Reserve protocol

The Reserve protocol is the first platform that allows for the permissionless creation of asset-backed, yield-bearing & overcollateralized stablecoins on Ethereum. The end goal of the Reserve protocol is to provide highly scalable, decentralized, stable money in contrast to volatile cryptocurrencies such as Bitcoin and Ether.

In our view, clear flaws can be demonstrated with many existing stablecoin designs. In the 2018 Reserve protocol whitepaper, we present arguments for why a widely used stablecoin should implement an exchange rate peg to a fiat currency first and a basket of assets later, using off-chain foreign collateral that has been tokenized by a diversity of issuers.

Furthermore, we believe that open exploration and competition can lead to the discovery of the best type of basket and governance system for ideal onchain money. There's a lot to explore, and it's better not to keep that under the control of the initial founding team. For this reason, the Reserve protocol is entirely permissionless—allowing anyone to deploy a Reserve stablecoin (RToken) with their preferred collateral basket, governance system and revenue distribution.

Watch this introduction video to know exactly why we built Reserve protocol:

Overview

The Reserve protocol allows anyone to create stablecoins backed by baskets of ERC-20 tokens on Ethereum and Base. Stable asset-backed currencies launched on the Reserve protocol are called “RTokens”.

Once an RToken configuration has been deployed, RTokens can be minted by depositing the entire basket of collateral backing tokens, and redeemed for the entire basket as well. Thus, an RToken will tend to trade at the market value of the entire basket that backs it, as any lower or higher price could be arbitraged.

RTokens can be overcollateralized, which means that if any of their collateral tokens defaults, there's a pool of value available to make up for the loss. RToken overcollateralization is provided by Reserve Rights (RSR) holders, who may choose to stake their RSR on any RToken. Staked RSR can be seized in the case of a collateral default, in a process that is entirely mechanistic based on onchain price-feeds, and does not depend on any governance votes or human choices.

RTokens can generate revenue, and this revenue is the incentive for RSR holders to stake. Revenue can come from yield from lending collateral tokens onchain or revenue shares with collateral token issuers. Governance can direct any portion of revenue to RSR stakers, to incentivize RSR holders to stake and provide overcollateralization. If an RToken generates no revenue, or if none of it is directed to RSR stakers, it probably won't have any RSR staked on it, and thus won't be protected by overcollateralization.

Each RToken is governed separately, and each can have an entirely different governance system. Initial RTokens will likely have relatively simple governance systems, which will probably evolve over time. That evolution is up to those that hold power in the initial governance systems.

Governance defines not just the basket to back an RToken, but also an ordered list of emergency collateral. So there's a current basket, and a series of assets that can be deployed to the basket in the case of a default. A collateral token is considered to have defaulted if it's gone down in value more than a defined amount for a long enough time, relative to its reference or target unit (described in the Monetary Units section).

For the kinds of RTokens the core team is imagining, default will be an extremely rare "black-swan" situation, not something that occurs regularly. But still, it could happen, and the purpose of the overcollateralization mechanism is to preserve RToken holders’ value if it does.

Governance can update the basket configuration regularly. When the current basket is updated, or in the case of a default, the protocol makes onchain trades to reach the new basket composition. This trading is modularized so that it can happen in different ways over time as onchain liquidity evolves. Currently, there is a plugin built for Gnosis Auctions (batch auctions), as well as Dutch Auctions, but in the future, once onchain protocol trading can be done without danger of front running, then we expect AMMs and other trading methods to be an option.

As with any smart contract application, the actual behavior may vary from the intended behavior, and it's safest to wait for an application to be in use for a long period of time before trusting it to behave as expected. This overview and subsequent documentation describes the intended behavior.

Our long-term goal

Taking a look at the history of currency reveals that, whenever a major world empire gives way to the next one, the value of the currency that the empire issued tumbles. Besides this phenomenon having happened with currencies such as The Dutch Guilder & The British Pound, recent speculation Ray Dalio states that “the US dollar is not destined to remain the world’s reserve currency”.

Bloomberg reported that “His concern — shared by BlackRock Inc.’s Larry Fink, among others — is that swelling U.S. budget deficits will eventually irk big buyers overseas. You easily could have a 30 percent depreciation in the dollar as the Fed has little choice but to monetize the national debt.”

This is the reason why the Reserve community intends to create a Reserve stablecoin (RToken) that is designed to go off of the peg from the US Dollar. In the very long run, the best outcome for cryptocurrency isn’t just to extend an existing currently-stable asset class, but to create something new that is equally stable in the short run, and much more stable in the long run.

The value of the US Dollar continues to depreciate as time goes on.

We think it’d be really neat if there was a stable currency that kept its value with no inflation for centuries. Think about it. What if you could earn some money today and set it aside for your grandchildren, and when they spent it 100 years from now, they got to buy something just as valuable as what you could have bought right now? That’s not how fiat currencies tend to work, even the best ones like the US dollar.

The way we think this cryptocurrency should be built is by backing it with a diverse and well-structured basket of many different tokenized assets that will hold its overall value for a long time. These could include all kinds of precious metals, commodities, debt & equities.

With a sufficiently diversified basket of assets backing this new currency, its value might be able to follow the global GDP, which, during the world financial crisis of 2008 only dipped ~2%.

However, there are two major challenges that we expect to face on this journey:

1. Right now, most financial assets like equities, commodities, and derivatives don’t exist on Ethereum - they aren’t tokenized. Yet. We imagine a world where nearly everything gets brought onchain and is available for use in Reserve stablecoin baskets. The way the Reserve platform is built, anyone can make new Reserve stablecoins and try out any basket.
   
   We don’t know what will be tokenized, on what timeline, and what the regulatory limitations will be for how tokenized assets can be used around the world. This is out of our hands – the Reserve protocol is a way of building asset-backed coins that can be used as currencies, not a tokenization project. If you’d like to get a sense of the state of real-world asset tokenization, check out the overview on rwa.xyz.

2. We believe that the decentralized governance systems for cryptocurrencies that exist today do not meet the requirements that the governing of a world reserve currency would need. The simple token voting mechanism that is the most prevalent today is ultimately flawed, and the cryptocurrency community as a whole will need to evolve these mechanisms in order to get them to a place where they are truly fair & sufficiently decentralized.
   
   While the Reserve core team intends to work on improving decentralized governance systems, community input & cooperation between different projects will be crucial.

All that being said, we are extremely excited to start working on this part of the project together with the Reserve community and anyone else willing to join in. As more and more assets get tokenized, and decentralized governance systems evolve, we’ll be able to create more and more robust stable cryptocurrencies - and while we’re getting there, we’re building the platform to make it spendable everywhere you want in parallel.