Why Arbitrageurs Should HODL
As Reserve prepares to have one of its tokens listed via a Prime offering on the Huobi Global digital asset exchange this month, prospective participants may have questions about this capital-raising event.
By listing the Reserve Rights token (RSR) on the Huobi Prime platform, Reserve is offering non-U.S. Huobi Global users and Huobi Korea users the opportunity to buy RSR before it is released on the open market. U.S. citizens and those located in the U.S. (collectively, “U.S. people”) are not allowed to participate in the Prime offering on Huobi. Prime participants are prohibited from selling RSR to U.S. people or acquire RSR for the benefit of U.S. people indefinitely.
RSR is a temporary placeholder ERC-20 token used to keep the Reserve stablecoin (RSV) anchored to its target price of $1.00 and vote on governance proposals. RSR is crucial to the Reserve ecosystem because it helps recapitalize the network if the value of vault collateral decreases below a target ratio. This asset also offers Prime participants the opportunity to purchase newly minted RSV tokens and profit from arbitrage opportunities.
An Arbitrageur’s Dream
The key benefit to holding RSR is that it enables participants to profit through arbitrage opportunities whenever the value of RSV is trading above $1.00 on exchanges. Arbitrage is defined as the simultaneous buying and selling of an asset in different markets in order to take advantage of price discrepancies. The same principle applies to decentralized ecosystems and has been driving much of the trading volume in stablecoin markets.
From a crypto-arbitrageur’s perspective, Prime participants could be in an advantageous position, as they will be able to acquire RSR at the offering price. Should the price of RSR increase prior to the launch of the Reserve Protocol, the entry fee for participating in arbitrage opportunities would be less than if they acquired the RSR on the open market post-launch.
Here is a brief overview of how RSR arbitrage trading works: When RSV is trading above $1.00 on exchanges, any excess RSV tokens in this pool can be purchased from the Reserve smart contract by RSR holders exclusively for $1.00 worth of RSR. Once the purchase is made, RSR tokens are burned.
For example, say RSV was trading at $1.02. In this scenario, participants could buy $1.00 worth of RSR on an exchange. If there is excess RSV in the Reserve vault, RSR holders could then use the $1.00 worth of RSR to purchase the stablecoin through Reserve’s smart contract. Once in possession of RSV, these token holders could go back to an exchange and sell the RSV at market price, making a profit of two cents per token.
It follows that Prime participants, who acquire the RSR token at the offering price, will be able to maximize the value-capture of these arbitrage opportunities, assuming the price of RSR increases. However, should the price of RSR decrease between the Prime and launch of the protocol, token holders will be in a worse position than if they bought the RSR on the open market post-launch.
Beyond arbitrage, RSR’s crypto-economic model is similar to MakerDAO’s DAI stablecoin. Broad market forces within the Reserve network can impact the value of RSR, so there are many other incentives to hold it; but also many risks. As RSR is burned the circulating supply of RSR decreases, which would be expected to lead to an increase in the price of RSR, assuming demand for RSR did not also decrease.
Reserve’s Prime offering is scheduled for May 22, 2019. To learn more about Reserve and its upcoming Prime offering, please join the conversation on Telegram.