How Does the Reserve Ratio Affect Seigniorage Profitability?
In models that have a reserve or a collateral token, a lower reserve ratio (or higher leverage) can potentially increase the profitability of seigniorage because the protocol has more tokens to issue relative to the assets it holds. However, this also drastically increases the risk of a de-peg and failure, as the system has less capacity to absorb volatility or mass redemptions.
Glossar
Seigniorage
Profit ⎊ Seigniorage, within cryptocurrency ecosystems, represents the difference between the cost of producing a unit of digital currency ⎊ primarily computational power and validation fees ⎊ and its nominal value or exchange rate.
Fractional Reserve
Concept ⎊ Fractional reserve is a banking concept adapted to the cryptocurrency space, particularly in stablecoin design, where the entity holds only a fraction of the total outstanding digital currency value in actual reserves.
Reserve Ratio
Framework ⎊ The reserve ratio, within cryptocurrency, options trading, and financial derivatives, functions as a critical risk management parameter, establishing a baseline for solvency and operational stability.