Summing up Reserve Protocol

This article breaks down all the major features and mechanisms behind Reserve Protocol, all the information provided here is taken directly from their website.

Reserve overview

The project has 2 core beliefs:

• Access to a stable currency should be a human right.
• Hyperinflation can be erased in the long term.

The mission is to provide people in the world access to a stable currency, by rebuilding financial services in places that are traumatized and stressed by wealth destruction due to high inflation and currency devaluation. The business generates revenues by charging a fee when users move funds in or out of the Reserve app. At the time of writing, Reserve provides the opportunity to save, spend, and receive money through their app and the use of a stable currency, Reserve Dollar (RSV). RSV is a cryptocurrency designed to preserve its 1-to-1 value to the dollar. Reserve is still in its infancy, currently, the protocol processes 15,000 transactions daily, with around $1.5 million in value moved daily. Users are from Argentina, Venezuela, Colombia, and the US.

Main components of the protocol

Reserve Protocol, RSV, RSR, App.

The primary purpose of reserve protocol is to provide an alternative fiat currency. This would be achieved by aggregating baskets of tokenized assets, in this way it is possible to create a stable currency that is able to retain its purchasing power while being independent of the state. The ideal basket could be formed by commodities, debt, and perhaps equities.

Reserve Protocol

With Reserve is possible to create stablecoins backed by baskets of ERC-20 tokens on Ethereum, these stablecoins are called RTokens. RTokens are minted by depositing the entire basket of collateral tokens, an RToken will tend to trade at the market value of the entire basket. These tokens can be insured against the event of collateral tokens default, this insurance is provided by RSR holders. Reserve Rights holders may stake their RSR on any RToken, then staked RSR can be seized in case of default, in an algorithmic process based on on-chain price feeds.

RTokens generate revenue, therefore there is an incentive for RSR holders to stake their coins. Revenues can come from:

• Transaction fees
• Revenue shares with collateral token issuers
• Yield from lending collateral tokens on-chain

Governance can direct a portion of revenue to RSR stakers to incentivize them to stake and provide insurance. Each RToken is governed separately, and each can have a different governance system. Governance will define a series of baskets arranged in a tree-like structure, there is a current basket, and a series of backups selected algorithmically in the case of default. With governance it’s possible to update the basket composition regularly, once updated or in the case of default, the protocol makes on-chain trades to reach the new composition of the basket.

The core team of Reserve is releasing two RTokens upon initial protocol launch:

• A pure USD coin like RSV, is backed only by fiatcoins. This token will not generate revenue, it will not be insured, and it will be governed with a core-team-held multisig and a timelock.
• A yield-bearing USD coin, backed by Defi USD tokens (like cUSDC, aUSDC, cDAI, cUSDT, aUSDT, aBUSD). This token will generate revenue that could be offered to RSR stakers, the underlying collateral yield is split between the RToken holders and the RSR stakers. It will be governed by RSR stakers, through Compound-like token voting, 1 staked RSR is equal to 1 vote.

Governance

Whoever deploys an RToken determines how it is, and its governing body could be a DAO, a multi-sig, or a single Ethereum address. The governing body can also replace itself with another governing body. Some RTokens could therefore be governed centrally, and others through an arbitrarily decentralized system of rules, including timelocks and other smart contract programmable mechanisms. Governance also sets the basket that backs the RToken, and all the backup baskets that the protocol will automatically select from in case of a default. It can also update the set of baskets at any time, via internal rules.

Governance can also set:

• The delay on un-staking staked RSR
• The portion of revenue that goes to RSR stakers and/or other recipients, including the RToken’s treasury
• The threshold in price deviation needed for a collateral token to be considered in default
• The amount of time a deviation needs to exist to declare a default
• RSR staking reward period
• Min minting quantity
• Issuance/redemption spread
• Global minting limit per block
• Max RToken supply

Finally, governance can also replace contracts in the RToken system of contracts with entirely different contracts.

Issuance and Redemption

Underlying collateral tokens in the basket are just held by the smart contracts that implement the RToken. Issuance is not immediate, it has a global rate limit per block, set by governance.

Revenue model

RTokens generate revenue in 3 ways:

1) Lending collateral tokens

These tokens can be lent out with overcollateralization (like Compound, Aave). Collateral baskets can contain the tokenized outputs from Compund, Aave (e.g., cUSDC, aDAI, etc.)

To book the revenue with this approach, the RToken can track the appreciation of its collateral tokens in USD terms and decrement the redeemability accordingly. Appreciation can be split among RToken holders, revenue receivers like RSR stakers. RToken holders would be able to redeem their RTokens for less and less of the collateral basket, but more and more USD value, since the basket would have appreciated more than redeemability was decremented.

2) Revenue share with collateral token issuers

Tokenized assets, and currencies will sometimes have a business model of earning interest on the underlying assets they hold in custody. If an RToken reaches a large scale, asset tokenizers will compete to have a greater share of the basket, in order to increase their deposits. It therefore would be rational for the tokenizer to offer part of the revenue they earn.

3) Transaction fees

Fees could be charged on each transfer of an RToken. Fees need not to be a fixed amount or a single percentage. However, fees present many problems since tokens are mostly transacted on L2 or sidechains, and it is often not possible to charge fees.

Revenue allocation

RToken revenue can be allocated in any proportion to any set of addresses. The two main places governors will allocate revenue are:

• RSR stakers (to incentivize insurance)
• The treasury for that RToken

The treasury for an RToken can be used to pay for operating costs, oracles, or bounties for performing transactions that the protocol needs to conduct. RToken creators and governors can also allocate revenue to themselves. So, a person, team, or company could create and promote an RToken as a business and be rewarded if it succeeds.

Price feeds

RToken relies on price feeds if it is insured and needs to react to collateral token default. The optimal price feed will depend on the type of collateral tokens within an RToken. For Defi tokens like cUSDC, prices must be computed with the combination of the redemption ratio between cUSDC, and the market value of USDC. The redemption ratio can be accessed through the Compound contracts directly, and the market value of USDC can be taken either from Oracle sources such as ChainLink or Time Weighted Average Prices (TWAPs) from on-chain liquidity pools such as Uniswap.

Defaults

The protocol has a parameter called the “default flag,” which can be “raised” or “lowered.”

Anyone can submit a transaction to raise the default flag if any collateral token has a short-term price-feed value that is sufficiently less than one of its corresponding backup tokens in a backup basket. The definition of short-term and the price deviation threshold are governance parameters, with plausible values of 5 minutes and 5% deviation. Any time the default flag is raised, issuance is paused. This is to prevent market participants from minting RTokens for cheaper than usual, in anticipation of RToken value being restored with insurance shortly thereafter. If the mid-term price-feed value of the token in question is back within the normal range after 6 hours (configurable), anyone can submit a transaction to lower the default flag.

If the default flag stays raised continuously for 24 hours (configurable), all baskets containing the defaulted token are disabled. If the current basket contains the defaulting collateral token and is thus disabled, then it is replaced with the next remaining active basket in line, and the default flag is lowered. Once the current basket has been updated and the default flag lowered, issuance is re-enabled. Redemption was never paused but redeeming before this point would likely be unattractive as the redeemer would receive the defaulted collateral token as part of the basket. Once the basket has been updated, issuance and redemption are both for the new basket.

Use cases of RTokens

The RToken software is a tool to aggregate relatively stable assets together to create basket-backed stablecoins. The intention in the long term is to facilitate the creation of an asset-backed currency that is independent of fiat monetary systems. This becomes possible once enough asset types are tokenized. The main purpose of allowing and encouraging many RTokens is so that open exploration and competition can lead to the discovery of the best type of basket and governance system. Imagine fintech companies using the protocol to launch their own branded basket-backed stablecoins, though this wasn’t the central intent of opening the platform. Reserve don’t expect lots of RTokens to be created right after protocol launch. Rather, they think that if one or two RTokens become large and known, that will inspire the creation of more over time.

RSV token

RSV is the basic stable coin issued by Reserve Protocol on the Ethereum blockchain, and it is backed by 1/3 USDC, 1/3 TUSD, and 1/3 PAX. Each RSV is, therefore, redeemable for 1/3 TUSD + 1/3 USDC, and 1/3 PAX. In this way, RSV is anchored at 1.00$. These assets are held by the Reserve Vault smart contract. The basket can be further diversified over time through rebalancing.

RSV features

1. RSV Issuance: direct interaction with the protocol to lock up collateral and issue new RSV.

2. RSV Redemption: trading of RSV for collateral.

3. Vault Rebalancing: holders of RSV can submit proposals to the Reserve Manager smart contract to rebalance the composition of the collateral.

Smart contracts are audited by CertiK.

Issuance and Redemption

If you want to interact with the system:

1. Approve their system to spend funds, using the standard ERC20 interface function.

2. Call the Issue or Redeem function in Reserve Protocol smart contract.

3. Issuance process: USDC + TUSD + PAX is collected from the wallet of the user and the corresponding quantity of RSV is minted.

4. Redemption: RSV is collected and burnt, and the user is given back USDC + TUSD + PAX.

Vault Rebalancing

The Vault composition is changed through a proposal, this proposal can be accepted by the governance account. After, a 24-hour timer begins, and the proposal can still be canceled before the execution. After 24 hours timer expires, and the proposal can be executed only by the governance account. After a Proposal is Accepted, a 24-hour timer begins, and a proposal can be canceled by the proposer, at any time before execution.

After the 24-hour timer expires, the Proposal can be “Executed” by the governance account, and only by the governance account. When a Proposal is Executed, some quantity of collateral tokens is withdrawn from the proposer’s account in order to gather the missing funds that are needed to back RSV according to the new Proposal. There are two different types of Proposals. To see why to consider that changes in the circulating supply of RSV are likely to occur during the 24-window between when a Proposal is Accepted and when it is executed. That means that the funds required in order to achieve some target backing may increase in that time.

To deal with this problem, Reserve created two different types of Proposals: Weight Proposals and Swap Proposals.

Weight Proposals

A Weight Proposal consists of:

1. A list of token addresses of length N

2. A list of “weights” of length N

For example, it might be: [TUSD, USDC] and [0.50, 0.50].

Swap Proposals

A Swap Proposal consists of the following:

1. A list of token addresses of length N
2. A list of quantities of length N.
3. A list of booleans indicating whether the quantity is to be added or removed from the Vault.

So, for example, a Swap Proposal may consist of [TUSD, USDC], [1000, 1000], [True, False]. This Proposal says to add 1000 units of TUSD to the Vault and remove 1000 units of USDC from it.

RSR token

RSR is the governance token of the Reserve protocol.

Fundamentally, RSR exists as a backstop to make RSV holders whole in the unlikely event of a collateral token default, and to govern basket-backed stablecoins built on the Reserve protocol. RSR holders can choose to stake their RSR on any RToken, or none. When RSR is staked on an RToken, it’s deposited into a staking contract specific to that RToken, and the staker receives a further ERC-20 token, which represents their staked RSR position on that RToken. This token is transferrable and fungible with other staked RSR balances for that RToken, so you can send any portion of the staked position to someone else or trade it, and the new holder can un-stake it.

Staked RSR can earn rewards, based on three factors:

1. The amount of revenue the RToken generates
2. The portion of revenue that governance has directed to RSR stakers
3. Your portion of the total RSR staked on that RToken

The protocol stores revenue in RTokens, but when staking rewards are distributed, it market-buys RSR on DEXs with those RTokens in order to distribute the rewards to stakers in RSR. Thus, as rewards are earned, staked RSR balances increase. Staked RSR can be seized by the protocol in the unlikely event of a collateral token default, in order to cover losses for RToken holders. It’s seized pro-rata if this happens. Un-staking RSR comes with a delay, which is configurable by governance, and predicted to usually be between about 7 and 30 days. During the unstaking delay period, the staker does not earn any rewards.

Reserve App

The app allows its users to save, spend, and receive money in stablecoin without the need for a foreign bank account. The app also facilitates the conversion of local currency into Reserve dollars (RSV). Transactions are carried out by ILP (independent liquidity providers). ILPs set the exchange rates and commissions for each transaction. Users deposit funds in the app, they do so by sending money to the ILP via a bank transfer of another platform. Once confirmed, the ILP credits the Reserve dollars to the user's in-app balance. When a user wants to withdraw funds, the reverse occurs. The user gives a certain amount of their in-app balance to an ILP, in exchange for a deposit into the selected payment platform.

Credits: https://reserve.org/protocol/index.html#main-content

This article is not intended to be investment advice. Seek a duly licensed professional for an investment recommendation.