SYNO Research Division - The early adoption of rgUSD to Arbitrum money markets
Trying to kill time before we kick back, get the beers out the cooler and and enter the interdimensional hot tub that is SYNO Summer? Ham’s got exactly what you cowpokes need… the inaugural SYNO research article covering Reserve Protocol.
With Reserve’s recent expansion to Arbitrum, their successful LTIPP application and latest stablecoin offering, rgUSD they have set the stage for supercharged yields for any money market brave enough to embrace the early propagation of rTokens on Arbitrum.
In this article we’ll introduce the Reserve Protocol, its new stable coin - rgUSD and the benefits early adoption of rTokens can have on a money market like Synonym Finance, think evergreen interdimensional hot tub experiences… YEEHAW!
Reserve Protocol
Overview
Reserve protocol provides decentralized access to inflation-resistant stablecoins, LST indexes and flatcoins in the form of rTokens. All rTokens have yield bearing collateral baskets and are over-collateralized with RSR used to govern the rToken and in the case of an asset in the collateral basket depeg is also used as first loss capital. For their participation in governance and provision of first-loss capital RSR stakers are provided with a share of the yield, usually 10-15%. The other 85-90% of the yield is usually directed to rToken holders however this isn’t the case for rgUSD. The platform has been live on Mainnet, Base and Arbitrum collectively for over a year now with $150M in TVL, 8 major audits and a $5M ImmuneFi bug bounty continues to contribute to the safety.
Reserve introduction, the video is 30 minutes long but well worth a watch - https://reserve.org/protocol/introduction/
Reserve’s LTIPP
The recent chain expansion to Arbitrum was well timed with a successful LTIPP application, which will see them net 500k $ARB matched with 120k $RSR to increase rToken TVL on Arbitrum. The proposal states Reserves mission is to ‘increase access to inflation-proof money and to do this all barriers to entry must be minimized’ and later go on to say that ‘a highly liquid rToken ecosystem is a fundamental building block to enable access to inflation proof money’. The use of funds support these comments as the $ARB will be used to establish a thriving rToken ecosystem on Arbitrum with at least $20M in rToken TVL, $4M of which will be rToken collateral supplied to money markets and have $8M in DEX liquidity.
LTIPP application - https://forum.arbitrum.foundation/t/reserve-protocol-ltipp-application-final/22019
rgUSD
rgUSD is a permissionless co-incentive rToken with a collateral basket consisting purely of sDAI with an APY of 8% to minimize minting fees. The yield is then split between RSR stakers (5%), rgUSD liquidity efforts (5%) and liquidity incentives (90%). The mandate for rgUSD was to enable permissionless incentives which scale for stablecoin DEX pairs as liquidity increases.
In the current DEX landscape USDC is the king of the liquidity castle and as such all projects require high liquidity in token/USDC pairs before being able to be used in other DeFi legos. To drive liquidity to their pools projects will often provide incentives directly or through the use of gauges while this will increase pair liquidity USDC gets a free ride!
Through centralisation of stablecoin minting Circle has been able to generate incredible profits by putting the underlying collateral to work, however this is counter to many of DeFi’s core principles. rgUSD is built differently, by deploying the profits generated by its collateral into the De-Fi venues where rgUSD is being used as incentives the stablecoin will decentralize its profits and grow organically along with the other asset in the pair. A win-win.
If successful rgUSD will be the most-efficient way to co-incentivise DEX pairs while eliminating governance overhead and current frictions relating to co-incentivisation while having all the benefits of a overcollateralized stablecoin that deploys capital into high yield, market neutral and low risk ventures across DeFi.
Even though rgUSD was conceptualised as a stable coin which co-incentivises DEX pairs there is no reason to stop there, the same mechanics can be implemented in a money market with supply APYs for rgUSD markets increasing above what USDC markets can offer.
rgUSD and SYNO synergies
The LTIPP of both SYNO and the Reserve Protocol are destined to increase their respective ecosystems TVL on Arbitrum. Through collaborative efforts and co-incentivisation these ecosystems could easily overlap ramping up TVL while providing JUICED yield for users of both protocols.
Co-incentivisation
rgUSD’s baked-in co-incentivisation mechanisms mean incentives will scale with money market supply once incentive distribution has been approved through RSR governance. In the case of SYNO these incentives will provide evergreen incentives to our BIP programme and given Reserve’s aims to have $4 million of rToken collateral on Arbitrum money markets I can also see further incentives provided directly from Reserve via their LTIPP grant. As they say the early bird catches the worm(hole) and early adoption of rgUSD by SYNO is no different.
For example the rgUSD collateral basket currently yields 8%, therefore a market with $500,000 supplied (Just under half the current USDC market) would yield $40,000 a year for the incentive programme and this is not taking into account any additional co-incentivisation by the reserve protocol as per their LTIPP grant.
The benefits of co-incentivisation of an rgUSD market on SYNO are apparent to all parties;
SYNO - co-incentivisation leads to high APYs, increased supply and ultimately higher fee revenue for the protocol and vlSYNO lockers
Reserve - Increased liquidity efforts across Arbitrum as per LTIPP
Market Participant - Higher yields through the supply of rgUSD
Early Partnership Opportunity
The co-incentivisation of rgUSD markets on SYNO are only first order benefits of the potential partnership. Once the rgUSD market has been proven and close alignment continues between the protocols other synergies become apparent.
A SYNO collateral plugin for asset markets anyone?
A collateral plugin for SYNO markets means new and existing rTokens will be able to allocate a portion of their collateral basket to SYNO markets, further driving up SYNO TVL while providing access to market competitive yields for rTokens.
Imagine a rToken with a plugin with a collateral basket consisting purely of rgUSD supplied on the SYNO market, in this example yield would scale with rToken TVL this could resolve current issues around assets dropping APY such as the recent case of Aave pyUSD in the USD3 collateral basket. While these issues can be resolved via governance it is often lengthy and yield is reduced until a proposal is passed.
The two largest USD denominated stablecoins, eUSD and USD3 both have assets deployed in blue-chip money markets in their collateral baskets, netting both Comp and Aave $19.6M in yummy TVL. Even if a SYNO plugin could route 10% of this TVL, that would be a cool 100% increase in supply at current levels.
rTokens go cross-chain
As SYNO a universal cross-chain credit layer built on Wormhole tech it is uniquely placed to take rTokens cross-chain and already maintains spokes on all active rToken chains - Mainnet, Base and Arbitrum.
The hub and spoke model adopted by SYNO means while Arbitrum remains the liquidity layer this liquidity can be accessed instantly from any chain integrated with the dApp.
A successful partnership with Synonym means massive reductions in the friction associated with cross-chain rToken deployment.
Barriers to adoption
Unfortunately there’s no such thing as free TVL and some barriers need to be overcome before rToken integration can be successful.
Price oracles are a concern, especially to cross-chain money markets dependent on finality across chains. In SYNOs case strict specifications from Gauntlet mitigate protocol risk and avoid erroneous liquidations. rgUSD is a novel product based on mainnet and as such liquidity has not yet reached the threshold for price oracles. This barrier will have to be overcome before a SYNO market can be established.
Also, Plugins have to be built, while it isn't a mammoth undertaking dev time is finite for any protocol and at SYNO it’s no different. Coupled with expensive audits and no guarantee of TVL being routed through the plugin a costly endeavour and will delay other protocol goals such as spoke chain expansions with little to no reward.
However it's hard to ignore the potential up-side of getting in at the ground floor and tapping into the sticky rToken TVL on offer which will scale as Reserve builds out its presence on Arbitrum.
Summary
These really are exciting times for both protocols competing for market share in their respective verticals with significant amounts of capital behind. With well-planned collaboration synergies can be amplified and will not only directly benefit each protocol through increased TVL and fee generation but also through cross-pollination of the community bases and higher yields for protocol users.
It’s only a matter of time before rgUSD becomes the de facto token pair for DEX LPs and the benefits to money markets are clear so it only leaves one question… wen rgETH?
PEAS