The ratio of all USDT reserves over all Unitas liability is the protocol's reserve ratio. When the ratio is larger than 100%, the protocol is over-reserved, meaning that it can fully satisfy all the redemptions for USDT on demand. Unitas achieves the objective to be over-reserved by having the minters of Unitas stablecoins to contribute the 100% and the insurance providers (IPs) to contribute the addition part. The following figure also serves as an illustration.
In the current design, to enjoy full minting functionality, the protocol requires a minimum of 130% over-reserve ratio. Being over-reserved means the redemption demand for USDT can still be fully satisfied under short-term exchange rate shocks. In case the over-reserve ratio drops to or is below 130%, the protocol does not allow new supply of USD1 tokens. Over-reserve ratio does not impact redemption of Unitas tokens, hence the exit out of the Unitas ecosystem. Redemption will remain available at all over-reserve ratios.
This way IPs must provide additional 30% (and more) USDT to the insurance pool to ensure smooth functioning of the protocol. IPs take a potential risk of EMCs appreciation with significance; to compensate for this risk, the protocol rewards them by sharing a portion of the revenue.
About the risk of EMC appreciation against the USD
The appreciation of an EMC against the USD would push down the protocol's reserve ratio by an increase in the liability. An important assumption taken by Unitas is that in the long run a majority of the emerging market currencies will continue to depreciate against the USD. Looking at the historic values of the past 25-30 years, almost all EMCs have declined against the USD. We expect the same trend to continue as the macro economics of the emerging market is expected not to change radically in the short run compared to some past decades.
We also acknowledge that it is probable that emerging market currencies appreciate against the USD in the short term. In an unlikely scenario of one or more EMCs appreciating against the USD,
IPs' additional USDTs enables the protocol to still remain over reserved. Once the appreciation is not becoming a stable trend that might come from some structural changes in the macroeconomics of these emerging markets, the reserve ratio is expected to return to the original safe level, and the reserved assets from IPs become intact.