Becoming a Reserve Provider: Pseudo-Staking in Zephyr Protocol

6 min readSep 20, 2023

Introduction

In the ever-evolving world of decentralized finance (DeFi), Zephyr Protocol has emerged as a stablecoin protocol that promises both untraceable transactions and stability. While much attention has been given to $ZSD (Zephyr Stable Dollar), the protocol’s private stablecoin, $ZRS aka “Zephyr Reserve Share”, plays an equally vital role in the ecosystem. This article aims to provide a comprehensive guide on $ZRS and the role of Reserve Providers.

What is Zephyr Reserve Share ($ZRS)?

$ZRS serves as what is known as the “Reserve Coin” in other Djed implementations. In Zephyr Protocol, the naming convention has been updated to better reflect what it represents — A share of the available equity in the reserve. It is given to Reserve Providers who bolster the reserve with $ZEPH, forming the backbone of the stablecoin protocol. $ZRS performance is influenced by various incentives and the flux in ZEPH’s price.

**(Testnet)** ZRS priced in terms of ZEPH

Why Become a Reserve Provider?

Who Should Consider It?

Becoming a Reserve Provider is not just an investment choice; it’s a testament to your confidence in the future of Zephyr Protocol. By doing so, you’re betting on an increasing demand for ZEPH and, by extension, $ZSD.

Benefits and Profits

Reserve Providers are directly rewarded through a pseudo-staking reward mechanism, thanks to the 20% block reward. Additionally, all actions, except adding value to the reserve, attract a fee, which is subsequently added to the reserve, thus directly benefiting the Reserve Providers.

How Do Reserve Providers Profit?

Mechanisms in Play

20% Block Reward: A portion of the block reward is added to the reserve, creating a pseudo-staking reward mechanism.
Conversion Fees: Fees from conversion transactions are added to the reserve, benefiting Reserve Providers.
Spot and MA Divergence: Due to the dual pricing of Zephyr’s Assets; users will use the ‘worse’ rate between the Spot and MA prices. This mechanism is employed mainly to avoid Oracle Frontrunning (Reserve Drainage attack) but also has the added benefit of lessening pressure on the protocol.

**(Testnet)** ZRS priced in terms of USD

Risks

Leveraged Position

Being a Reserve Provider can be likened to taking on a leveraged position in the market, involving both opportunities and risks. During significant market downturns, the value of ZRS could potentially decline, both in terms of ZEPH and USD, affecting Reserve Providers adversely.

Minimum Reserve Ratio

The Zephyr Protocol mandates a minimum reserve ratio of 400% to ensure the robustness and stability of the system. This high ratio acts as a safety net, providing a buffer against market volatility and financial shocks. It ensures that each ZSD stablecoin is over-collateralized with 4x as much value in Zeph.

For Reserve Providers, it is important to note that because of this mechanism ZRS cannot be redeemed if the protocols Reserve Raito is below 400%.

However, ZRS can be traded openly on exchanges and the transfer of ownership of ZRS would not remove ZEPH from the reserve. Also outlined in Extended and Osiris versions of Minimal Djed is the concept of being able to redeem ZRS and ZSD at the same time, so long as the redemption would not decrease the reserve ratio in cases under 400%.

Testnet Performance and Learnings

The Testnet phase has been particularly revealing in understanding the influence of Reserve Provider incentives. It has enabled the protocol to assess the impact of the proposed 20% block reward, which directly contributes to strengthening the reserve.

Note: the grey areas on graphs are due to outages. Technically the testnet concluded before the large section (9 days). Important information could be garnered after this period so it was decided to collect more data for this article.

Here is a graph outlining what a $10,000 investment into ZephRSV at the initial price of 0.5 Zeph has tracked over time in USD.

**(Testnet)** $10,000 Investment in ZRS over time

Starting Point:

ZRS Minted: 5788
ZRS Price: 0.5 Zeph | $1.72
Zeph Price: $3.45
Value: $10,000 (2,894‬ Zeph)

Tracking the value of the 5788 ZRS gives us interesting insights.

Key Observations

Initial Dip: The value initially dipped below $10,000, correlating with a drop in ZEPH’s price.
Highs and Lows: As ZEPH’s price peaked at $6.15 (1.78x), the ZRS investment soared to $30,000 (3x), thanks to the leveraged position and the 20% block reward mechanism.
Mid-Point Downturn: Despite ZRS’s price in ZEPH terms continuing to climb, its USD value diminished. However, the block reward mechanism provided a cushion.
Lowest Point: The ZRS value returned to $10,000 (1x), even as ZEPH’s price plummeted from $3.45 -> $1.65 (0.47x)

Ending:

As ZRS price recovered to similar levels to the beginning of the testnet phase, we have interesting ending metrics

ZRS Redeemed: 5788
ZRS Price: 1.32 Zeph (2.64x) | $4.43 (2.57x)
Zeph Price: $3.36 (0.97x)
Value: $25,670 (2.57x) | 7,640‬ Zeph

Zephs Price ended close to the inital value, but ZRS’s value is up over 2x!

The following graph shows how a $10,000 investment in Zeph would have compared to ZRS

Testnet Caveats

Not Indicative of Real-World Performance

It’s crucial to understand that the testnet serves as a controlled environment for experimentation and is not a guaranteed predictor of how ZRS will perform in the real world.

Variable Performance Factors

ZRS performance on the mainnet could be influenced by a myriad of factors, including market conditions, adoption rates, etc. making it inherently variable.

Block Reward Impact

As the protocol matures and more ZRS and ZSD are minted from added Zeph in the reserve, the growth of the reserve from the 20% block reward is deminished. Also the overall block reward is reducing over time. It’s likely that the block reward factor is over represented in the testnet.

Underrepresented Fees

The testnet environment does not fully capture the potential fees generated from minting and redeeming ZSD and from redeeming ZRS. This is due to the nature of a testnet and real adoption data is not captured. These fees could significantly impact the reserve and, by extension, the value of ZRS in a live environment. Its likely that this factor is significantly underrepresented.

Conclusion

Opting to become a Reserve Provider in Zephyr Protocol is more than just an investment; it’s a strategic decision that comes with its own set of rewards and risks. With mechanisms like the 20% block reward and conversion fees, ZRS shows promising signs of robust performance, particularly when ZEPH gains value.

By understanding the intricacies of ZRS and the role of a Reserve Provider, you can make an informed decision, contributing not just to your financial growth but also to the stability and success of Zephyr Protocol.