stCHI: Governance Token with ETH Staking Rewards and Token Burns
In our previous article, we discussed the yield sources of stUSC and emphasized the significance of the LST yield flowing into the staked governance token, stCHI. In this article, we will take a closer look at staked CHI and illustrate how it stands to gain from the expansion of USC reserves and token burning.
For those of you who don’t know it yet, Chi Protocol is a stablecoin protocol designed to address the stablecoin trilemma. It issues a stablecoin known as USC that is designed to be stable, capital efficient and censorship resistant. Anyone, whether individuals or organizations, can mint USC at 100% collateral ratio against their ETH/LSTs and then stake it with Chi Protocol to earn various sources of yields, such as additional USC, stCHI and stETH. If you want to dig deeper on stUSC, we recommend reading our previous article as today’s purpose is to understand stCHI. Before we do this, let’s explore the yield issues of governance tokens of existing stablecoin protocols.
Governance tokens come in various forms, differing in revenue sources, governance models, and supply emissions. Their primary purpose is to give voting power to their holders or lockers, allowing them to participate in governance and shape the protocol’s decisions while offering economic incentives for their engagement. However, they share a common limitation: the lack of real yield. Most stablecoin protocols struggle to generate sustainable yield for their governance tokens, often resorting to imposing fees on users. For example, overcollateralized stablecoins like eUSD, which use LSTs as collateral, charges a fixed annual service fee of 1.5% on the circulating stablecoin amount. This proves detrimental as eUSD holders receive less of the initially promised LST’s yield, while LBR holders have very low incentives to participate as stakers. Chi Protocol, on the other hand, tackles this issue by channelling the entire ETH staking yield from the reserves to stCHI, offering them the most attractive protocol returns.
Here are four ways stCHI can benefit from the system:
1) Users mint USC → LST reserves expand → Higher ETH staking yield for stCHI
2) USC trades above 1 USD and the reserves are in excess → USC is minted to buy — burn CHI → Buy pressure on CHI and more scarcity
3) USC trades above 1 USD and the reserves are in deficit → USC is minted to buy ETH, which is converted into LST and added in the reserves → Higher ETH staking yield for stCHI
4) USC trades at approximately 1 USD and the reserves are in surplus → Excess ETH is swapped to buy — burn CHI → Buy pressure on CHI and more scarcity
In each of these four scenarios, stCHI experiences either a price increase due to buybacks or an increase in its inherent value thanks to additional reserves and higher ETH staking rewards.
Conclusion
stCHI serves as the staked governance token of Chi Protocol and is directly tied to the demand for USC. When USC is in demand, stCHI benefits from both increased ETH staking rewards and token burns.
The primary challenge faced by existing stablecoin protocols is the lack of real yield in their governance tokens and constraints in maximizing the protocol’s value from its collateral assets. Chi Protocol effectively addresses this issue by implementing a well-designed and sustainable reward distribution model that rewards both CHI token holders and USC users.
While stCHI benefits from LST yield, stUSC also earns additional USC and stCHI, thereby automatically participating in ETH staking yield. This not only ensures significant rewards for all participants in the protocol but also safeguards the system by expanding USC with collateral assets of equivalent value, generating higher yields, and increasing the governance token’s value.
Presently, the demand for ETH staking yield instruments stands at $28 billion. Given stCHI’s ability to benefit from both ETH staking rewards and stablecoin dynamics with token burns, we anticipate that such a product will amplify the demand for LSTs and benefit from their growth.
Be sure to come along with us on this journey by keeping in contact with us through our social media channels at:
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Website: https://chiprotocol.io/
Docs: https://chi-protocol.gitbook.io/docs/background/chi-protocol
