Decentralization

The role of CHI is to fill the need of a truly decentralized stablecoin, that can still scale effectively. There are currently very few options, with LUSD being the only truly decentralized option, however, they have issues with scalability due to requiring over-collateralization.

Our Approach

As you may be thinking, 1:1 USDC backing is not "truly decentralized". Our end goal is for CHI to be backed solely by decentralized assets like ETH, but due to price volatility it would be difficult to maintain 100% collateralization at launch.

The protocol will need to be overcollateralized to allow for volatile assets. Our plan for Essence is to launch CHI whilst being backed 1:1 with a stablecoin, then deploying the collateral to earn a yield, slowly building up our collateralization level.

As the collateralization level increases, Essence can gradually gain exposure to more volatile assets i.e. ETH. If ETH appreciates in value, this would further increase the collateralization level, allowing for an increased buffer against future volatility.

End Goal

Essence will eventually be 100% collateralized by solely decentralized assets, and rely on trust-minimized oracles (Chainlink) for maintaining CHI peg; i.e CHI can be minted/redeemed for $1 of ETH.

After conducting thorough research and analysis of past successes and failures of stable asset approaches in DeFi we believe that this is the best strategy to accomplish our end goal of true decentralization, whilst still ensuring CHI stability and safety for CHI holders.

Safety

The strategy adopted to achieve full decentralization is centered around sustainability and effectiveness while minimizing risk for CHI holders. Essence has implemented robust safety mechanisms to safeguard CHI against black swan events. In the initial stages, responsive PCV (Protocol Controlled Value) management will be integrated. For instance, if the collateralization ratio approaches 100% and Essence holds significant exposure to volatile assets, those assets can be converted to stablecoins.

Essence’s ultimate goal is a genuinely decentralized stablecoin. However, decisions will always prioritize the safety of CHI holders and stakeholders. Steps toward decentralization—such as allocating PCV heavily to volatile assets like Ethereum—will only be taken when they do not pose critical risks to CHI holders. We recognize that achieving true decentralization will take time, and we are committed to patiently working toward that goal without taking premature actions that would jeopardize the safety of the protocol.