Cryptocurrencies initially were created as a peer to peer payment system. And while one can argue how well that has played out so far, one thing is clear: the inherent volatility of cryptocurrencies that is a huge opportunity for traders, is hindering mass adoption.
Since 2018 different blockchain companies have started to issue stablecoins to bring the advantages of blockchain and the stability of real-world assets together. Yet, many stablecoins sacrifice decentralization by storing all reserves in a central bank account. It’s quite ironic considering that initially, crypto companies were embarking on a mission to get rid of traditional banking.
Other stablecoin companies are issuing decentralized versions of a stable currency, often relying on over-collateralization of issued coins and sophisticated smart contracts to help keep the stable value. These are highly complicated and the main use-case for them is cheap leverage, hence not so useful in real-life.
Are those the only two options to create something stable that benefits from blockchain technology?
The team behind Reserve chose a compromise of moving through different phases that are increasingly decentralized on their mission to create a universal store of value. They believe that cryptocurrencies can be better money of some kind than fiat and are working on building a cryptocurrency that is stable, yet accessible: Reserve.
The 1st phase marks the most centralized phase, where Reserve is backed by a small number of collateral tokens, that are pegged to the US-Dollar. In the 2nd phase Reserve would be backed by differing baskets of assets, but still, maintain the peg to the US-Dollar. And in the third and last phase, the dollar-peg would be abandoned to stabilize the real purchasing power of Reserve.
The Reserve ecosystem includes 3 different kinds of tokens:
- The stable reserve token (RSV)
- The Reserve Utility Token (RSR)
- Collateral Tokens
Collateral Tokens are simply tokens that are held in the Reserve smart contract to back the value of the Reserve Stable token, similarly to Ether in the Maker ecosystem. The idea behind is a collateralization ratio of at least 100%. This means that at any time, the assets held in the smart contract should have at least the same value as the circulating supply of Reserve. Collateral tokens can be any kind of tokenised asset such as bonds, stocks or real estate.
Whenever someone purchases Reserve with a tokenised asset, this asset will be held as collateral so that the collateralization is always 1:1. Over time, more and more different assets will be used to buy Reserve consequently diversifying what is held as collateral.
One possible limitation of this set-up is that even real-world assets are not stable in their value. Whenever collateral assets decrease in value, the Reserve Rights Token can be minted and sold on the open market to increase collateral. Additionally. Reserve Rights Tokens (RSR) give holders the opportunity to vote on governance proposals in the Reserve network.
Another mechanism contributing to the stable price of $1 are the powers of the market. The redemption price for reserve in the reserve smart contract is always at $1. However, when Reserve sells for less on the open market, it creates an incentive for traders to buy cheaper RSV and sell it for more back to the smart contract. This in return increases the demand for RSV and drives up the price back to $1. The beauty of Market Forces in action.
While all this may sound a bit far from real-life, the Reserve team is working on bringing their solution to the people who most need it.
They launched a user-friendly venmo style app that is targeting countries in South America that are battered with hyper-inflation. The app allows users to easily switch from fiat to reserve and back, hence providing a better store of value than money in countries with hyperinflation.
The Reserve team is actively building on growing their user-base and backed by strong advisors, reputable investors and with a solution for anyone looking to protect their money, send it abroad or easily accept payments, is on a good way to achieve their mission of creating a universal store of money.
Reserve’s RSV and RSR are going to be listed on the Bitcoin.com Exchange on Thursday, April 16th 14:00 UTC with BCH and USDT pairs.