How Reserve works

Reserve is a platform that enables anyone to create and use assets (RTokens) that are backed by a community-defined basket of crypto assets. Reserve consists of two main components: the Reserve protocol and the Reserve Tokens (RTokens). The Reserve protocol is the set of smart contracts that governs the creation, redemption, and adjustment of RTokens. The Reserve protocol ensures that every RToken is fully backed by a basket of collateral assets, overcollateralized by the RSR governance token, and yield-bearing from the fees or interest generated by the collateral assets. The Reserve Tokens (RTokens) are the index assets that are created and used on the Reserve platform. Each RToken has its own name, symbol, peg, collateral basket, governance system, and revenue model. For example, one RToken could be pegged to the US dollar and backed by a basket of USDC, DAI, and ETH, while another RToken could be pegged to a basket of commodities and backed by a basket of tokenized gold, silver, and oil. Users can create their own RTokens by depositing the required collateral assets and RSR tokens into the Reserve protocol. Users can also redeem their RTokens for the underlying collateral assets and RSR tokens at any time. Users can also trade or transfer their RTokens with other users or use them for various transactions and services in the DeFi ecosystem.

What happens in the case of a collateral default

The Reserve protocol always aims to be fully collateralized, though this may not always be the case. In the case of a collateral default, Reserve has several mechanisms to recapitalize the system. First, the protocol would immediately raise a default flag through its default checking mechanisms. The protocol will then proceed to sell as much of the faulty collateral as possible through auctions and use the proceeds, plus any excess collteral, to purchase the predefined emergency collateral (specific to each RToken). In the event that this is still not enough to cover the shortfall, the protocol will recapitalize using RSR tokens staked in the respective RToken contract.

How you make money on Reserve

You can make money by either holding the RToken to earn its underlying yield or stake RSR tokens to overcollateralize a RToken and earn fee share. For example, a RToken may split its revenue distribution such that 95% goes to RToken holders and 5% goes to RSR stakers.