Hermetica Reserve Fund

Overview

The Hermetica Reserve Fund is a reserve of assets maintained by Hermetica to safeguard against negative funding rate environments as well as other unforeseen adverse events.

The fund primarily covers two types of events:

1. Negative funding rates

2. Exchange failure

For a detailed analysis of the Hermetica Reserve Fund, please refer to our research paper.

Negative Funding Rates

As detailed in the Yield Mechanism section, the yield for USDh is generated from the funding rate accrued by short perpetual futures positions.

Typically, the funding rate is positive, resulting in yield generation. However, there are instances where the funding rate turns negative. During these times, the position backing USDh incurs interest payments, which would otherwise lead to negative yield on USDh.

To prevent this, the Hermetica Reserve Fund covers these interest payments, ensuring the principal value remains stable and USDh stakers only receive neutral or positive yield.

Our risk management systems use current and historical data to conservatively assess the optimal capitalization of the Reserve Fund, based on the total value locked (TVL) of USDh.

Exchange Failure

Exchanges, whether centralized or decentralized, are prone to hacks and failures.

While the off-exchange settlement systems of the custodians we use safeguard collateral, the failure of a hedging venue could lead to not honoring unrealized profits, which could result in a partial unbacking of the protocol's liabilities.

In such cases, Hermetica’s risk management systems seek to re-hedge the position on another venue and any negative PnL accrued between off-exchange settlement periods is covered by the Hermetica Reserve Fund.

Reserve Fund Capitalization

Hermetica initially funds the Hermetica Reserve Fund. The optimal size of the fund is continuously reassessed based on several factors, including:

• Total amount of USDh in circulation (TVL)

• Bitcoin volatility

• General market conditions

Security

The Hermetica Reserve Fund is held in an array of multisig wallets which are controlled by Hermetica.

All addresses associated with the Hermetica Reserve Fund are publicly available and Hermetica receives periodical proof of funds attestations from our counterparties and third party audit firms.