Reserve Fund Liquidity Provider Queue and Citizen Bonds.
This is a V2 framework to iterate the original Reserve Fund framework and address the shortcomings of that mechanism design.
Last updated
This is a V2 framework to iterate the original Reserve Fund framework and address the shortcomings of that mechanism design.
Last updated
The Reserve Fund Liquidity Provider Queue (RFLPQ) is a standing queue of ZUSD liquidity provided to to cover bad debts in the event of a liquidation. During liquidations, ZUSD is drawn from the queue on a First-in, First-Out(FIFO) basis. This ZUSD is then burnt in proportion to the bad debt outstanding, and the Liquidity Provider to the queue receives the collateral at a ~10% discount to the market price.
The queue has a standard contract size of 100 ZUSD. Every slot in the queue can be represented with a transferable, liquid, non-fungible token(RFLPT) of slot n, where n represents the slot in the queue. As liquidations get processed, and one's slot moves up the queue, the counter on the token decreases. Market participants may place ZUSD bids for tokens of various slots in the queue, and RFLPT holders may post an 'ask' for their slot. The LP may exit the queue at any point in time to withdraw the ZUSD principal, effectively making the 100 ZUSD loan principal auto-callable. However, withdrawal from the queue means losing one's slot, and one must reenter at the end of the queue. The RFLPT is also referred to as "Citizen Bonds."
Upon liquidation, LPs receive an estimated 10% yield. Effectively, the slot in the queue represents the duration on an auto-callable bond with a 10% yield, where the duration is a function of the protocol's velocity of liquidations. We expect market participants to discount the 10% yield, effectively creating a yield curve that prices RFLPTs from the top of queue to the last slot in the queue. If the the velocity of liquidations increases, the curve should shift up, allowing bondholders to realize a gain even if their principal is not called on. We expect the market to determine the height of the queue, or the Nth slot, and that the Nth slot will converge with market price of the ZUSD stablecoin.
The Citizen Protocol may elect to make coupon payments to RFLPT holders in the form of CTZ or ZUSD. These may be paid out per-step, or aggregated and paid out at maturity in proportion to the duration held. We expect coupon payments to be an effective monetary policy lever to shift the RFLPT curve up or down, increase or decrease the YTM, and price the Nth RFLPT, in turn influencing the market price of the ZUSD stablecoin.