Tokens and Arbitrage

The volatility of existing cryptocurrencies significantly reduces their usefulness. A cryptocurrency with stable value would permit much wider usage as a stable store of value, medium of exchange, and standard of deferred payment.

Reserve is introducing a stable, decentralized double-token currency that can’t be abused by governments because it is globally distributed outside of anyone’s control, and thus nearly impossible to shut down. This is what differentiates it from Tether, Libra or PayPal. Two tokens of Reserve Protocol are the following:

  1. The Reserve token (RSV) — a 100% asset backed and decenttralized stable cryptocurrency that can be held and spent the way we use US dollars and other stable fiat money.

  2. The Reserve Rights token (RSR) — a cryptocurrency used to facilitate the stability of the Reserve token and used as a governance token for the Protocol. It will be burned and minted to keep the stability of RSV.

RSV is currently backed by a combination of stablecoins USDC, TUSD and PAX. RSV Portal allows for easy issuance and redemption of $RSV and can be accessed here. In the future, RSV will be backed by +50 assets with the Protocol having the ability to rebalance and adapt to regulatory actions by holders of its governance token - RSR. RSV can also be thought of as a low risk investment fund, allowing RSR holders to invest in a bunch of other assets, without going through a KYC process or interacting with an intermediary. Initially, the backing will be picked by the Reserve Foundation and its advisors that have extensive experience in managing global macro funds. Two of the advisors have managed the Harvard endowment portfolio, among other global macro work at other funds, and one was a portfolio manager for Thiel Macro for a decade. The portfolio will start off relatively simple and diversify over time as more asset classes are tokenized. Three options we are looking at for RSV backing:

• Government debt, like US treasury bills, can function as an asset that is similar in value to fiat money, with less inflation, due to the small yield.

• Commodities, like gold and diamonds, are more volatile in the short term, but can be more stable in the long term, and so could make up a part of the backing.

• If structured and diversified properly, it may make sense to include some equities.

If you can construct the right backing portfolio, we believe you can beat fiat money in global stability. At that point, the protocol can be changed to peg RSV to the basket itself, instead of one RSV token being redeemable for $1.00 worth of collateral tokens. But this is a long ways out, and right now we are starting by focusing only on parts of the world where money is truly broken, and a simple backing portfolio is sufficient to provide a huge upgrade for them.

Reserve Protocol can accumulate RSV stablecoins through two means:

  1. Transaction fees on RSV transfers. RSV transactions initially have a 0.1% transaction fee, which can be adjusted over time. Transaction fees on RSV transfers remove RSV from circulation and place them into the smart contract.

  2. Appreciation of collateral tokens. If the collateral tokens are chosen appropriately, then while they may undergo periods of decreases in value, we can expect it in aggregate to trend upwards and that the pool will have yield on the collateral. This means that overtime, excess collateral accrues in the smart contract. When this happens, RSV is minted and placed into the smart contract.

These are the same revenue streams as PayPal — transaction fees, and yield on the float — implemented in a decentralized way.

The utility of RSR is as a mechanism to keep RSV stable around the pegged value, and as a governance token for the Protocol.

Example 1: The redemption price of RSV is $1.00. If the price of RSV on the open market is below $1.00, arbitrageurs will be incentivized to buy it up and redeem it with the Reserve smart contract for $1.00 worth of collateral tokens. They’ll continue buying on open markets until there is no more money to be made, which is when the market price matches the redemption price of $1.00.

Example 2: The same mechanism works in reverse when demand goes up. If the price of RSV on the open market is above $1.00, arbitrageurs will be incentivized to purchase any excess RSV tokens from the Reserve smart contract, and immediately sell them on the open market. Purchases from the smart contract are made with RSR, and only available to RSR token holders. Once the purchase is made, these RSR tokens are burned. RSR is a deflationary token. Arbitrageurs will continue selling on open markets until there is no more money to be made, which is when the market price matches the purchase price of $1.00. If they had purchased RSR earlier, the price had appreciated, and then they had used it in this transaction, they would get a better deal, but many will just buy it when they need it. To summarize:

• Buy $1.00 worth of RSR on an exchange
• Trade $1.00 worth of RSR for one RSV token with the Reserve smart contract
• Sell one RSV for above $1.00 on an exchange
• (repeat)

As previously stated, when this process occurs it reduces the supply of RSR tokens. So suppose that $1M in RSV tokens has accumulated in the pool of excess RSV. This will lead to $1M in RSR tokens being burned. The more RSV activity there is (total RSV circulating and RSV transactions), the more RSR is spent and burned. Reserve estimates that about 2-5% of the USD value of the RSV in circulation will be burned in RSR per year. This comes from estimates about RSV velocity (for the transaction fees) and average collateral token appreciation rates. This means that if there are 100 million RSV in circulation, about $2-5 million worth of RSR would be burned per year. If RSV grows larger, the rate would be higher, e.g. with 100 billion RSV, that would be about $2-5 billion worth of RSR burned per year.

The project itself can also participate in RSR-powered arbitrage pro-rata and maintain the same fraction of ownership of RSR over time, without selling any RSR on the open market. An example: say that there are 20M RSV from fees and collateral appreciation in a given year, and say that the project holds 50% of RSR in that year. The 20M RSV would lead to about $20M in RSR being paid to the smart contract and burnt, in exchange for the 20M RSV. So if the project participated pro-rata that would mean it would have traded in about $10M in RSR for 10M RSV. But it would still hold 50% of RSR at the end of the year, as twice that much would have been burnt. Thus the project would have 10M RSV in revenue while still holding the same fraction of RSR, and not selling any RSR on the open market.

Market makers and traders also profit maintaining the RSV peg – they can purchase $1.00 worth of RSR, and trade it in for 1 RSV, at a time when its possible to sell that RSV for >$1.00.

In addition, anyone holding RSR will be able to propose rebalancing of the RSV collateral. The governance mechanism is used to approve or deny these swaps. Reserve is building contracts so that control can be passed on to a DAO of RSR holders with a single transaction. Why is this important? RSV tokenized collateral assets will be domiciled in many different countries. If any tokenized asset is coming under regulatory pressure, the Reserve smart contract governed by the DAO can trade those tokens for other collateral tokens, thus reducing its dependence on that country. In addition, RSR token holders will have the ability to decide on RSV transaction fees and other Protocol parameters.

For more on Reserve Protocol read our whitepaper.

What is mainnet and when will it launch?

Mainnet launch is when the complete version of the Reserve Protocol is released. This includes the launch of arbitrage and governance decentralization via RSR.

This is not a technical milestone, we can launch mainnet at any time. However, it will happen when we determine that it’s the right time to do it, which depends on multiple factors including getting real-world adoption of RSV. Improvements under the hood are very important to RSV’s censorship resistance and stability at massive scales, but won’t themselves yield adoption, which is our main priority right now. A beautiful, elegant cryptocurrency that nobody uses is still worthless.

Main conditions for the launch of mainnet are:

  • Achievement of product-market fit, and rapid growth in real-world adoption of RSV already occurring.
  • Dramatic growth in awareness of the Reserve project, based on real, exciting progress, and strategic marketing efforts to spread the word about that progress.

We realize the extreme importance of getting the decentralized governance mechanism right. You can read more about our views on this topic here.

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