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, with the overlay's payoff floored at 0%, subject to counterparty performance; not guaranteed. 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 payoff floored at 0%, subject to counterparty performance; not guaranteed. Reserves stay with the issuer's own custodian. 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): The contract's payoff never calls for a negative return. That is a term of the payoff, not a guarantee: receiving it depends on the counterparty paying.
- cap(·, C): You give up upside above C. This is sold to help finance the floor.
- Perpetual: No expiry, no roll, no calendar gap. The floor is a contract term through any overnight gap or weekend, and like every term it depends on the counterparty performing.
What the floor costs
The floor isn't free — it has an economic cost, the carry the two parties agree in the confirmation. 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 cost (target ≈ 0, set by the choice of C)
If rates fall and the funding budget shrinks, the optimizer proposes a lower C (less upside) rather than weakening the floor.
Two honest caveats
1. Counterparty performance
The floor is a term of the contract, and it depends on the floor-writer performing. A defaulting counterparty breaks the protection. Tomorrow is not a party, does not guarantee settlement and holds no collateral; spreading the overlay across more than one counterparty, and any credit support the parties agree between themselves, are the issuer's decisions.
2. Pro-cyclical cost of the floor
The cost of the floor can rise in stress exactly when carry may fall. The SCO-TAILLOCK leg sets a contractual cap on that cost, subject to the counterparty performing. Without it, a vol spike could erode economics.
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. The overlay is a bilateral contract between the issuer and a named counterparty; any credit support is agreed between those two parties off platform, and Tomorrow holds nothing. The GENIUS eligibility gate checks the structure, not the parties' credit arrangements.
Note: GENIUS Act implementing rules are unsettled. The gate applies the conservative interpretation. Issuers must obtain independent legal counsel.