The Celo Reserve FAQs
What it is & how it works
What is the Celo protocol?
The Celo protocol is a platform on which the community can create stabilized value digital assets. These digital assets aim to track the value of an existing real-world asset (for example, the first one, cUSD, tracks the US Dollar). The Celo protocol also includes mechanisms for lightweight identity and ultralight mobile validation. The platform aims to make the assets built on the protocol easy to use with a mobile device. The original whitepaper gives a broad overview of the protocol.
What is the reserve?
To help stabilize the value of Celo stabilized assets, the protocol is supported by a component called a reserve. The reserve consists of a basket of cryptocurrencies that helps the protocol to reduce the supply of Celo Dollars (cUSD).
When the protocol aims to reduce the supply of Celo Dollars (in times when the supply is greater than the demand at the target price point, or in other words, when the price of Celo Dollars is less than $1), it does so by allowing users to sell Celo Dollars, using CELO, the Celo native asset, to make the purchases. CELO was previously called Celo Gold or cGLD and changed to CELO after a community-driven governance proposal (link). Conversely, when the protocol aims to increase the supply of Celo Dollars (in times when the supply is less than the demand at the target price point, or in other words, when the price of Celo Dollars is greater than $1), it does so by allowing users to purchase newly created Celo Dollars in exchange for CELO, which it then places in the reserve and diversifies. Holders of Celo Dollars may redeem them for CELO with the protocol, or trade them for other value through third party exchanges, but do not have rights to the diversified crypto assets, which are used to moderate CELO volatility.
Why is the reserve useful in the protocol?
Any protocol that aims to stabilize the value of tokens needs a way to contract the supply of the tokens in circulation. To do so, the protocol needs a mechanism to remove tokens from circulation. The reserve assets support this mechanism.
What is the reserve composed of?
The current target allocation for the reserve is 50% CELO, 30% BTC, 15% ETH, and 5% DAI. The reserve will reach this target over time, and this target allocation could be changed through governance. Once this initial allocation is reached, the reserve will occasionally be rebalanced to target. Rebalancing will be carried out in a way to balance the tradeoff between minimizing trading cost and maximizing tracking to target allocations.
Why is the reserve composition off-target initially?
The initial reserve is funded with CELO. Diversifying this over time allows reserve balancing to be achieved without large one-time sales and one-time purchases. The time to get to the target balance will depend on the parameters for reserve CELO unfreezing (which is set through governance), and the market demand for CELO.
What are the upsides to using crypto as reserve assets?
A primary upside of using crypto assets in the reserve is that all user transactions with the reserve can happen on-chain, in a decentralized manner, in a fully-auditable way. This blogpost talks about different collateral types as reserve assets.
Does reserve rebalancing happen on-chain?
Until there is the ability to have decentralized cross-chain transactions with CELO, reserve rebalancing happens off-chain. However, several teams are working on cross-chain transactions and we hope to see it by next year.
What are the downsides to using crypto as reserve assets?
The principal downside is that the value of most crypto assets available today fluctuates. There are a number of mechanisms in the protocol to address this. First, the reserve begins as an overcollateralized reserve. Second, in times when the reserve ratio gets below a certain threshold, a transfer fee going to the reserve gets placed on CELO transfers. Third, during these times, a portion of block rewards also goes to the reserve. Fourth, the mechanism to expand and contract supply includes a small fee for every expansion or contraction transaction that goes to the reserve.
What is the reserve ratio?
The reserve ratio is the ratio between the size of the reserve and the total value of all outstanding cUSD (and other future stabilized tokens supported by the reserve).
What are the criteria for selecting reserve assets?
Reserve asset selection is done through governance by the community. At the moment, any new reserve assets under consideration should be freely traded and settled 24/7 on liquid markets, and should be based on an open-source protocol.
What information about the reserve will be available to the community?
More information about the reserve, the current reserve holdings and the reserve addresses can be found on celoreserve.org. Content for this website will be produced by the cLabs team, Alliance for Prosperity members, Custodians, and community participants.
Where can I get more information?
The whitepaper can be found here.
A stability analysis and a detailed explanation of the expansion and contraction mechanism can be found here.
The technical documentation site for the Celo project can be found here.