Reserve Ratio and Threshold

The Reserve Ratio is the ratio between the total value of all non-native reserve tokens in a pool and the value of the two native tokens.

In order to limit the amount of risk taken by the VirtuSwap LPs, the maximum possible reserve ratio (reserve threshold) is set on the protocol level. If the Reserve Ratio in the pool would exceed the threshold following a trade, the trade does not go through. Trades increasing the reserve ratio beyond the threshold are never allowed. In other words, the pool stops accepting additional reserves until some or all of the reserves are emptied during the Exchange of Reserves procedure.

The value of a reserve asset is expressed in terms of one of the native tokens in the pool. This is accomplished by obtaining the implied exchange rate from another pool (a reference pool) that holds the reserve in question and one of the pools' native tokens.

For example, to determine the value of reserve C in pool A-B, it is necessary to locate an A-C or a B-C pool. Thus, the price ratio between C and A (or C and B) can be established, and the ratio between total value of C and the total value of A and B can be calculated.

The initial value of reserve threshold is set to 2%. The value is governed by VirtuSwap DAO and can be updated from time to time.

In future versions of the protocol, pool-level governance of reserve threshold will be added, so that LPs can make decisions on the value of reserve threshold in their pools.