Interview with Reserve Protocol
For this week’s podcast we had the gusto of interviewing Nevin Freeman, Founder of Reserve Protocol, a stablecoin project that closed their first round of 5 million dollars from investors like Coinbase and Peter Thiel. Reserve has a team of 20 people, including Google and OpenAI veterans, and an advisory relationship with Patomak Global Advisors, led by former SEC Commissioner Paul Atkins. But it’s a pretty stealthy startup, so we are excited to learn more about it today.
This interview is <25 minutes long, feel free to click play and listen to it now, subscribe to our podcast here to listen later, watch it on YouTube, or simply go ahead and read the edit below. Please enjoy and let us know what you think!
SR: Nevin, our first question in the Stable.Report is always: What got you into crypto and what inspired you to create a stablecoin?
NF: I got excited about Bitcoin around 2011 when reading about it on a rationality blog called lesswrong. It was exciting to me because it presented a way to have a currency that would work even when government institutions were not working. Fiat currencies are often pretty functional, but when the government institutions that support them are not functional, then they can break down. Normal money works via the combination of carrots and sticks but Bitcoin just uses carrots and that idea is really really cool. So I bought some Bitcoin as a speculator while it was cheap and sold it all in 2012, because Bitcoin would always be deflationary or volatile and that would not really make for a very good currency, I still believe that today. I did not think about the possibility that it would be treated as digital gold…otherwise I would not have sold it. I wondered if there was a way to create a cryptocurrency with that property (carrots, not sticks) that wouldn’t depend on the functionality of governments, maintain a stable purchasing power, and solve any other problems that exist with Bitcoin to be adopted in a wide scale. So that’s kind of how and why I got into this space and why I’m interested in creating a stablecoin.
SR: I’m sure you regret selling that Bitcoin in 2012.
NF: (chuckles) I do.
SR: As a Venezuelan, I like that you always mention the 16 countries with high-inflation as part of your go-to-market. What are your main target markets and can you share some partnerships in the pipeline?
NF: We spent a week in Argentina studying the details of what’s going on on the ground there. Argentina is a really interesting case study because they have high inflation and it’s legal for them to buy and hold dollars — which is not true for many countries with high inflation, where capital controls are often enforced. From the surface it’s kind of unclear whether Argentina is a good target-market for a stable cryptocurrency because they are allowed to use dollars: they save in USD and spend in Pesos. But this fits with our vision for what Reserve would be at the beginning which is something we call a savings currency. It’s an unfortunate fact that a lot of people don’t have enough money to save, they immediately spend what they earn, and we are thinking of creating a system that would give them a way to tuck away small amounts of money. Without getting into many details, Argentina is something that we are looking closely at, but are not sure if it’s the best place to start. I’m also quite interested in Venezuela and we’ve been looking into it because it’s obviously the place in the world that could benefit the most from this right now — if we figure out the logistics on how to make it happen. Philosophically I got into this space to help people store their value in a safe way and have a means of exchange that is globally accessible and open, but it is a sticky issue if our product is used to evade capital controls, because we are not able to explicitly endorse people doing something that is illegal. Regarding partnerships, we are having conversations with people in e-commerce and Telecom companies, as we saw how successfully this played out with M-Pesa transitioning from a Telecom company into one selling digital currency.
SR: Very little has been revealed about the Reserve Protocol, from my understanding it is a mixture between crypto-collateral and seigniorage shares. Could you provide more detail on this?
NF: The Reserve protocol is centered around three pieces: the Reserve stablecoin, Reserve shares and the Vault — which is a smart contract that stores a bunch of other crypto assets. The normal way governments maintain stability when pegging their currency to a stronger currency is by holding foreign currencies in reserve, and the way we do that in Reserve is with the Vault, which is a diversified portfolio of cryptocurrencies. The assets in the vault can be used to implement a direct currency peg, by using them to purchase our stablecoins in circulation when the price goes down, and minting new stablecoins when the prices goes up and purchasing more assets for the vault from the income. The last piece, Reserve shares, are sold to raise additional capital and its holders can receive income over time if the protocol is widely adopted. But I’ll stop there and leave the details for the forthcoming release of the white paper.
SR: What are the incentives for the investors or governance token holders?
NF: The main revenue source for the shareholders will not come from the appreciation of the assets in the vault, as that will be used to maintain stability, but it will come from internal revenue generated within the system itself.
SR: In a blogpost, you said you are convinced that all of the existing stablecoin attempts are likely to fail. What makes you so confident Reserve won’t?
NF: We’ve put together a team of really careful thinkers who are committed to not releasing something into the wild that has a notable risk of default. But more specifically, I think our protocol is better because there seems to be a trade-off in the stablecoin space between the amount of capital given to shareholders and governance token holders vs. the amount of capital available for stabilizing the stablecoin. Many projects seem to be distributing a lot of their value to the investor side of the equation because they want to raise capital and present a compelling investment, but we are holding ourselves to the standard of only allocating value to investors if we can prove with high degree of confidence that the stablecoin will be totally stabilized. We also interviewed many economists, until we found one who actually has a very sharp understanding on the history of currency pegs and that has proven to be a very worthwhile investment, many people in crypto understand business or crypto but not necessarily economics or exchange pegs so they miss a bunch of the basics of monetary policy. It’s really important to think about how exchange pegs work and as an industry we need to quickly become familiar with that so we can make better decisions on what to support. Essentially, if you look at exchange rate pegs throughout history you can boil it down to two factors to know if they’re going to work: 1) the value of the assets held in reserve: if it’s 1:1 you are solid because you can repurchase your currency 100%; 2) the credibility of the promise to spend those assets to maintain the peg. We are holding ourselves to those standards, i.e. holding sufficient reserves and writing code that implements the exchange peg logic.
Unlike seigniorage share models, where the size of the reserve effedtively fluctuates according to market sentiment, our vault will always be fully backed 1:1.
SR: Is Bitcoin going to be in the vault?
NF: Not initially because we are going to build on top of Ethereum.
SR: Can you share who some of your advisors are?
NF: One advisor who has been extremely helpful is Santiago Siri, the founder of Democracy Earth, who has spoken a lot about Bitcoin in Argentina and understands all of this at a gut level. On the Economics side, Garett Johns from George Mason University, has been tremendously helpful in guiding us to learn about different exchange rate peg regimes. We have many more, but I would add Paul Atkins, former commissioner of the SEC, who has taking a liking to cryptocurrencies and is quite helpful discussing the regulatory climate.
SR: Nevin, is there something else you’d like to tell our audience that we did not cover in this brief interview?
NF: We think that the “open currency movement” has reached a pivotal moment, entering a phase where it might start being used like real money, and there is an enormous amount of promise in that but also a pretty substantial risk. On the promise side is the possibility to supplement inflationary currencies around the world and the benefits of open currency systems to transact freely around the world, we haven’t experienced that yet, will it be as good as we expect? The enormous risk is that stablecoins can be the introduction to cryptocurrencies for hundreds of millions of people, but these are not like the speculators that have gotten into crypto until now, we are talking about people who are dealing with money they cannot afford to lose. If a couple stablecoins get large adoption and they fail, it would not only be terrible for the people who trusted the stablecoin, but for the cryptocurrency ecosystem in general — it’s exactly the sort of financial catastrophe that would give governments a good reason to clamp down on citizens creating currencies. I think there is a lot that can be done with cryptocurrency that is promising and good, but if we have a hiccup along the way it can make it much harder for the industry to do that. I encourage everyone thinking about stablecoins to not just be looking for the next Bitcoin, but about what makes sense to bring to the world and what would be a safe bet for the people we are trying to provide stability to.
If you are interested in learning more about the Reserve Protocol, check out their website ‘reserve.org’ or follow them on twitter at @reserveprotocol