Summary
Reserve has deployed their basic stablecoin ($RSV) on Ethereum made up of fiat-backed USD tokens, non-functional governance token ($RSR) and the Reserve app which has gained significant usage in some hyperinflationary economies. However, the launch of the full reserve protocol on Ethereum mainnet is planned for this year and its progress can be viewed on their current dashboard. As the protocol is yet to be “live” on mainnet, we’ll be reviewing the intended behavior and expected outcome of their platform.
Similar to how anyone can deploy a new Uniswap trading pair, Reserve will allow anyone to create a decentralized stablecoin by aggregating together baskets of ERC-20 tokens on Ethereum. These stablecoins can be insured by the backing of $RSR holders who in return receive a portion of the revenue and yield generated by the underlying assets. Similar to how DAOs manage their own treasury, each stablecoin can be governed separately with its own governance system. The governing body can be a DAO, a multi-sig or a single Ethereum address and will have the tools to manage certain parameters such as time delay on un-staking staked RSR. If one or more of the collateral tokens were to default, the basket would be rebalanced by leveraging other collateral tokens while utilizing staked RSR. If the total amount of staked $RSR is not sufficient to make up for the default, the stablecoin holders would ultimately take the corresponding loss. Reserve intends to facilitate the creation of asset backed currency, that’s independent of fiat monetary systems, as more assets are tokenized over time.
Overview
More than $180 billion in stablecoins have already been issued while settling trillions of dollars in transactions every year; this highlights their importance in the crypto industry. However, a large number of current protocols are reliant on centralized stablecoin issuers who have the power to freeze one’s assets. Most recently, a top centralized stablecoin issuer Tether froze more than $1million worth in USDT, effectively making it unusable. This is the antithesis of crypto and poses counter-party risk to the broader crypto ecosystem. In addition, regulatory uncertainty has been growing and history has shown us that governments are not successful in deploying digital services. For these reasons, Reserve believes decentralized stablecoins that are community owned have the potential to play an important role in the future of global finance. By building a platform that facilitates healthy competition across established and new players, Reserve believes their protocol will ultimately help us get there.
Upon the initial launch, there will be two types of stablecoins in addition to the existing $RSV stablecoin. One will be purley backed by USD fiat coins (eg. USDC) with no insurance or revenue while the other will be backed by DeFi USD tokens (eg. cUSDC) that generates a yield for $RSR stakers. These stablecoins will aim to kick off the platform at launch and incentivize others to create similar stablecoins. As more real life assets are tokenized they may serve to collateralize and back such stablecoins in the future. The basket may hold real assets or even traditional equities as shown in the illustration below.
The platform will allow anyone to create their own stablecoin and will be called RToken. Similar to how Uniswap works today, the smart contracts deployed by Reserve will be factory smart contracts which will allow anyone to create stablecoins that are collateralized by a basket of tokenized assets. Similar to an ETF, these tokens will have a one to one relationship with the basket that backs them. However, it’s not 100% clear on how efficient issuance will be as it will require one to mint and wait due to the global rate limit per block. Despite the benefit of it preventing an attack during collateral default scenarios, if the RToken has high demand, you may need to wait in que for a significant amount of time before they are released.
There will be three ways the RTokens can generate revenue.
Lending collateral tokens: Much like Aave, collateral tokens can be lent out with overcollateralization
Revenue share with collateral token issuers: Tokenized assets may earn interest on the underlying assets
Transaction fee: Fees could be charged on each transfer of an RToken
These revenues can be allocated to any addresses and it is anticipated that most of it will be allocated to $RSR stakers and the treasury for that RToken. $RSR stakers will be able to earn rewards based on their portion of the total $RSR staked, the amount of revenue the RToken generates and the portion of revenue that governance has directed to $RSR stakers. Unstaking $RSR is predicted to be between 7 to 30 days to potentially seize any it needs to cover losses in the event of a default. It’s also important to note here a powerful economic mechanism that benefits all $RSR holders. It is the process where accrued revenue in RTokens will market buy $RSR to increase staked $RSR balances when rewards are distributed. This will generate more demand for $RSR and play a significant role on the demand-side of tokenomics.
There are also interesting dynamics to consider when thinking about the stake to reward ratio for a potential RToken. If one were to have staked 4x as the market cap of the RToken and its staking rewards were 2.5%, your earnings as an $RSR staker would be 0.625% (2.5%/4). However, if the RToken were to gain popularity and the ratio flips where 1/4 of the RToken market cap is staked in $RSR, your staking rewards would be 10% assuming the same 2.5% staking rewards. Another interesting dynamic is the price appreciation and depreciation of $RSR. In the scenario where RToken gained popularity with a 10% staking reward, a purchasing price of 1/10th the price at the moment you end up staking would yield you 100% in annual returns relative to your initial spend.
In the case where a default occurs and there is not sufficient $RSR staked to insure the loss, the RToken holders will need to take the corresponding loss. Therefore, it will be important for those looking to create a RToken to ensure the expected loss from potential default is less than the expected gain from staking rewards.
The governing body of the RToken can be a DAO, a multi-sig or even a single Ethereum address. They may also set and select the basket that backs the RToken including the backup asset in the case of a default. Below are examples of several parameters governance can expect when setting up their RToken:
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 (can be set to zero)
Global minting limit per block (necessary for preventing a class of attacks)
Max RToken supply (for reducing risk to users in the early days)
To summarize the above, there are four unique properties that distinguish the RToken from some of the stablecoins that exist today.
Backed by baskets of ERC-20 tokens on Ethereum
Set of backup tokens that automatically replace collateral tokens if they were to default
Its own governance model
A mechanism built into the code where $RSR holders may stake and earn revenue
Mechanism Design and Tokenomics
$RSR is the protocol’s native token and is used primarily to 1) insure RTokens for incentives and 2) governance. In short, users can stake their $RSR to receive more $RSR as a result of providing insurance and govern basket backed stablecoins built on the Reserve protocol.
$RSR has a fixed supply of 100 billion tokens of which 14.3 billion are in circulation. The locked portion are distributed as follows:
https://reserve.org/protocol/rsr_release_schedule/#main-content
The slow wallet is used to fund RToken initiatives and is controlled by the Reserve team. However, it has a 4-week delay after initiating each withdrawal on the blockchain. This gives ample time for the community to react if they do not agree with the purpose of withdrawal. Investors, partners and team members will primarily have the following unlocking schedule for their $RSR holdings:
Tokens have begun unlocking in January 2022 but will still be in Reserve’s custody
Any $RSR holders who wish to sell may submit request
All orders will be routed to an OTC desk where sell and buy orders will be limited to dampen the impact on the price of $RSR
After six months, $RSR holders will receive all tokens they did not sell
Macro View
While the protocol has not yet launched on mainnet, its Reserve app has been growing organically to more than 500k registered users due to the growing number of merchants accepting $RSV as a viable form of payment. Reserve has been focused on hyperinflationary countries like Venezuela and has further plans to expand to Peru, Chile and Mexico. As Reserve continues to demonstrate a growing use case for its app and its $RSV stablecoin, it will be natural for them to also offer a savings account that will generate some yield to their existing users once the platform launches on mainnet. While the protocol makes a lot of sense for those countries experiencing hyperinflation, it isn’t to say that countries like the U.S. won’t find decentralized stablecoins less appealing. There’s been increasing concerns around the Fed’s monetary policy and its contribution to the recent spike in inflation in the U.S. Additionally, the idea of de-dollarization may become a significant factor supporting decentralized stablecoins as more countries experience the weaponization of fiat currencies through sanctions. Therefore, de-risking and creating a currency that is not controlled by a single government may create a more stable and fair global monetary system. Lastly, one of the unique properties of RToken’s as mentioned earlier is the ability to have its own governance model. Once Reserve and the RTokens is run by a DAO, the decentralized stablecoin will no longer be seen by the U.S. as a security. This would allow for RTokens to gain mass adoption amongst other decentralized stablecoins today.
Further Reading and Sources
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