Reserve Fund Application by USD3 and Reserve Protocol

1. Name:
Web 3 Dollar USD3

2. Key Information:
Web 3 Dollar (USD3) is a blue chip stablecoin index earning over 6% APY for holders deployed on the Reserve Protocol.

USD3 Mandate: A low-risk yield-bearing USD stablecoin built on DeFi markets. Governance should prioritize safety and stability, seeking highly-rated stables and DeFi platforms.

3. Expected APY

6.11% APY

4. Underlying asset(s)

USD3 is composed of the following:
50% sDAI - (DAI deposited into Spark to earn the DAI Savings Rate)
50% Compound USDC - ( USDC deposited into the supply side of the compound finance lending market)

5. Minimum/Maximum transaction size
Minimum - N/A
Maximum - N/A

Current mint/redeem throttles are the higher of

Mint - $6,500,000 or 10% of supply
Redemption - $7,500,000 or 12.5% of supply

6. Current AUM for asset

$40,927,723

*There is no formal “issuer” on the Reserve protocol as all operations are handled using decentralized onchain smart contracts. The Reserve Protocol is currently the number 1 Index protocol and has a TVL of $204,645,718

7. Volume metrics.

Curve Pools:

USD3/ETH+

  • Pool Size: $416k
  • 24hr Volume: $40k

USD3/sUSDe

  • Pool Size: $670k
  • 24hr Volume: $120k

USD3/sDAI

  • Pool Size: $720k
  • 24hr Volume: $470k

USD3/USDM

  • Pool Size: $628k
  • 24hr Volume: $38k

USD3/eUSD

  • Pool Size: $542k
  • 24hr Volume: $10k

Data as of 8/12/2024 from https://www.geckoterminal.com/

Proposal Summary

Requested Allocation $4,000,000 into USD3.

USD3 is a RToken deployed on The Reserve Protocol.

The Reserve Protocol is a free, permissionless platform on Ethereum mainnet (as well as Arbitrum and Base) to build, deploy and govern asset-backed currencies referred to as “RTokens.” RTokens are always 1:1 asset-backed, allowing for permissionless minting and redeeming onchain.

Reserve Rights (RSR) is the governance token for Reserve protocol and can be staked on RTokens, where it has two roles:

  1. Overcollateralization: Staked RSR receives a portion of the RToken collateral’s revenue in exchange for being the first capital-at-risk in the case of collateral default
  2. Governance: Staked RSR proposes and votes on changes to the RToken’s configuration.

Source of first-loss capital: $RSR staked onto the RToken

Should an underlying collateral asset depeg occur, the RToken autonomously exchanges all collateral for a predefined emergency collateral basket (in the case of USD3: USDC, USDT, USDP, DAI). The RSR staked on the RToken is then seized and auctioned off to recapitalize the RToken. Should there be a collateral shortfall after this recapitalization process, emergency collateral is distributed to holders equally.

The benefit to Ethena comes in the form of the simplicity of the yield while maintaining overcollateralization/depeg protection.

USD3 is a single ERC-20 token comprising a basket of other ERC-20 tokens, and any appreciated yield from the underlying tokens is distributed to holders of USD3. Over time, the idea is that one USD3 tomorrow will be worth more than one USD3 today.

The protocol also has demonstrated the ability to handle very large redemptions and re-mints during black swan events such as the USDC depeg in March 2023.

Basics and background

1. How will this allocation improve the diversification or capital efficiency of Ethena’s Reserve Fund and/or backing assets?

Allocating to USD3 would diversify Ethena’s Reserve Fund by introducing USDC exposure via a single, yield-bearing asset. This allocation improves capital efficiency by earning returns on otherwise idle funds (USDT) while maintaining strong liquidity through the Reserve protocol’s efficient trading mechanisms. The multi-layered security approach of the Reserve protocol, including multiple audits and a $5M bug bounty, adds an extra layer of protection to the allocation in addition to having demonstrated an ability to handle large-sum transactions at low cost.

2. Please describe any experience your firm has in working with decentralized organizational structures

ABC Labs is the company that built and deployed the Reserve project, which for 6 years worked to develop the protocol. Ever since the deployment of the protocol in October 2022, ABC Labs contributors have been working across the DeFi ecosystem to grow RToken TVL.

3. What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?

TVL of the Reserve Protocol: $204,645,718

Legal design

1. Do holders of your product have any shareholder, investor, creditor or similar rights?

No shareholders, investors, creditors or any other parties have preferential rights over USD3. RTokens are fully noncustodial and only the holder of the RToken can redeem it to access underlying collateral.

Those staking $RSR on the USD3 RToken receive governance votes and yield from the collateral revenue in exchange for providing first loss capital.

2. Describe the legal and contractual structuring for your product, specifically naming any regulatory bodies overseeing the product, if applicable.

USD3 is a RToken deployed using Reserve that is fully decentralized and available through permissionless smart contracts onchain only. ABC Labs is one of many ecosystem contributors to the project and does not deploy RTokens itself. RTokens like USD3 do not have an issuer as the minting process is entirely manifested by users in smart contracts when they deposit the underlying collateral.

3. How would the proposed allocation be treated in a bankruptcy or insolvency situation?

USD3 assets inherit the properties of Compound, USDC and sDAI. Neither the USD3 creator nor ABC Labs have any control over the USD3 asset-backing which are transparently locked in smart contracts onchain and controlled by governance.

Smart Contract/Architecture

1. How many smart contract audits have been completed with respect to your tokenized product? Please name the auditors and provide a copy of reports.

To date there have been 9 audits performed on Reserve protocol smart contracts: Reserve Protocol Docs | Security

Reserve currently has a $5M ImmuneFi bug bounty, one of the largest bounties in DeFi

2. Is the asset/product permissioned? If so, how are you managing user identities? Any blacklisting/whitelisting features?

USD3 is permissionless allowing for minting and redeeming onchain 24/7. There are no blacklist / whitelist features

3. Is the asset/product present on several chains? Are there any cross chain interactions?

Reserve has been deployed to Mainnet and rollups Base and Arbitrum (in that order). It is not live on other networks. Some RTokens are bridged from Mainnet up to rollups, but there are no cross chain interactions.

4. Are the applicable tokens being used in any other protocols? Please describe the various components of the ecosystem.

USD3 is integrated in various DEX liquidity pools including Curve and Aerodrome and is in the process of being listed on Lending Markets such as Morpho as well.

5. How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?

USD3 admin roles have the following few capacities and may execute them based on predetermined security minded criteria:

Addresses 1 and 2 may “pause” the RToken. This address can stop the issuing or trading of new RTokens, but cannot stop RToken redemptions (or other functions). This could be one person, a multisig or even a bot which triggers based on failsafe conditions.

Addresses 1 and 2, 3, 4, 5 are “Short Freezers”: addresses capable of freezing RTokens. This disables nearly all RToken functions including minting, redeeming, and unstaking. These “short freezer” can maintain the freeze for a governance-set amount of time, which is then passed onto the highest level of freezer: the Long Freezer.

Address 2 is “Long Freezer”: who can extend the duration of the freeze. This “long freeze” is much longer than the short freeze, and so governance should carefully consider who can trigger it. This particular role exists so that in the case of a zero-day exploit (for example), governance can act before the system unfreezes.

Finally, there is the Guardian role. This address has the ability to reject proposals even if they pass through the governance process.

Address 1 is controlled by Tom Sawyer, the deployer of USD3.

Address 2, 3, 4, 5 and the guardian address are controlled by ABC Labs.

RToken holders require some degree of trust to governance to make decisions in the best interest of the RToken, however anyone can participation in governance by staking RSR on the RToken in question. Governance risk is further mitigated by:

A 14 day (at least) onchain governance process with many checks and balances throughout.

Incentive alignment from having RToken governors provide first loss capital resulting in conservative, mission aligned stewardship.

ABC Labs’ guardianship on USD3, which may veto governance actions in extreme situations (e.g. a governance attack).

6. Is there any custom logic required for your token/product? If so please give any details.

RTokens are ERC-20 tokens and therefore require no custom logic.