Overview

The Reservoir Protocol sets several key mechanisms to mitigate the financial risks and to ensure the health and solvency of the protocol. The key metrics are as follows:

Liquidity Ratio

$$\frac{\sum \text{Liquid assets within 30 days}}{\sum \text{rUSD that can be redeemed within 30 days}}$$

• This ratio indicates the ability for the rUSD to be redeemed timely by measuring the liquid assets with 30 days against the maximum amount of rUSD redeemable for 30 days. The ratio is used to manage liquidity risk of the protocol.

• The safeguarding threshold for liquidity ratio is set at 105%. As the ratio falls below 105%, the credit enforcer (which is the smart contracts that ensure risk metrics are enforced permissionlessly) will commence sales of assets to increase liquidity.

Asset Ratio

$$\frac{\sum \text{Assets}}{\sum \text{Liabilities}}$$

• The solvency ratio indicates the protocol’s ability to meet its existing liabilities by measuring its total assets against its total liabilities.

• The solvency ratio's safeguarding threshold is set at 105%. If the ratio falls below this, the credit enforcer, a key internal mechanism, will step in and sell native tokens to raise cash for the balance sheet's liabilities.

Equity Ratio

$$\frac{\sum \text{Equity}}{\sum \text{Capital at risk (*)}}$$

• The capital ratio is used to mitigate capital risk when the protocol takes on too many risky assets, and the capital at hand might not be enough to absorb the losses (if losses happen).

• The safeguarding threshold for the equity ratio is set at 105%. As the ratio falls below 105%, the credit enforcer will commence sales of risky assets to reduce the exposure to risky assets on hand.

Metric	Liquidity Ratio	Asset Ratio	Equity Ratio
Measuring/ Indicating	Reservoir Protocol’s ability for rUSD to be redeemed timely	Reservoir Protocol’s ability to meet its liabilities and repay the creditors	Reservoir Protocol’s capital on hand is enough to absorb any losses from the risky assets
Comparable to	Liquidity Coverage Ratio (LCR) with Reservoir using 100% of net cash outflow	Leverage Ratio (at Basel III standard) with Reservoir inverting the Asset Ratio (i.e. Asset Ratio = 1/(1 - Leverage Ratio)	Common Equity Tier 1 (CET1) capital requirement, which computes Equity / Capital at risk with Reservoir adjusting with Capital ratio = CET1 * 12.5
Threshold	105%	105%	105%