What Is Reservoir Protocol?

The broader cryptoasset industry may have existed for nearly 15 years, but it is only recently that the world has woken up to the reality that stablecoins stand as one of the only use cases to date that have provable product-market-fit.

That is to say, stablecoins have proven themselves to possess extreme usefulness in transferring value not only within cryptoasset markets but also between businesses, individuals, and institutions. At the current pace, the world will inevitably transition from a cash and card society to one where digital wallets housing a variety of stablecoins will dominate the flow of commerce, remittance, and investment. Consider that in less than 5 years, the total stablecoin market cap has soared from roughly $30B to more than $168B and more than $14T in value has been transferred via stablecoins so far this year.

Although stablecoin adoption remains on pace to become a trillion-dollar market before the end of the decade, the case could be made that there remain several inefficiencies and bottlenecks that the industry needs to overcome to realize its full potential. Only recently have market participants realized that stablecoins must be sufficiently decentralized, scalable, efficient, scalable, and possess real utility before onboarding and cross-collateralizing the next $1T of assets.

Knowing these realities exist and stand in the way of mass adoption, Reservoir was born. Amongst all else, Reservoir offers market participants a variety of yield-bearing products backed by high-quality assets, making it the next-gen stablecoin protocol. But to understand where Reservoir is headed and why it is destined to disrupt legacy stablecoins, such as USDT and USDC, one must first understand its ins & outs, Reservoir's underlying architecture, and how it is superior to competitors. Only then will it be obvious why Reservoir exists and what's ahead for the protocol.

Understanding Reservoir Protocol

Since day 1, the purpose of Reservoir has been to offer users the most trusted and scalable decentralized, next-gen stablecoin protocol as part of a broader effort to address the market’s demand for a decentralized, scalable, efficient, and yield-bearing stablecoin. As a permissionless protocol on Ethereum with native integration on top-tier networks, Reservoir offers users globally access to a next-gen stablecoin, a liquid yielding asset, a term-based yielding asset, and a permissionless lending market. Backed by multiple digital and Real World Assets (RWA), Reservoir provides the most scalable stablecoin through DeFi applications and RWA integrations, offering better and more consistent yields than other stablecoin protocols, irrespective of market conditions. By design, the underlying assets powering Reservoir products are less volatile, of higher quality, and offer greater diversification compared to peers, thereby opening up the door to all sorts of options for individual investors, funds, DAOs, exchanges, TradFi, and fintechs.

The Products

In addition to its unique design, the Reservoir protocol has several different products for users to select from, depending on their preferences. While each product is unique in its own regard, together, the following assets allow for protocol synergies to be realized and thus, a more comprehensive, sustainable, and attractive protocol for all market participants: 

• rUSD Stablecoin: An ERC-20 stablecoin pegged to the U.S. dollar that's backed by a balance sheet of both real world and digital assets. rUSD can be minted, redeemed, borrowed, or lent at any time.

• srUSD Savings Asset: A yield-bearing, liquid savings product with no lock-up that’s minted via rUSD. srUSD offers users low-risk yield on idle assets without sacrificing liquidity.

• trUSD Term Asset: The world's first smart contract term-based source of capital where deposited collateral is used to fund Real World Assets and DeFi yield strategies. Users can mint a fixed yield token to receive scheduled cash flow payments and buy different terms at different maturities.

• Lending Market: Reservoir's lending market allows users to borrow/lend digital assets. Users can access fixed-rate and floating loans directly from Reservoir's balance sheet using a variety of RWAs and digital assets as collateral, thereby gaining leverage via a loan denominated in rUSD.

How It Works

Amongst all else, the core focus of Reservoir is to grow the demand for rUSD while generating high-quality yield for users. We, however, expect rUSD and our infrastructure to be the basis for other DeFi and CeFi partners to integrate, build products alongside, and be a source of high-quality collateral. In doing so, Reservoir will help answer outstanding market demands, improve the liquidity and efficiency of various protocols & markets, and also help further accelerate the adoption of stablecoins, RWA, and DeFi. But how does the protocol work, you ask?

1. Users deposit an approved stablecoin, such as USDC or USDT, into Reservoir’s Credit Enforcer (CE) & Peg Stability Module (PSM) to mint rUSD.

   • The CE is a smart contract with wide powers to enforce the protocol’s financial covenants in terms of liquidity and solvency to ensure a 1:1 conversion of rUSD to other supported stablecoins is available at all hours.

   • The PSM is a special vault managed by the CE system that automatically balances to offer liquidity to users on the respective chain.
   

2. The CE then allocates deposited assets into high-quality RWA and/or onchain crypto-backed loan asset adapters, allowing the protocol to generate a competitive yield.
   

3. Once approved stablecoins are deposited, the user mints rUSD. Users can instantly redeem their rUSD for supported stablecoins. They can also hold and/or use rUSD across DeFi & CeFi platforms to earn points/incentives.
   

4. Users then have the following options:

   • Mint srUSD with their rUSD to generate a liquid yield-bearing token with no lockup to earn a high yield and protocol incentives.

   • Mint trUSD with rUSD to generate a term-based yield token with a fixed rate and desired maturity/lockup to earn a higher yield and protocol incentives.

   • Note: Both srUSD and trUSD are backed by the protocol’s assets and accrue yield in real-time.

Better Yields, Better Rewards

It should be noted that, unlike legacy stablecoins, rUSD holders will eventually be able to earn a competitive, sustainable yield while helping the protocol generate revenue that benefits all. More specifically, while centralized stablecoins and yield-bearing stablecoins, such as USDC, USDY, and USD0, either pass back 0% or 5% of revenue generated from depositors to the token holders, rUSD seeks to pass back a whopping 15% back to rUSD holders. On top of that, while Reservoir is similar to its peers in that revenue generated at the protocol level flows into governance tokens, such as Ondo Finance’s ONDO token and Usual’s USUAL token, governance token rewards are also passed back to rUSD holders - thereby boosting the yield earn from holding rUSD and directly and indirectly driving demand for rUSD and DAM holders.

Under The Reservoir Hood

Reservoir has several components and features that make up its futuristic architecture and next-gen design. At the end of the day, Reservoir is designed to ensure protocol solvency. As shown in Figure 3, many moving parts make up the Reservoir protocol and allow it to be what it is today.

Credit Enforcer (CE):
Reservoir's CE is a robust smart contract designed to uphold the protocol's financial covenants regarding liquidity and solvency. It ensures that there is always sufficient liquidity for a 1:1 conversion of rUSD to other supported stable assets. Additionally, it deploys the remaining protocol-controlled assets into automated yield strategies, benefiting srUSD and trUSD holders. To maintain the protocol's solvency, any modifications to asset allocations must comply with specific invariants. If these invariants are violated, the transaction will be automatically reverted.

Peg Stability Module (PSM):
The Peg Stability Module is managed by the CE system, which ensures the PSM has sufficient liquidity to meet demand without excess. This system, powered by Proof of Reserve, stabilizes the stablecoin peg by ensuring enough USDC is available to redeem liquid rUSD, providing transparency and increasing trust. Additionally, the stablecoin protocol benefits from using high quality assets as collateral, which offers higher yields and stability compared to liquid DeFi assets, reducing peg risk and insolvency threats posed by market manipulation.

Term Issuer:
Reservoir's Term Issuer allows users to exchange rUSD for yield-bearing tokens (trUSD) with various maturities. Governance sets debt caps and interest rates for these tokens, which are purchased at a discount. Upon maturity, users can redeem trUSD for rUSD at a 1:1 ratio. When issued, rUSD is burned, and trUSD is minted at the discounted rate, with users receiving an equivalent rUSD balance at maturity.

Savings Module:
The Reservoir savings product allows users to exchange rUSD for srUSD, a variable-rate yield-bearing token. Governance periodically adjusts the interest rate based on market conditions, affecting the price appreciation of srUSD in rUSD terms and enabling users to earn the best stable liquid yield in the market. When users mint srUSD, they burn rUSD at the current price and can be confident that the redemption price for burning srUSD will be the same or higher in rUSD.

Asset Adapters:
Reservoir's asset adapters provide opportunities for capital within the Reservoir protocol (USDC) to generate yield through on-chain and real-world investments. Once Governance approves the capital allocations and destinations, the stablecoins are transferred to underlying smart contracts with standardized interfaces that report net asset value, enabling the tracking of Reservoir's overall solvency. Regardless of whether the holdings are off-chain net asset values, debt tokens, or LP positions, the assets remain in the custody of the protocol, contributing to the asset side of the Reservoir protocol's balance sheet.

Protocol Balance Sheet:
Reservoir’s balance sheet ensures protocol solvency and user trust, guaranteeing capital availability for redemptions and growth. The balance sheet can be broken down accordingly:

• Protocol Assets: Reservoir will partner with other protocols and firms to facilitate asset selection, growth, and risk management, focusing on several categories of assets: DeFi yield, market making, money markets, crypto-backed loans, and RWA.

• Protocol Liabilities: Reservoir mints rUSD to fund protocol assets and offers srUSD and trUSD products for users in exchange for their rUSD, making all three tokens protocol liabilities.

• Protocol Equity: This portion of the Reservoir balance sheet is the most secure capital owned by the protocol, also known as the "Protocol Reserve."

Proof of Reserves:
As part of our mission to make rUSD the most scalable and widely used stablecoin in DeFi, Reservoir offers users a live view into the protocol's health in terms of solvency and liquidity, which is also known as our Proof of Reserves. The protocol's underlying balance sheet is updated every time a transaction occurs, and real-world asset tokens reflect a daily price update as well. With our Proof of Reserves offering, we can assure users of current protocol balances and prove that the protocol can fulfill future withdrawals.

Superiority Over Competitors

As previously mentioned, Reservoir sports a unique design and value proposition that uniquely positions itself as the next-gen stablecoin protocol while meeting the ever-changing and growing demands for stablecoin users. To understand how Reservoir's rUSD stablecoin is superior to peers, it is worth taking a look at the competitive landscape and considering how rUSD and its peers stack up when considering its scalability, capital efficiency, permissionless nature, transparency, multi-collateral support, and yield-stability.

Circle’s USDC
USDC has long been one of the few go-to stablecoins when it comes to trading cryptoassets and, more recently, has become a more efficient and viable means of getting dollar exposure for those worldwide. USDC may be one of the most coveted stablecoins to date, given its long-standing record of being highly scalable and stable, but it falls short in several ways. For starters, USDC is far from permissionless and is instead centralized with underlying issuing entities in charge of managing issuances & redemption, managing and allocating the underlying capital backing their respective stablecoin, and Circle possesses the power to freeze tokens. Consider that in 2022, Circle froze over 75,000 USDC worth of funds linked to the 44 Tornado Cash addresses sanctioned by the U.S. Office of Foreign Assets Control's Specially Designated Nationals and Blocked Persons (SDN) list. Not to mention, USDC falls short when it comes to transparency. It also fails to reap the benefits of being multi-collateral backed and doesn't offer holders yield.

Maker’s DAI
USDC might currently stand as the de facto stablecoin to turn to for most current use cases, but Maker's DAI has established itself as the first successful permissionless stablecoin that has maintained its peg during unprecedented bouts of downside market volatility. Unlike USDC, DAI also separates itself by enabling holders to earn a yield via its DAI Savings Rate (DSR) and by being multi-collateral backed, meaning more than one asset can be used as collateral to mint DAI. In turn, DAI is less likely to collapse since a single asset failure won't send DAI to its knees. This also means that DAO can be more widely adopted and trusted amongst users, thereby widening its appeal and expanding its potential use cases. DAI comes up short in being scalable since its yield is a function of the demand for DAI, which influences its DSR. DAI is also far from capital efficient since minting DAI can require anywhere from 110% to 200% of collateral value to be deposited. Lastly, it isn't as transparent as some of its peers.

Ondo Finance’s USDY
Relatively new to the stablecoin scene is Ondo Finance's USDY, a stablecoin secured by short-term U.S. Treasuries and bank demand deposits. While USDY fits the bill in terms of being transparent and having yield-stability given the underlying instruments powering its yield to users, it also has several shortcomings worth noting. More specifically, USDY comes up short in being scalable, as its yield is relatively low at what market participants call "the risk-free rate." Additionally, USDY is not capital efficient since its underlying protocol requires $1 of capital to mint 1 USDY, USDY is only available to certain regions of the world and is thus not permissionless, USDY can only be minted with USDC or USD (not multi-collateral backed), and lastly, USDY has no yield stability since it is fixed to short-term U.S. treasury and rates.

Ethena’s USDe
The latest stablecoin to catch the attention of the masses is Ethena's USDe, or what some refer to as a synthetic dollar cryptocurrency with a soft peg to USD that is maintained through opening and closing short perpetual positions, which act as USDe's underlying collateral assets. While many tout USDe's potential for its design and transparency, it has several flaws that, as a result, don't justify the status of being a next-generation stablecoin with considerable potential. In particular, Ethena's USDe needs to be more scalable since its yield is contingent on the crypto market being in a secular bull market and lending markets where there is only so much open-interest that can be tapped to generate its yield. The aforementioned variability in USDe's yield also means that it doesn't pass the test in terms of yield-stability. On top of that, USDe isn't capital efficient, isn't permissionless, and isn't multi-collateral since USDe can only be minted with stETH.

Reservoir’s rUSD
As you can see, Reservoir's rUSD stablecoin checks all the necessary boxes to be the next-gen stablecoin and fulfill all wants and needs. That is to say, rUSD is decentralized, highly scalable, capital efficient, and increasingly more decentralized. It has the proper mechanics in place to ensure peg stability, is transparent with its verifiable Proof-of-Reserves, is multi-collateral, and also offers holders a sustainable and competitive yield.

What's Ahead for Reservoir Protocol

In the months and quarters ahead, Reservoir will focus on several initiatives that will ultimately help drive meaningful adoption of rUSD and its various other product offerings. In addition to mass protocol adoption, Reservoir intends to push the limits of stablecoins, showcasing new stablecoin use cases and features and playing a pivotal role in onboarding the next $1T of assets. As such, Reservoir core focuses include the following:

• TVL Expansion

  • Building liquidity for rUSD, locking capital into srUSD and trUSD, and providing onchain liquidity via Curve Finance. 

  • Offer users various opportunities to earn points and reap other incentives that drive protocol usage and awareness.
    

• DeFi & CeFi Distribution

  • Launch lending and borrowing markets on key DeFi protocols.

  • Roll out new incentive pairs in LPs and exotic DeFi yield strategies with key industry partners.
    

• Cross-Chain Integrations

  • Allow for users to natively mint and use tokens on major Layer-1 and Layer-2 blockchains, as well grow access via centralized exchange platforms.

  • Ramp up Reservoir's incentive flywheel across various chains, launch new distribution channels, and expand existing ones.

  • We intend on focusing on existing and emerging Layer-1 and Layer-2 blockchains that have demonstrated technical superiority, have a lively community, and stand well positioned to help accelerate the success of RWA, such as Arbitrum and Berachain.
    

• Launch Governance
  

👇️ Get started TODAY by visiting the official Reservoir app! 👇️ 
https://www.app.reservoir.xyz/ 

Conclusion

In short,  the Reservoir Protocol represents a significant evolution in the stablecoin industry, aiming to address and overcome the inefficiencies and bottlenecks that have hindered the mass adoption of existing stablecoin solutions. By offering a decentralized, scalable, and yield-bearing stablecoin backed by high-quality assets, Reservoir is poised to disrupt legacy stablecoins, like USDT and USDC, with its innovative architecture and design and comprehensive and attractive product suite.

Reservoir looks forward to growing alongside the industry and seeks to play a pivotal part in the next evolution of stablecoins as mass adoption persists and intensifies. That's why we believe the Reservoir Protocol is not just a response to current market demands but a forward-thinking solution poised to shape the future of stablecoins. By fostering greater efficiency, stability, and utility, Reservoir is well-equipped to lead the transition towards a digital economy dominated by stablecoins, ultimately achieving its vision of onboarding the next trillion dollars of assets. We look forward to our journey and are excited to have you part of it.

Disclaimer: The information contained herein is general information, intended for educational purposes only, and is not intended to constitute legal, tax, accounting, or investment advice. Information, opinions and views are solely of Fortunafi and none of the information contained should be used as the basis for an investment decisions. To ensure suitability, contact a licensed investment professional when making any investment decisions and do your own research.