Collateralization

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.

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.

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.