The reserve silos (1, 2, 3, and 4) are such that each individual silo alone is capable of backing—100% of the minted supply of USD Tez. This means that when all 4-silos are at full-capacity the minted supply of USD Tez will be backed 400% (i.e. a 4:1 ratio).

Silo-1 — “Base FIAT”

The first collateralization method follows the simple model described above; $1 USDtz for $1 USD. FIAT collateralization enables 100% redeemability (unlike crypto) because no matter when happens to the price of XTZ, the price of $1 FIAT will always remain $1.

Why FIAT?

The FIAT serves as a safety fallback so that no matter what happens to the price of crypto, the coin will always be stable and fully redeemable.

The price of XTZ could drop 99%, and still, all USDtz issued will be 100% redeemable; the price of XTZ could grow 100x, and still all USDtz issued will be 100% redeemable

This is the easiest, fastest, and the most rock-solid way to begin collateralizing a stablecoin. We could just stop there and have a 100% backed stablecoin, growing with the growth of the reserves. However, if the price of XTZ grows say from $1 to $10 and the trade volume would grow with it, and the serviceable liquidity that USD Tez could provide would be very little compared to the demand. Effectively, a FIAT collateral reserve alone for USD Tez is like shorting XTZ (not a good idea in the long run).

Silo-2 — “Base XTZ”

The base collateral needs to be in FIAT as well as XTZ—double-collateralizing the stablecoin. Silo-2 (the XTZ silo) starts empty, but with the help of lending activities from Silo-1, it can start to fill. Silo-2’s baking activities will commence as soon as some seed XTZ is deposited. Eventually, Silo-2 will be independent and be able to meet its own growth needs strictly from baking activities.

Imagine just 2 silos— Silo 1 and Silo 2. The value of each bucket must independently match the value of all minted USDtz in circulation. In other words, for every $1 USDtz-token issued, there must be $1 USD in a FIAT bucket as well as (assume the price of XTZ is $1) 1 XTZ coin in a crypto bucket; 1–1–1.

Why XTZ?

The XTZ reserve silo enables the stablecoin’s collateral to grow with the market since keeping just FIAT collateral while XTZ grows perhaps 10x would not enable USDtz to keep up with liquidity demands.

Secondary reason includes keeping the collateral “on-chain” so that we can stake the XTZ held and thereby contribute to the ecosystem on which USD Tez thrives

Together Silos 1 and 2 comprise the Base Layer of the USD Tez reserve. Although we’re starting with Silo-1 alone, and although Silo-1 alone is sufficient, upon the point in which Silo-2 is definitively filled, neither Silo-1 nor Silo-2 should be considered better than the other and at that point, the reserves should never fall under 200% collateralization.

This complete-hedge actually enables us to maintain the full-confidence either polarity of the market confidence spectrum:

“I don’t care for crypto-backing. Are you fully-collateralized by FIAT?” Yes, 100%

and

“I don’t care for FIAT-backing. Are you fully collateralized by Crypto?” Yes, 100

Though this is still not the perfect system.

Why 200%+ [over]collateralization is not-good-enough: As the XTZ silo (Silo-2) grows in value beyond the value of the FIAT silo (Silo-1), the USD Tez Foundation can mint more USDtz tokens to meet the new—greater—value of the XTZ in Silo-2). However, there cannot be more USDtz than there is FIAT to back it. This means that some XTZ would have to be liquidated to feed Silo-1 if it were to mint more USDtz.

Despite actually ‘double-collateralizing’ all USDtz by a combined 200% collateralization ratio, these 2 silos alone will hinder growth prospects. In other words, if our goal with Silo 2 is to grow our serviceable liquidity offering over time, then the double-collateralization method (namely, the servicing Silo 1) would hurt that effort.

Even if XTZ were to grow again and again over time, the XTZ silo’s size as a proportion to the overall XTZ market would otherwise be virtually cut in half with every new minting period.

A similar problem emerges if the price of XTZ were to crash. Then part of Silo 1 would need to be used to purchase more XTZ. Since FIAT is the first Silo, the actual supply of USDtz would need to be reduced in order to even make that purchase so that the token isn’t under-collateralized (first rule).

These are the reasons for Silo-3 and Silo-4, which together comprise the ‘Growth Layer’ of the USD Tez reserve.

Silo-3 — ‘Growth FIAT’

Silo-3 is a FIAT reserve designed to match Silo-1 and act as its backup, incase Silo-2 needs replenishing.

If the price of XTZ crashes, then the difference will need to be made up for by a FIAT reserve to purchase more XTZ. We cannot use FIAT funds from Silo-1 without ending up under-collateralizing the USD Tez supply unless we were to slash the amount of USD Tez, which is something to avoid. After all, our goal is to grow our liquidity offering, not shrink it. In a sense, if Silo-2 is the base that collateralizes USD Tez (just as Silo-1 does), then Silo-3 is what provides cover for Silo-2.

It is critical that Silo-1 and Silo-2 become full as soon as possible and to remain that way in perpetuity, whereas, Silo-3 can be more flexible. After all, the purpose of Silo-3 is to be an active reserve that can be used to replenish Silo-2. It’s a “growth” reserve which will have times where it’s at capacity and times in which it is less than capacity. Ideally, it need not break from full-capacity at all (how that would work will be described later) but it’s not a cause for alarm if it does.

For Silo-3’s reserves to go down from 100% to a fraction of that if need be, should just be seen as Silo-3 doing its job, and that it will rise up to 100% over time with further growth activities.

However, this only covers the balance if the price of XTZ were to crash. If the price of XTZ were to skyrocket, say 10x, then Silo-3 would not be very helpful.

For that reason, there’s Silo-4

Silo-4 — ‘Growth Crypto’

In a state of XTZ growth, the dollar value of Silo-2 will have outgrown the value of all FIAT in Silo-1 and of course, all USDtz in circulation. At the same time, it will likely be of great interest to all stakeholders that the occasion is used to increase the liquid supply of USDtz available.

To validly increase the USD Tez supply after an XTZ growth spurt, at the very least, the amount of FIAT in Silo-1 must be increased making Silo-1’s liquid dollar value match that of Silo-2’s liquid dollar value. This cannot be done by liquidating any XTZ since that practice would lead to a halving of its proportion to the overall market supply of XTZ in the market (very bad in the long run).

Instead, Silo-4 will provide the solution. Silo-4’s reserve is designed to match that of Silo-2 to act as a backup for Silo-1. If Silo-1 collateralizes all USDtz in circulation (as does Silo-2), then Silo-4 is a source of coverage for Silo-1.

Just like 2-keys needing to be turned to launch missiles from a submarine, so too should Silo-1 and Silo-2 be of equal size before new minting of USDtz tokens is to occur. However, if the Trustees decide that USD Tez’s liquidity offering must grow at full speed, then they can decide to spend all available funds to recapitalize Silo-1 alone. This is because Silo-1 backing all USD Tez in circulation is the absolute minimum requirement.

Together at full-capacity, all 4 silos will be collateralizing USDtz 400%. This is the maximum reserve ratio allowable. After that, all other funds earned from baking and lending activities enter the surplus chamber, which we call the “Harvest.”