How is USC Stability Achieved?

Mantaining USC Peg and Protocol's Solvency

USC stability is maintained through 100% collateralisation, 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 Collateralisation

LSTs and ETH fully back USC at a 100% collateral ratio. This full collateralisation ensures stability by permitting USC supply expansion only when there is sufficient collateral to back 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 opportunities arise when the USC price deviates from its intended 1 USD peg. The arbitrage contract exploits these price divergences to earn profits, helping to restabilize the USC price at its target of 1 USD. As compensation for covering transaction fees (gas costs), external users interacting with the arbitrage contract are entitled to a share of the arbitrage profits.

The following points detail the stability mechanisms of USC, focusing 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 is 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

The Chi Protocol integrates solvency triggers designed to safeguard the system against changes in the price of reserve assets. Should the price of ETH drop or increase while the USC price remains at the target of 1 USD, the arbitrage contracts can still perform arbitrage. They can use the excess reserves either to buy and burn CHI or to mint new CHI to buy ETH and add it to the reserves. The primary goal of these solvency triggers is to ensure that USC is 100% collateralised by 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 minting the reserveDiff (reserveValue - uscTotalSupplyValue) and adding it to the arbitrage contract. To ensure that external users are incentivised 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, and USC becomes 100% collateralised.

USC Price at 1 USD and Deficit Reserves

When the price of USC trades at the $1 USD peg and the protocol has a reserve deficit (USC Debt > LSTs/ETH Reserves), the arbitrage contract can still be profitable by burning USC. In this instance, the arbitrage opportunity is defined with the arbitrage reward being a percentage (discount) of 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 is minted in CHI, USC is burnt and it newly becomes 100% collateralised.