Peep into the prospects of DeFi synthetic assets from the progress of the Synthetix ecological project.
Original Title: “Inventory of Synthetix Ecological Projects of Synthetic Assets: Can the application of synthetic assets be promoted as a whole after going online”
Written by: Jiang Haibo
The projects in the same ecology may produce wonderful combinations to promote the overall development of the ecology. Recently, a series of projects in the veteran synthetic asset project Synthetix ecosystem will be launched on the main network and deployed to the Ethereum second-tier expansion solution Optimism. This may drive the demand for synthetic assets in Synthetix, increase the trading volume of synthetic assets, and make SNX pledgers Profits increase, and part of the new tokens will also be distributed to SNX pledgers.
Currently known ecological projects created by the Synthetix team include option agreement Lyra, binary options Thales, trading platform Kwenta, fund raising platform Aelin, and asset management platform dHedge. This article PANews will introduce these projects and their progress, and discuss the development prospects of synthetic asset ecology.
Lyra Finance
Because of the high risk of option trading, even in centralized exchanges, there is a large spread between the buying and selling prices of option contracts. Option trading in decentralized exchanges (DEX) is more difficult to control the risk of liquidity providers . Lyra’s advantage lies in reducing the risk of liquidity providers through active risk management and improving the liquidity of automated market makers (AMM).
We know that in a spot transaction, if you buy 1 ETH at a price of $4,000. When the price of ETH drops to $3,000, investors will lose $1,000. Also use 4000 USD as a margin, and do a long 2ETH contract at a price of 4000 USD with 2 times leverage. When the price of ETH drops to $3,000, investors will lose $2,000. If you ignore the premium and capital costs in futures, futures trading can be regarded as just a leveraged spot. In general, there is a linear relationship between futures and spot gains/losses and prices, as shown in the figure below.
The losses and gains in option trading are even more “violent.” For most OTM (Out of the money, the exercise price is outside the asset price) options, before the delivery date, the asset price may not reach the exercise price, and the loss of purchasing the option remains 100%. In fact, option premiums and insurance premiums share the same English word “Premium”. Option premiums are also called insurance premiums. Normally, there is no income after purchase, but when certain conditions are met, the income will increase sharply.
As shown in the figure below, taking the purchase of a call option Call as an example, before reaching the strike price Strike, the loss is a fixed 100%, that is, the entire principal of the purchased option. When Break Even is reached, the income just covers the cost of purchasing the option, and the total income is zero. If prices continue to rise, earnings will increase sharply. If the spot or low-leverage futures and options are placed in the same coordinate system, the corresponding graph slope of the option is larger, which can be understood as the higher leverage of the option.
Because of the different risks, the liquidity of spot, futures, and option agreements on the chain varies greatly. It is relatively simple to provide liquidity for spot assets on the chain. AMM such as Uniswap can be used directly. Even if the price of the underlying asset doubles or falls by 50% relative to the pricing asset, the impermanence loss is only 5.7% relative to holding two assets. It is more difficult to provide liquidity for futures trading platforms, and the risk will increase exponentially. Take the Perpetual perpetual contract as an example. According to CoinGecko data, as of August 24, the circulating market value of PERP is approximately US$760 million, but the total lock-up of the agreement is The position is only 12.4 million U.S. dollars. The official website shows that the sum of the two main trading pairs, BTC/USDC and ETH/USDC, in the past 24 hours, is approximately 13.8 million U.S. dollars.
Considering the high risk in option trading, it is more difficult to provide liquidity for option trading in the form of AMM on the chain. In options, Delta, Vega, Gamma, Theta and Rho can all reflect the sensitivity of the current price. The specific meanings, characteristics and calculation methods are as follows. Lyra dynamically regulates the risk of AMM based on Delta and Vega.
Delta hedge
Delta is the most important option sensitivity indicator. Delta = option price change/spot price change, which means that when the spot fluctuates by one unit, the amount of change in the option price.
In traditional finance, investors often use Delta neutral strategies to construct portfolio positions that include options. Lyra hedges the liquidity provider’s Delta by trading on Synthetix, controls the liquidity provider’s risk, and makes the overall Delta return to neutral. The delta hedging steps in Lyra are as follows:
Calculate the Delta of each option product, and the detailed numbers will be displayed on the trading page.
Get the net position of each AMM.
Multiply the net position of each AMM by the corresponding Delta.
Calculate the sum of the above products for each type of product to get the net Delta.
Buy (when Delta is negative) or sell (when Delta is positive) the same number of tokens as net Delta, so that the underlying assets return to Delta neutral.
For example, if ETH only has two products with Delta of 0.5 and 0.3, and AMM is short 10 ETH and long 3 ETH respectively, then net Delta = 0.5 x (-10) + 0.3 x 6 = -3, which means AMM is short 3ETH, you need to buy 3ETH from an external exchange to return to Delta Neutral.
Vega risk dynamic adjustment
The price of option transactions will be around the theoretical value of Black Scholes, but in order to reduce the risk of liquidity providers, Lyra will generate an asymmetric spread based on whether the transaction reduces the total risk exposure or increases the exposure. Increased exposure to liquidity pool risk will be suppressed, and transactions that reduce risk will be promoted.
For example, a call option priced at $100 according to Black Scholes and AMM’s net short position is 500Vega, AMM may be willing to buy the call option at a price of $95, and will continue to sell the call option at a fixed price It is 110 US dollars. The additional Vega increases the buyer’s price by $5.
Current Progress
Currently Lyra has been deployed on the Optimistic Kovan testnet, where users can buy and sell options. In the case of an existing position, trading in the opposite direction will automatically close the position. If you want to sell the option net, you need to pay 100% of the margin and get the option fee. For example, if the price of ETH on August 19 is 3,000 USD, if you sell a call option with 1 ETH delivered on August 23 and the delivery price is 2700 USD, you can get the option fee of 500 USD, but you need 1sETH as collateral. After expiration, the agreement will be automatically liquidated.
However, considering the high risk of providing liquidity, the project party did not provide a UI interface that allows users to add liquidity. It is understood from the team that even if the mainnet goes live, initial liquidity will be raised from investors and partners. After maturity, users will eventually be allowed to provide liquidity.
Thales Matket
Thales was an ancient Greek thinker born in 640 BC. He predicted the weather by observing the starry sky and judged that the next olive harvest would be ripe, so he rented all Ionian olive presses in advance. When the olives were ripe, because the demand for olive presses increased, he rented them out at a higher price and made a lot of money.
This is the first exercise of an option contract in the record. Here, the binary options agreement Thales borrows the name of ancient Greek thinkers, which enables users to flexibly create derivatives including traditional finance, encrypted assets, and sports betting.
At expiration, the betting of binary options is not continuously distributed like stocks, futures or conventional options. Simply put, there are only wins or losses, and there is no intermediate state. During the last U.S. presidential election, exchanges such as FTX introduced a binary option whether Trump or Biden won.
Every option market in Thales has an order book available for trading on 0x. Option tokens with direction can be obtained by selling another token while minting, or can be directly traded through 0x. At the time of coin minting, 1sLONG and 1sSHORT tokens will be minted for every 1sUSD, and the agreement will charge a 1% minting fee. At the same time, you can choose to sell the tokens you are not optimistic about. The remaining tokens will expire according to whether the conditions are met. Redeem 1sUSD or return to zero, and use Chinlink to feed the price.
For example, Joe bought a BTC call binary option at a price of 0.5sUSD, the expiration date is December 31, and the strike price is $100,000. If the BTC price at maturity is greater than or equal to 100,000 U.S. dollars, each sLONG token held by Joe can be redeemed for 1sUSD and each earns 0.5sUSD; if the BTC price at maturity is less than 100,000 U.S. dollars, Joe holds sLONG No assets can be redeemed, and each loss is 0.5sUSD.
All option tokens in Thales need to be minted by sUSD, which can mint corresponding options such as cryptocurrency, index, and foreign exchange in Synthetix. Thales can drive demand for sUSD and provide more complex trading strategies for synthetic assets in Synthetix. In the token distribution announced by Thales, it is clearly stated that 35% will be allocated to SNX pledgers, 15% of which will be retroactively rewarded when the tokens are issued, but will be released linearly within 12 months, and the remaining 20% It will also be issued to SNX pledgers within one year.
Kwenta (Synthetix.exchange)
Kwenta is a decentralized derivatives exchange based on Synthetix. Compared with other DEXs, Kwenta is characterized by unlimited liquidity and zero trading slippage. This feature makes Kwenta more advantageous in large-value transactions.
Prior to this, Curve and Synthetix jointly realized cross-asset transactions. For example, in the process of trading WBTC into ETH, WBTC will first be exchanged for sBTC, then exchanged for sETH in Synthetix, and finally exchanged for ETH. Improved the position of Curve and Synthetix in large transactions.
Kwenta has been deployed on the Ethereum mainnet and migrated to the expansion solution Optimism to reduce user costs. Transactions in Kwenta charge three-thousandths of a handling fee, and these fees will be distributed to SNX pledgers.
According to the description of the Synthetix founder in the project development plan, the Kwenta team will be split into an independent team for autonomy and management outside the Synthetix governance framework. It may launch a governance token to be distributed to SNX pledgers.
Aelin Protocol
Aelin can help project parties raise funds, and can also help ordinary users enter the primary market. The project party can be in the early stage of venture investment rounds and allocate tokens according to a certain vesting schedule, or it can be any number of one-time transactions. Normally, this opportunity is seized by large funds, and Aelin makes the financing process more open and transparent.
50% of the protocol governance token AELIN will be allocated to SNX pledgers.
dHEDGE
dHEDGE is an asset management agreement built on Synthetix. Like Enzyme, it allows anyone to create an investment fund or join a fund managed by others. dHEDGE was launched on the Ethereum mainnet last year and issued governance tokens. It will be deployed on Polygon this year to support the token and liquidity mining strategy on Polygon.
Currently, dHEDGE does not have many assets under management. As of August 23, dHEDGE managed a total of 242 funds with more than US$10,000 on Ethereum and Polygon. The largest asset under management is the “Jesse Livermore Hearts Crypto” fund pool created by Ben formerly’Jesse Livermore’. This pool manages $4.13 million in assets and has brought investors a return rate of 437.2% from its establishment to the present.
However, the performance of the two larger asset pools managed by dHEDGE itself is not outstanding. Among them, the “dHEDGE Top Index” pool manages assets of US$3.95 million, ranking second in terms of assets, and has lost 3% since its creation; “SNX Debt “Pool Mirror” manages assets of US$2.69 million, ranking fourth in terms of assets, and has made 60% profit since its establishment.
Because the stablecoins used by investors when they join will also be first replaced with sUSD, dHEDGE on Ethereum can only trade synthetic assets (Synths) on Synthetix, and dHEDGE drives the application of synthetic assets in Synthetix.
Concluding remarks
The Synthetix ecological project will improve the overall application of synthetic assets, improve the demand for synthetic assets such as stable coins, and increase the profitability of SNX pledgers.
The use cases of the stable currency sUSD have been greatly improved. For example, users must use sUSD to cast option contracts and invest in on-chain funds.
Enrich the application of other synthetic assets, hedge risks through option transactions, etc., so as to use synthetic assets to build more complex investment portfolios.
Deployed together with Synthetix on Ethereum Optimism, the protocol is highly composable, which is conducive to seizing the early market.
To bring benefits to SNX pledgers, most projects have indicated that they will distribute tokens to SNX pledgers, which is likely to be rewarded retrospectively.
However, due to the split of the project, SNX’s equity will be reduced in the future. For example, the transaction fees in Synthetix.exchange previously will be distributed to SNX pledgers, but after Kwenta is split, it will be managed by an independent governance token.
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