As seen in our Stablecoin history, we have evolved through various forms of stablecoins over recent years. From USDT to TUSD which are dollar-pegged, into more complex forms of stablecoins such as MKR and Dai, which are a set of two tokens that are inter-related; the stablecoin Dai is collateralized by Ethereum. Essentially, Maker MKR token, the fluctuating asset, holds the reserve collateral (Ethereum) which allows the Dai token to be stable.
The problem with having the reserves based on one asset as collateral (in Maker Dao’s case, ETH), is that if the asset drops below a certain price point, it could lead to an under-collateralization of the whole ecosystem.
We saw issues on March 12th 2020, whereby the price of the Dai stablecoin was not so stable, at one point trading as high as $1.12 on Coinbase. Congestion in this situation with both Ethereum and the data oracles allowed for ETH to be auctioned off by the Maker Vault and won by zero bidders (bidders who basically got Ethereum for free).
Similar to this concept of having a two-token ecosystem, Reserve Protocol has a multi-tiered approach throughout their roadmap, which is to have:
- A Centralized phase, backed by a small basket of collateralized tokens, pegged to the dollar.
- A Decentralized phase, whereby a changing basket of assets which rotate in a decentralized way and is still pegged to the dollar.
- An Independent phase, which is no longer pegged to the dollar, with the basket of assets which should mean that it should be independent from the dollar and other fiat currencies.
The ecosystem consists of:
RSV Reserve Token: The dollar-pegged stablecoin (for now), which is backed by the RSR.
RSR Reserve Rights Token: The token which stabalizes the RSV via collateralization of a basket of assets. It will also be used for governance in the future. Currently, the three in the basket are USDC, TUSDT and PAXOS.
The collateral held in a basket of assets over-collateralize the RSV by at least 100%, which gives it more credence than other stablecoins that are fractional and could be seen as a much lower risk play, in case something similar happens to the market aliken to March 12th 2020, with the MKR issues.
How does RSR help RSV to be stable?
Arbitrage, or “Arbing” is used to keep the price of the RSV stable. If the price of the RSV goes to, let’s say, $0.96, holders of RSR will be incentivised to buy it at the 4% discount and then redeem the tokens with the Reserve smart contract for $1.
The opposite is true too, whereby if the price goes higher than $1, it can be bought from the smart contract for $1 and then sold on the open market, securing a profit and bringing the RSV back to its original price.
Why the current strategy?
As mentioned in the latest podcast on Huobi, many problems that crypto can solve are invisible to those of us who are lucky enough to live in a country where the currency is stable.
In countries like Venezuela, the hyperinflation is at a point where any money you get paid will be worthless the week after. Also, to use services like Paypal or Cashapp, cashing out from USD to your bank account can take several days, by which the money will have lost a lot of its purchasing power anyway.
Another issue is that countries like Argentina are inforcing capital controls on their own citizens, so only a limited amount of foreign currency can be bought per week. When someone is trying to save their wealth by converting it into the dollar for example, there is very little they can do currently, other than spend it before the value gets inflated away.
This is why Reserve Protocol have targeted countries with financial instability present, so they the app is live in Venezuela, Argentina & Columbia, with more countries to follow.
Speculation: why is the potential PayPal link significant?
Earlier on this year, PayPal announced that they will be bringing cryptocurrency to 325 million users. As there are three Paypal Associates who are investors in Reserve, one of them being Co-Founder of Paypal Peter Thiel, There is speculation that RSR & RSV will be involved some way.
If this does happen, it will be massive exposure for this digital currency. However, there is no concrete evidence for this so do not expect it to happen.
All content is for entertainment and educational use only. We do not give investment, financial or trading advice. Always do your own research.