Reserve Fund
Revenue Allocation and Yield Distribution
Avant strategically allocates its financial resources to maximize security and efficiency. The Avant Protocol takes a cut from the yield generated to cover operational expenses, including the reserve fund. For example, if the strategy yield is 50% and the fee is 10%, the user receives 45% while 5% goes to Avant. This approach ensures that Avant can sustain and grow its operations & Reserve Fund while users still receive a highly competitive return on their investments.
Distribution Mechanics
For avUSD and avBTC that are not staked, a portion of the potential yield that could have been earned if staked is redirected to Avant’s operations, including increasing the size of the Reserve Fund.
Reserve Fund Contributions and Purpose
To protect users and their assets, we’ve established many best-in-class measures, which include a robust Reserve Fund. Initially, 100% of the revenue from both our operational yield cut and the redistribution from unstaked avUSD/avBTC is directed entirely into this fund. These contributions are designed to mitigate potential losses from unforeseen events such as DeFi exploits, smart contract vulnerabilities, or systemic failures.
Enhanced Reserve Fund Strategy & Flexibility
Flexibility and Expanded Coverage
The Reserve Fund is not only designed to mitigate black swan events but also to provide the flexibility to manage non-exploit strategy losses. Minor, temporary issues—such as a carry trade briefly turning negative—can be absorbed without derailing our overall stability.
Quarterly Transparency and Updates
To ensure ongoing transparency, we will perform quarterly updates on our social media regarding the dollar amount held in the Reserve Fund. These regular reviews will help all stakeholders stay informed about the fund’s status and ensure that any necessary adjustments are made in a timely manner.
Portfolio Utilization and Target Coverage
In addition to external contributions, we may also utilize our own portfolio assets (funds held in savUSD/savBTC or avUSD/avBTC) as part of the Reserve Fund. Our portfolio is diversified with a target of no more than 10% allocated to any single strategy. Given this structure, a 10% loss in any given strategy requires a coverage ratio of 1/9. This relationship is defined by the following formula:
P (Portfolio Value): This represents the total value of our portfolio, specifically the funds held. The portfolio is diversified with the target of no more than 10% of the total is allocated to any single strategy. This diversification minimizes risk by ensuring that losses in any one area are limited.
R (Reserve Fund): This is the portion of funds set aside as a buffer to cover losses. The Reserve Fund is designed to absorb any shortfall in case one or more strategies incur losses—whether due to unforeseen events (such as exploits) or more minor, temporary issues (like a brief negative carry trade).
This means that the Reserve Fund should be about 11.11% of the total portfolio value. In practical terms, if a loss equivalent to 10% of a given strategy’s allocation occurs, having a reserve fund at 11.11% of the portfolio is calculated to provide sufficient coverage. This coverage ratio (1/9) is a target for ensuring that even in adverse conditions, our system has the flexibility to absorb losses while maintaining stability.
This approach is designed to keep some flexibility—ensuring that both unforeseen and minor strategy losses can be managed effectively without risking the overall financial health of the protocol.
Asset Allocation for Sustainable Growth
We aim to maintain the Reserve Fund in assets that are both high-earning and low-risk. This ensures that the fund not only keeps pace with protocol growth but also sustainably covers the required safeguards.
Crisis Management Provisions
In the event of a major crisis, we have additional measures at our disposal. Beyond the funds within the Reserve Fund, we can also utilize the funds raised by our team (in excess of $6M), the amount insured by avUSDx boosters, and our governance token.
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