Reserve Overlays — How they work
A perpetual OTC overlay lets a stablecoin issuer earn the total return of a commodity or real-world asset on their reserve — while guaranteeing the reserve can never lose money. Here's the mechanism in plain language.
The basic idea
A stablecoin issuer holds T-bills (or repo) in custody — safe, but yielding only the short-rate carry. They want gold upside. Today, getting gold exposure means either buying gold (which isn't a permitted reserve asset) or using dated options (which expire, roll, and have calendar gaps).
The perpetual OTC overlay solves this: an always-on swap where the issuer swaps their T-bill carry into the total return of gold (or a basket), with the received leg hard-floored at 0%. Reserves stay in custody. Exposure shifts economically.
The range perp formula
received_t = cap( floor( U_t_return, 0 ), C )
Where U_t is the underlier (gold, WTI, basket), C is the cap level. The floor is embedded in the payoff — not a separate option that expires.
- floor(·, 0): You never receive a negative return. Ever. Not probabilistically — structurally, via the payoff function.
- cap(·, C): You give up upside above C. This is sold to finance the floor — making the structure near-zero net cost.
- Perpetual: No expiry, no roll, no calendar gap. The protection holds through any overnight gap or weekend.
What the floor costs
The floor isn't free — it has an economic cost called the funding rate. But the structure finances itself:
Floor cost
Continuous option-theta-like carry
Cap give-up credit
Selling upside above C generates carry
Plus: reserve carry (T-bill rate)
The issuer's T-bill carry is the base funding budget
= Net funding ≈ 0 (costless range perp)
If rates fall and the funding budget shrinks, the optimizer lowers C (less upside) rather than weakening the floor. The floor is never the thing that gives.
Two honest caveats
1. Counterparty performance
The floor is structurally hard in the contract, but it depends on the floor-writer performing. A defaulting dealer breaks the protection. This is why we require ≥2 dealer diversification, SA-CCR/SIMM collateral, and concentration limits.
2. Pro-cyclical funding cost
Perpetual funding rises in stress exactly when carry may fall. The SCO-TAILLOCK leg locks a worst-case funding cap so this risk is bounded. Without it, a vol spike could erode economics even while the floor itself holds.
GENIUS reserve compatibility
The overlay is a referencing contract (TRS/option) — not a transfer of reserve assets. Custodied T-bills stay in permitted form, unencumbered. Collateral for the overlay posts from a separate margin pool. The GENIUS eligibility gate checks this on every structure.
Note: GENIUS Act implementing rules are unsettled. The gate applies the conservative interpretation. Issuers must obtain independent legal counsel.