protocol acquires undervalued USC, its demand increases, leading to a price recovery to the 1 USD target.

Solvency Triggers - Discount Mechanism

Chi Protocol integrates solvency triggers designed to safeguard the system against changes in the price of the reserves assets. Should the price of ETH drop or increase and USC price remains at the target of 1 USD, the arbitrage contracts can still perform arbitrage by using the excess reserves to buy CHI and burn it or via minting new CHI to buy ETH and add it to the reserves. The goal of solvency triggers is to ensure the 100% collateralization of USC with the reserves.

  • USC Price at 1 USD and Surplus Reserves

In circumstances where the price of USC trades at 1 USD peg and the protocol has a surplus of reserves (USC Debt < LSTs/ETH Reserves), the arbitrage contract can still perform an arbitrage by removing the reserveDiff (reserveValue - uscTotalSupplyValue) from the reserves and buying CHI with it to then burn it. To ensure that external users are incentivized to call this function, the arbitrage opportunity is defined with a dynamic percentage (discount) of the excess reserves that reflects the value of the difference between assets and debt in comparison to the debt value (reserveDiff/uscTotalSupplyValue). After the arbitrage is performed, the excess reserves are eliminated, USC becomes 100% collateralized and the supply of CHI decreases.

  • USC Price at 1 USD and Deficit Reserves

When the price of USC trades at 1 USD peg and the protocol has a deficit of reserves (USC Debt > LSTs/ETH Reserves), the arbitrage contract can still be profitable by minting new CHI tokens and buying ETH to add it to the reserves. In this instance, the arbitrage opportunity is defined with the arbitrage reward being a percentage (discount) of the CHI amount to cover (chiToCoverEth) for the reserveDiff (uscTotalSupplyValue - reserveValue) . The formula for the discount considers the ratio between deficit and reserves (reserveDiff/reserveValue).After the above computations are performed, the arbitrage reward and the CHI to cover for the reserveDiff are minted, chiToCoverEth is swapped for ETH, which is then added to the reserves to make USC 100% collateralized.

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