With the year 2021 coming to an end, we wanted to take a moment to share with our community what progress Reserve has made in the past year, how we think about the project now, how the mainnet protocol rollout will happen, and where we will be going in the future.
This article is a written summary of the “Reserve 2021 year-end update” video. Here’s that video for those who prefer the long-form presentation:
Let’s start by looking at how Reserve has grown in the past year.
Since the end of 2020, we’ve offered an app with an easy-to-use interface that allows deposits & withdrawals from various banks and payments platforms to and from the Reserve token (RSV), a stable cryptocurrency pegged to the US Dollar.
The Reserve app supports different fiat integrations, such as Venezuelan Bolivars, Argentine Pesos, Colombian Pesos, but also payment platforms such as Uphold or Zelle, and even various cryptocurrencies.
Ultimately, the Reserve app serves as a way for citizens of hyperinflation-affected countries to cope with the effects of hyperinflation by allowing them to save and spend their hard-earned money with a USD stablecoin.
Here’s a live demonstration of the Reserve app in its current state:
In September 2021 we came out of beta, removing the waitlist for new signups and allowing anyone in countries we serve (Venezuela, Argentina, Colombia, Panama) to join. As of now, more than 380,000 people have registered to use the app & more than 100,000 people visit the app weekly.
Most of the efforts of the Reserve team in 2021 were focused on the growth of the Reserve app and everything that revolves around it, a significant part being the growth of the network of merchants that accept Reserve directly for their goods or services.
At this point, more than 8,000 merchants accept Reserve as a means of payment — with Burger King Venezuela most notably recently announcing that all of their Venezuelan branches now accept Reserve.
The Reserve team itself has also grown incredibly. We’ve managed to recruit a group of about 160 people who are not only very qualified to grow the project, but are also committed to the mission at heart. We expect our growth in team members to continue in 2022 to be able to continue supporting our growing customer base & community.
So what does all this growth mean? To us, it means that phase 1 of the Reserve project — helping people cope with hyperinflation — is really working! There is a clear product-market fit and we are able to really help normal people in their daily lives. We are now starting work on phase 2 of the project — developing toward a non-fiat-based stable cryptocurrency — along with continuing to grow our phase 1 offerings.
Let’s take a look at what the future holds for Reserve.
The goal of Reserve is to help people cope with the effects of high- and hyperinflation, and to reduce its occurrence (or even eradicate it entirely) over time.
In the short term, this means offering a fiat alternative to all those who need it. By allowing citizens from hyperinflation-affected countries to access the (relative) stability of the US Dollar through RSV, they can effectively save themselves from the significant effects of hyperinflation by saving & spending their money at stable value.
However, what would happen if the value of the US Dollar falls? After all, a quick look at the history of currency teaches us that, whenever a major empire gives way to the next one, there usually is a large depreciation of the currency that empire was issuing. Furthermore — if that happens — it would not only cause serious issues for Reserve app customers, but also for the rest of the world population.
What if we could create a stable, state-independent, non-fiat currency? A currency that would remain stable both month-to-month as well as century-to-century? That is the long-term vision of Reserve.
So what would this currency look like? Well… we believe it should be fully collateralized and backed by many tokenized real-life assets ranging from precious metals, commodities, and perhaps even equities. Which exact assets should be backing this currency and how it should be governed are questions that will be explored over time by the collective of RSR holders, and these elements are not something the founding team will govern.
We have developed the Reserve protocol as a platform (rather than a single application) that allows anyone to create their own stable currency within the Reserve ecosystem. Each of these stable currencies is called an “RToken”.
Part of the inspiration for this approach comes from economist Friedrich Hayek’s book “The denationalisation of money”, where he argued that the world would be better off if private entities were allowed to create currencies, and those currencies were allowed to compete against each other. The basic idea being that the normal force of capitalist competition for goods/services could also work for currency.
We will deploy this open protocol in 2022, and turn our efforts to building community and offering tools and resources for RToken creation and improvement.
The way the Reserve protocol works is very similar to how Uniswap works. The smart contracts that we deploy are actually factory smart contracts from which anyone can deploy a new set of smart contracts pretty easily. Thus, anyone can create a new basket-backed stablecoin using the Reserve protocol, without having to be a technical savvy user.
But how is an RToken different from other stablecoins in the industry? The answer lies in the 4 main components each RToken consists of:
- Each RToken is backed by a basket of other ERC-20 tokens.
- Each RToken has a set of backup tokens that can automatically replace the collateral tokens if they were to default.
- Each RToken has its own governance model. Once an RToken has been deployed, it can be governed in whatever way the creator determines (centralized, multisig, a DAO, etc).
- Each RToken has an insurance mechanism built into the code. RSR holders can stake on any RToken to offer up their RSR as insurance if any of the basket assets defaults. In return, they get a portion of that RToken’s revenue.
An RToken can have any combination of backing assets, so there may be many types of them deployed over time. But we’ve designed the protocol with the goal of supporting stable currency-like baskets. Here are already some examples of RToken types we anticipate users deploying:
The following image gives an idea of what the different steps are for fully launching the Reserve protocol. We are currently in the “Development” phase, and hope to soon be able to go into the “Code freeze” phase:
Our protocol development team has been working nonstop for several months to deliver the best possible mainnet version of the protocol as soon as possible. Our intention was to reach code freeze by early or late December, which would put us on a launch timeline of late December or somewhere in January.
However, we have encountered some steps that have taken longer than planned which have changed our estimates. Here are some examples of what causes us to push back the launch timeline:
- An unexpected refactoring: we needed to break one part of the code that was 2 smart contracts into 10 smart contracts so that we could think about them more clearly (which was necessary to guarantee their correctness).
- A need to update our testing approach: the normal way of doing tests and fuzz-testing would not have explored all of the paths in our code (which would’ve left room for possible bugs). We had to try and eventually choose a new toolkit in order to make our test more thorough. This led to a 2x increase in Solidity code, in order to write the new tests with the new framework.
- The need for doing different pieces separately: we came to the conclusion that a better approach to the new RSR contract deployment would be to deploy it first, give it some time to make sure there are no issues, make sure exchanges and wallets are updated, and only then launch the protocol officially. We are also aiming to get RSR added to Aave after the new version is launched and before the rest of the protocol is deployed.
For more explanation of these examples, check out this section of our year-end update video:
Given that these late-stage development tasks are generally taking much longer than expected in order to reduce the risk of bugs and hacks as close to zero as possible, we have started to project that the remaining final development stages are all going to take substantially longer. We always try to build in time for the unexpected, but in this case we’re finding even more unexpected time-consuming tasks that must be done carefully than we had projected.
With all of this in mind, our new estimated protocol launch timeframe is around the end of March or sometime in April:
For some of you reading this article or watching our presentation, that won’t really matter much. After all, what is a couple of months for a project that has been so long in the making?
But for some of you this will really matter. And we understand why.
The thing we want to make clear here is why we decide to develop the protocol in this way. Why we’re willing to take on delays like this.
As we mentioned in the previous section, we are aiming quite high as to the significance of what this technology is ultimately meant to achieve. Getting it right from the start, therefore, is really really important. After all, having a critical bug in the code after mainnet could destroy the reputation of the protocol and render the whole project irrelevant.
We are willing to take on these delays because it is essential for the long-term success of the project. If we want to set up the Reserve project for real success, we cannot afford to cut corners now. We need to prioritize security and careful development over earlier delivery of protocol.
Nevertheless, we acknowledge that this will be bad news to some in the community, and we certainly are not happy to delay the timeline, as we want to set the protocol free in the world as soon as possible. This is a challenge of sharing our estimates publicly — we really did estimate a December/January launch, so we chose to set community expectations, and now we have to reset those expectations. We hope you’ll understand why we think it’s the right thing to do.
We’ll look at the economics of RSR by examining two scenarios. In the first scenario, we have 4x as much RSR staked as the market cap of the RToken that the RSR is staked on — which we believe could be a possible early-days scenario. After all, the market cap of any RToken will be relatively low right after it has been launched.
Imagine that the RToken is offering staking rewards that are equal to 2.5% of its market cap (a plausible number, but an estimate nonetheless). Because you have 4x the amount of RSR staked on that RToken, you’d have to divide that value by 4 to actually get to the annual earnings for RSR stakers, resulting in only 0.625% in that scenario (which isn’t really that interesting of an amount to earn for staking your RSR).
Now let’s look at another scenario — one that is more plausible in a later stage if an RToken becomes popular.
In this second scenario, we have 1/4th of the RToken market cap staked in RSR. Here, the math goes into the other direction. If the RToken is paying 2.5% of its market cap to RSR stakers, that will actually result in 10% annual earnings for RSR stakers.
Now, there’s a further nuance we can look at with scenario 2. Suppose you purchased that staked RSR early on, and suppose you purchased it for 1/10th the price it ends up being at a later stage when you end up staking it. In that case, the yearly return on capital would actually be 100% of the capital that you initially spent to buy that initial RSR.
We are obviously not making any claims that the price of RSR will grow 10x. Maybe that will happen, but maybe it won’t. RSR could also go down in price, and in that case the math would go in the other direction.
We believe that this dynamic, however, is worth keeping in mind. When we think about the long-term economics of the protocol, this is something we take into account in our model.
We actually have a formula where we can think about the value of all the staking rewards for a particular RToken in perpetuity into the future. The slide below displays that formula:
Up to now we have not published the details of this model yet because we have to be really careful about not making any price predictions about RSR, but rather letting others come to their own assessments to that question. But we do intend to publish our mathematical analysis before the launch of the mainnet protocol — we just have to be sure to do it right.
On a high level, staking rewards are required to incentivize RSR holders to provide insurance for an RToken, or for participation in governance of that RToken. The latter will most probably not be applicable in the early stages of RToken governance, but we expect will begin to play a larger and larger role as RTokens grow.
It’s really these two forces that fundamentally drive whether RSR holders will have the opportunity to earn money by staking their RSR and participating in governance in the future. Important to keep in mind here is that the amount they’d be able to earn is contingent on the market cap of RTokens:
At Reserve, we’re especially excited about this type of staking for how real it is. What do we mean by that?
These days in the crypto world, the term “staking” is often times abused. It often just means putting your tokens in some kind of smart contract, without actually putting them at stake (which is the case in PoS protocols).
More often than not, staking these days is just a mechanism to incentivize people to lock up their tokens so they don’t sell them. This is very often part of some kind of scheme to make a token more valuable in the short term. But these kinds of schemes can fall apart when price crashes lead to reduced staking rewards, thus motivating more un-staking and selling. RToken staking has no such downward-spiral dynamic.
Another reason we’re so excited about this type of staking is because the rewards in this staking mechanism are coming from value that the protocol has actually provided to the world, rather than from just handing a newly minted token that the market has give some speculative value to. This is a sustainable, long-term revenue mechanism that the autonomous set of smart contracts can execute.
We believe it is very important to differentiate between the two major types of staking that exist in crypto today. The common pattern that we currently see in DeFi will be able to offer very large staking rewards in the beginning, but as the token that is paying for it gets handed out, or as interest in that token wanes and the value goes down over the course of time, those staking rewards will also reduce over time — until people just decide to move on.
In contrast, with the mechanism that is built into the Reserve protocol, if RTokens get popular, then the staking rewards will continue to go up over the course of time (instead of a large fanfare in the beginning followed by mass abandonment afterwards).
And the third main reason we are excited about this mechanism is that it puts the incentive in the right place for RSR holders. They won’t have the opportunity to earn high staking rewards if RTokens don’t get popular, so long-term RSR holders have the incentive to collectively promote the best RTokens.
The founding team is launching the protocol, but RTokens can be created and promoted by anyone. In the long term, the founding team is not intending to create and popularize many RTokens itself, that’s up to the collective of RSR holders to do. So it’s important that the community’s incentives are aligned.
In summary, the Reserve protocol really is built for the long term and to remain economically sound in the long term.
Something that members of our community have been expressing concerns about is the RSR unlocking schedule after mainnet launch, and also here we understand why.
We’ve been doing a lot of thinking about ways for how we could improve the unlocking of currently locked RSR and believe we’ve found a solution that is better for all parties involved.
There’s a lot of relevant background info that we’d love for you to know about, so we recommend watching the video below where Reserve CEO Nevin Freeman goes into all the details of this :
For those that prefer the written summary: we will be offering all locked RSR token holders a new option regarding the unlocking of their tokens. This new unlocking option entails the following:
- Instead of RSR tokens unlocking upon mainnet launch, tokens will begin unlocking in January.
- But… These tokens won’t really be unlocked, since they will still be in Reserve’s custody.
- If RSR holders wish to sell any of their RSR tokens, they can submit their request, and can only sell tokens through one connected OTC desk.
- This OTC desk will match sell orders with OTC buys and will limit selling on exchanges to about 3% of the real daily trading volume, in order limit impact on the price of RSR.
- After six months, the RSR holders who choose to go for this option will then directly receive all tokens they did not decide to sell.
Locked RSR holders still have the initial contract option of receiving their RSR tokens directly during 6 months after mainnet launch, as this was originally contractually agreed on.
At Reserve, we are very excited about this new option. We believe choosing option 1 is the better option for all parties involved (watch the video above to understand why), and we expect many if not most parties to do so.