Introduction to Chi Protocol

What is USC? What is CHI?

USC

USC is a fully collateralized, capital efficient and with intrinsic yield stablecoin, pegged to the US dollar. ETH and LSTs back it, and it is issued in a decentralized and unbiased manner. You can earn more USC, gain voting power through veCHI, and receive ETH and additional CHI rewards by simply staking USC.

Anyone against LSTs/ETH deposits can mint USC at a 100% collateral ratio. This means that for each $1 worth of collateral deposited, users will receive 1 USC, benefitting from the ability to store their wealth in a trustless and capital efficient fashion while having access to various yield opportunities.

When USC is staked in the USC staking contract (stUSC), users will see their claimable USC balance increasing as they earn stablecoin yield. These rewards come from the dual stability mechanism and the specific scenario where USC trades below 1 USD, and the protocol has excess LSTs/ETH reserves. In this particular case, the algorithm uses all or a fraction of the excess reserves in ETH to buyback USC from the Uniswap Pool, redirects the arbitrage profits to the function caller in USC, and distributes the remaining difference (uscAmountToFreeze = uscAmountReceived - rewardAmount) to USC stakers. This strategy makes productive use of USC instead of burning stablecoins, which would result in an economic loss for the protocol. Furthermore, stCHI incentives are allocated to stUSC, allowing them to earn additional rewards through ETH staking yield and CHI rewards.

CHI

Beyond minting and staking USC, users can also buy CHI and gain from the upside of the stablecoin’s demand with ETH staking rewards and CHI buybacks. Through staking CHI, users can earn all the ETH staking yield of the protocol’s LSTs, backing USC. This approach eliminates the need to redirect high CHI emissions or charge service fees to have revenue sources for CHI. Furthermore, when Chi Protocol has excess ETH/LSTs, and the price of USC trades above 1 USD, the algorithm mints new USC to buyback CHI from the Uniswap Pool, transfers the arbitrage profits to the function caller in CHI and burns the remaining CHI difference (chiAmountToBurn = chiAmountReceived - rewardAmount). This mechanism makes CHI tokens more scarce and acts as a revenue distribution mechanism independent of whether you are staking it or just simply holding it in your wallet.

In addition to staking CHI, users can lock it to participate in governance and receive veCHI according to their time lock. By locking CHI, the users will have access to at least the same ETH staking yield as stCHI but also benefit from additional veCHI incentives which boosts their ETH staking rewards. The longer the time lock, the higher the amount of veCHI received, the more veCHI rewards the users will earn on their locked positions and the higher the ETH staking yield boost.

Note: The amount of USC minted or repurchased by the protocol depends on the delta computation, which measures the responsive change in USC supply when its price deviates from the target 1 USD peg. This means that if delta > excess reserves, there will be a stability mechanism switch - this is why it is called dual stability mechanism.

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