Protocol overview
Reserve is a DeFi protocol that allows for the permissionless creation of tokens, or RTokens, backed by a custom selection of other ERC20 tokens, chosen by the issuer. So far, there have been four different RTokens issued on Reserve, three pegged to $USD namely, $eUSD, $hyUSD, and $RSD, and one pegged to ETH namely, $ETH+. While the following documents aims in the first place at giving a high-level overview of how the protocols works and the potential risks associated with it, the specific purpose is to better assess the ETH+ RToken for potential yield opportunities.
On top of the basket of ERC20 tokens that back RTokens at a 100% collateralization ratio, the protocol also supports over-collateralization by allowing its native token, RSR (Reserve Rights), to function as extra safety collateral shall one of the underlings decrease in value for any reason. In practice, RSR holders decide for which RToken they’d rather stake their RSR, and in exchange of the risk they undertake they receive a portion of the revenue generated by the underlying tokens and governance rights over specific configurations for the RToken itself. Even though RSR is intended to provide over-collateralization protection it may be worth mentioning that RSR has little over $100k of on-chain liquidity which makes its protection feature quite limited.
When RSR holders stake their tokens, they are issued stRSR as token receipt. Revenue generated from the collateral is used to repurchase RSR and transfer it into the insurance pool. This process gradually raises the quantity of RSR that can be reclaimed for stRSR, assuming the protocol is not compromised.
RTokens are usually backed by interest-bearing tokens as Compound cTokens or different Ethereum liquid staking derivatives (LSTs). In the case of ETH+, 50% is backed by Lido’s wstETH and 50% by Rocketpool’s rETH. Revenue generated by both LSTs is 95% distributed to ETH+ holders and 5% to RSR stakers.
Governance overview
As mentioned above, all RTokens initiated on the Reserve Protocol are independently managed by their corresponding communities (comprised of RSR stakers), with governance parameters being established at the time of RToken launch.
Reserve recommends the use of their own governance module ‘Alexios Governor’ which is a modified version of the OpenZeppelin governor and comes as default RToken issuers.
ETH+ utilises the Alexios Governor as well and has governable parameters set as:
-
Proposal threshold: 0.01%
-
Snapshot delay: 2 days (14400 blocks)
-
Voting period: 3 days (21600 blocks)
-
Execution delay: 3 days
-
Quorum: 10%
In addition, once a proposal is approved, a timelock is introduced to add a further 3-day delay between approval and execution in order to give RToken holders time to mitigate any foreseeable risk. As a result, there is a total of 8 days between the proposal and execution of a given proposal.
In case one of the backing assets were to experience collateral default, the protocol will proceed to rebalance its basket of underlyings’ by swapping the defaulted collateral for one or more of the emergency collaterals. For ETH+ the emergency collateral is set as wETH.
It may be worth mentioning that so far, there are only 14 RSR stakers covering ETH+, with 70% of the supply held by only 3 addresses. While no suspecting behaviour nor proposal has been in sight, it’s important to point out voter centralisation as a potential risk.
Source of Yield
ETH+ is 50% backed by Lido’s wstETH, and the other 50% by Rocketpools rETH. Therefore the primary value accrual for ETH+ derives from compounded staking rewards. As per governance, of the yield generated by the underlying, 95% is directed to ETH+ holders, while the remaining 5% is directed to $RSR stakers providing over-collateralization for this particular RToken. In addition, a pool on Curve was launched pairing ETH+ and ETH where holders can provide liquidity.
The fundamental procedure for revenue distribution commences with the Backing Manager contract, where collateral assets are overseen. In instances where the value of the yield-bearing basket surges in comparison to the circulating RToken supply, the Backing Manager might either generate new RToken or swap profits from its backing for RToken or RSR via the RToken Trader/RSR Trader contract. The revenue that is divided amongst RToken holders is channeled to the Furnace contract where it progressively burns the RToken, hence amplifying the redemption value. Conversely, the share of revenue destined for RSR stakers is dispatched to the stRSR pool where it is steadily distributed as rewards to enhance the stRSR/RSR value.
Team assessment
In their Docs, Reserve claims that ‘Our team has around 200 people organized into 2 Tribes, 15 Guilds, and dozens of Squads’. While part of the team is anon, a number of members are doxxed including the RToken lead. The two tribes mentioned above are:
-
RPay Tribe, in charge of the app and Latin American operations
-
RToken Tribe, responsible for smart contract development, led by Nevin Freeman.
Security
Smart contracts have been audited by Solidified, Ackee, Halborn, Trail of Bits, and Code4rena, with the latest being published in March of 2023. The audits from Solidified and Halborn did not find any critical vulnerability and all minor findings were addressed by the team. On the other hand, audits from Trail of Bits and Code4rena did find 5 and 2 high-severity issues respectively. Nonetheless, all issues have been mitigated as per the latest updates.
Suggested allocation
In line with the information above, the committee is considering allocating up to 400 ETH of its reserves to ETH+, either for simple value accrual through staking rewards accrual or by providing liquidity when paired with ETH.
Resource for further analysis
-
Website: https://register.app/
-
Documentation: https://reserve.org/protocol/
-
Github repository: https://github.com/reserve-protocol/protocol
-
Further analysis: https://cryptorisks.substack.com/p/asset-risk-assessment-reserve-protocol