At its core the AgeUSD protocol is quite simple to understand. There are two kinds of parties who interact with the protocol:
- Reserve Providers
- AgeUSD Users
Reserve Providers submit Ergs (the native currency of Ergo) to the dApp’s reserves and by doing so mint “ReserveCoins”. Each of these ReserveCoins represent a portion of the underlying Erg reserves held in the dApp.
AgeUSD Users also submit Ergs to the dApp reserves however in their case they mint AgeUSD instead. This is only allowed by the protocol if there are sufficient reserves within the dApp (reserves are above the minimum reserve ratio). At any given moment an AgeUSD user can redeem their AgeUSD in exchange for an amount of Ergs from the reserves equal to the current exchange rate as sourced by the Erg-USD oracle pool.
Reserve Providers can only redeem their ReserveCoins for Ergs if the price of Ergs goes up (or a substantial amount of protocol fees are collected) and thus cover the value of all existing minted AgeUSD plus an extra margin. By redeeming their ReserveCoins, they profit as they receive more underlying reserve cryptocurrency compared to when they minted their ReserveCoins (the increased amount coming from users who minted AgeUSD).
As such Reserve Providers allow AgeUSD users to enjoy stability of value. On their end, the Reserve Providers absorb the potential upside (if the value of the reserves goes up via the price of Ergs increasing compared to USD) but also absorb the potential downside (if the underlying cryptocurrency in the reserve goes down in price).
This provides individuals with the ability to choose to either go "long" Ergs (via minting ReserveCoins), or to choose stability (via minting AgeUSD).