# Collateralization

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ZEN, our governance token, is ***not*** and ***will never be*** counted collateral or used to back CHI.\
 \
On the analytics page, CHI is displayed as an asset. However, user-owned CHI is ***not*** backed by CHI. Instead, it is the protocol-owned CHI that, if removed, would only be burned. It will never be used to claim PCV, effectively canceling it out.
{% endhint %}

The collateralization ratio is determined by the Protocol Controlled Value (PCV) and the amount of CHI in circulation. The formula is:

***Value of collateral  /  CHI in circulation \* 100%***

> For example, if the protocol holds $100 worth of collateral and there are 75 CHI tokens in circulation, the collateralization ratio would be calculated as 100/75\*100 = 133%.

**The formula ignores "Protocol controlled CHI" because any CHI that the protocol holds will never be sold for PCV, only burned.**

{% hint style="info" %}
Essence will maintain a **fully collateralized state**, ie the minimum collateral ratio will be 100%. CHI will always be **1:1** redeemable with the PCV, meaning holders of CHI can always redeem CHI for $1 of collateral.
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***

## Overcollateralized

The protocol can become overcollateralized, meaning the value of the collateral (PCV) **exceeds** the circulating supply of CHI. This comes from the PCV **yield** and **appreciation of PCV** with

1. Partial allocation towards ZEN buybacks to help align the incentives of ZEN holders with the rest of the **Essence** ecosystem
2. The remainder serving as a buffer to absorb volatility and earn yield.

The market-bought ZEN is allocated towards the following in governance-controlled ratios:

* Burning
* DAO Treasury
* Staking rewards
* Bribing on Solidly forks

Overcollateralization occurs when the PCV appreciates in value or earns yield, causing an increase in the value of the PCV.