The Reserve protocol aims to empower any entity to easily launch decentralized synthetic assets on Ethereum backed by a predefined basket of ERC-20 tokens. These assets are referred to as RTokens in the Reserve protocol ecosystem, with customizable parameters for each token as it relates to governance, revenue share, collateral backing, and more. The deployment of RTokens is permissionless, which, in theory, should result in the market choosing which RToken model serves as the most efficient form of onchain money. The core development team’s thesis when creating Reserve was two-fold: more assets will be tokenized in the future and decentralized governance will need to evolve. The customizability of Reserve was intentional by design so that synthetic assets issued as RTokens can adapt to the ever-changing crypto landscape.

RTokens

The Reserve Protocol is essentially a system of factory smart contracts, or smart contracts that enable anyone to permissionlessly spawn additional contracts based on a template. The factory set can be interacted with directly onchain or through 3rd party front ends like Register to launch synthetic assets that anyone can mint with approved collateral or redeem for collateral within the underlying basket. RTokens inherit the properties of its asset backing, thereby creating a synthetic asset that possesses a plurality of properties deemed important by the RToken creator e.g. a fiat-pegged asset, a yield bearing token, a highly decentralized token, etc. In prior protocol implementations the minter of RTokens was required to provide the proper weights of each collateral type, but ‘Zaps’ have been integrated to let users deposit any supported collateral that is then converted under the hood to the appropriate asset in order to provide a more seamless user experience. The accepted collateral is defined by the RToken creator alongside governance parameters, the token ticker, emergency collateral types, issuance and redemption throttles, revenue share, and more. The Reserve protocol core development team has shown their commitment to security by launching a $5M bug bounty program and undergoing numerous audits from Halborn, Trail of Bits, Code4rena, and others.

Creators can opt to over collateralize their Rtokens with RSR, Reserve’s native token, whereby stakers serve as the backstop liquidity provider in the case of collateral default in exchange for a share of the yield earned on the underlying basket of tokens. RSR stakers are more likely to provide ‘insurance’ for an RToken if the asset backing is high quality and generates an advantageous yield for RSR stakers. This is made clear when looking at the RTokens live on mainnet today: eUSD has a 100% revenue share with RSR stakers alongside high quality collateral types, which has resulted in nearly $4M of RSR staker backstop liquidity.

It is worth noting that a governance proposal is live on the hyUSD forum to remove the MIM/3pool exposure in favor of the Balancer boosted Aave V3 stable pool on Aura. The author points out that the APY is not high enough to justify MIM’s volatility, and that a comparable yield can be earned via the bb-a-USD composable stable pool consisting of DAI, USDC, and USDT. hyUSD was created by a community member and is now being maintained through decentralized governance. hyUSD is a prime example of an RToken created and maintained by DAO community members.

There are some limitations on accepted collateral types for RTokens. They must adhere to the ERC-20 token standard with only one token contract address, and they cannot rebase or impose a fee upon transfer. In order to circumvent these limitations, RToken creators can use wrapped ERC-20 assets as a substitute. Yield-bearing LP tokens from an AMM or single sided receipt tokens from a borrowing and lending protocol are examples of ideal RToken collateral types considering the yield they can generate for RSR stakers, RToken holders, a community treasury, etc. Collateral tokens with supported plugins can be found on the Register app interface under ‘RToken Deployer’.

eUSD

The Reserve Protocol has evolved considerably since its inception in 2018. In the early days, the core product offering was RSV, a stablecoin backed by other stable collateral types with no RSR over collateralization or properties that exemplified decentralization. RSV was integrated into the Reserve Mobile App (RPay) and experienced modest success, but the team ultimately pivoted to become more modular in nature to improve decentralization and promote open innovation. RSV has since been replaced by eUSD on the RPay app. There is ~$6M worth of eUSD in the Ethereum-RPay bridge that is controlled by a 2-of-4 multisig.

Mobilecoin, a blockchain focused on delivering cheap, fast, and private transactions, chose to leverage the Reserve protocol to deploy eUSD in February 2023. The RToken is issued natively on Ethereum for maximum security and optimal composability, but can be bridged to Mobilecoin for every day payments on their mobile app, Moby. The application is KYC/AML compliant and privacy preserving. Mobilecoin eUSD is backed 1:1 by Ethereum eUSD with bridge transactions coordinated by the Reserve team and whitelisted LPs. It is difficult to gauge the success of eUSD on Mobilecoin given the private nature of transactions occurring there, but the lack of mint/burn activity and total supply of just 500K in the bridge signals modest adoption at best.

The Mobilecoin and RPay bridges currently hold ~31% of the entire eUSD supply, and just 7 other Ethereum addresses hold more than 1k tokens. One of which is an EOA that holds ~34% of the supply, with another ~33% in the eUSD/hyUSD or eUSD/FRAXBP pools on Curve. However, the latter two pools only have a combined 13 LP token holders. The lack of usage/adoption of eUSD on Ethereum is likely what motivated the Reserve team to make a $20M investment in assets related to the Curve, Convex, and Stake DAO ecosystems. By accumulating CRV, CVX, and SDT, the Reserve team can redirect incentives to RToken pools to ensure deeper onchain liquidity and greater price stability. The purchases are already paying off, with yields for LPs jumping significantly in late June.

During the USDC depegging event in March 2023, the RSR over collateralization and safety collateral mechanism was battle tested as saUSDC and cUSDC collaterals began to signal default after trading below peg for over 24 hours. The USDC derivatives (saUSDC and cUSDC) were auctioned off at ~0.955 on the dollar for emergency collateral. This left eUSD ~98% collateralized, with the difference made up by seizing ~8M staked RSR and auctioning it off for ~32k USDT.  The depegging took place prior to eUSD’s supply growth, which enabled the mechanism to be tested without inflicting significant damage to RSR stakers. The collateral diversification of eUSD combined with RSR staker over collateralization, which is largely attributable to the 100% eUSD revenue share with RSR stakers, resulted in a quicker repegging to $1 than USDC or DAI experienced throughout the event.

RSR

The adoption of RTokens has proven difficult thus far, but it doesn’t take much imagination to see the flywheel potential if an RToken design were to ever see significant adoption. Assuming a notable revenue share with RSR stakers, the incentive to stake RSR grows in tandem with the RToken’s supply growth. The supply cap of RSR is set to 100B, of which 50.6B tokens are in circulation with just a 3.95% circulating supply stake rate. If eUSD, ETH+, or hyUSD begin to see a significant supply expansion, the demand for RSR could sharply increase as investors seek a relatively safe source of yield.

The remaining 49.4B RSR tokens remain in a treasury designated for RToken adoption initiatives as deemed appropriate by the Reserve team. The supply overhand is something for investors to pay attention to given how long the Reserve protocol has been in operation and the need to drive adoption of RTokens sooner rather than later. But the combined RToken market cap of just ~$23M leaves plenty of room for upside, and as the RSR market cap grows so too does the insurance pool provided for RToken holders.

Final Thoughts

Reserve protocol enthusiasts believe that by making synthetic assets that inherit the properties of the underlying collateral easy to deploy, rapid experimentation will take place and ultimately let the market decide which design is the most efficient. The ideal currency will change drastically over time as more assets are tokenized, and Reserve makes it possible to add another layer of protection to synthetic assets via revenue share from the yield generated on the underlying collateral basket with RSR stakers who provide insurance. The key is ensuring that RTokens see growth so that the yield generated on the collateral increases, which then incentivizes RSR holders to provide insurance through staking, and the subsequent demand for RSR ultimately leads to price appreciation and higher RToken security guarantees.

The adoption thus far has been moderate, with the total RToken market cap growing to over ~$23M since February 2023. RPay and Moby represent interesting ways to spread eUSD adoption for everyday people, but the onchain usage of eUSD and other RTokens has proven lackluster. The Reserve protocol core team is actively attempting to increase incentives to use RTokens onchain, which was made evident by their $20M investment in the Curve, Convex, and Stake DAO ecosystems to direct liquidity incentives towards RTokens pools. It is important that the Reserve DAO develops a strong community of RToken supporters, or even begins to make partnerships with other DAOs to continue expanding the adoption of RTokens to kick off the flywheel.

Sponsorship Disclosure

This report was made free thanks to a sponsorship from the Reserve Protocol team but maintains a 100% unbiased nature. The sponsor's sole influence was on the scope of the report.