Most DeFi applications are like replica products of traditional finance, and synthetic assets offer another possibility: a market where everything can be tokenized.
Written by: Justin Mart, at Coinbase Ventures
Compiler: Leo Young
Most decentralized finance (DeFi) applications today are like copying traditional financial products. Tokens can be exchanged for each other, borrowed or loaned in the currency market, and even traded with margin and leverage on the exchange.
But DeFi is far from that. Blockchain is a globally open platform that essentially carries programmable value assets. Sooner or later, DeFi will produce truly unique products that have nothing to do with the traditional world.
Let’s look at one possibility: synthetic assets.
What are synthetic assets?
Synthetic assets are new types of derivatives. Derivatives are assets whose value is derived from different assets or benchmarks. Just like futures and options, buyers and sellers trade contracts that track the future price of assets.
DeFi has made a little adjustment on this basis: “Synthetic assets” are digital tokens for derivatives. Derivatives are financial contracts that are customized to obtain designated assets or financial product positions, and synthetic assets are the tokens of these derivatives.
Therefore, synthetic assets have the following unique advantages:
- Can be created without permission: Blockchains such as Ethereum allow anyone to build synthetic assets
- Simple to use and transferable: synthetic assets can be transferred and traded freely
- Global liquidity pool: The globalization of the blockchain itself makes it available to anyone in the world
- No centralization risk: There is no centralized medium for controlling privileges
Give a few examples
Synthetic assets tokenize physical assets and introduce physical assets into the blockchain world, giving it all the above advantages. Imagine that anyone in the world can buy tokens that track the S&P 500 index, and use these tokens as collateral in other DeFi products such as Compound, Aave, MakerDAO, etc. This model can be extended to gold or rice, TSLA stocks, SPY index, public debt bonds and so on.
There are also new and refreshing financial tools that are no longer out of reach, such as pop culture market, meme culture market, personal token market, etc., which can all be traded through synthetic assets.
Considering that any asset can be synthesized into the blockchain, this potential market is huge. For reference, the global stock exchange market in the first quarter of 2020 will reach 32.5 trillion. In theory, this part of the market can be turned into synthetic assets, and anyone can freely trade in the global liquidity pool without restriction.
Special case: trading “shit”
At the end of 2019, several developers came up with an idea and released a prototype : What if there was a synthetic asset that could track urine and urine anywhere in the streets of San Francisco? There is an increase in urine and urine on the street, and token holders profit. Urine is reduced, and the token issuer makes a profit. Use an oracle to report the number of bowel movements.
This token market can inspire the local government in San Francisco. If the San Francisco city government issues “shit coins,” it will encourage the government to clean the streets and make a profit. On the contrary, if the streets have not become cleaner, citizens who buy “shit coins” can at least make a profit and compensate for their bad feelings.
This is just a simple example to illustrate the potential of synthetic assets and explain the “tokenized” market.
Currently the most common synthetic asset platform
Universal Market Access (UMA)*
UMA is a synthetic asset agreement that allows anyone to recreate traditional financial products, novel crypto assets and other products.
On the UMA platform, two counterparties can use and create arbitrage financial contracts without permission. The contract is guaranteed by economic incentives (mortgage) and executed by Ethereum smart contracts. The feature of Ethereum’s global open blockchain greatly reduces barriers to entry and brings about a “universal market use” protocol.
At present, UMA community members are focusing on building a tokenized yield curve first (for example, yUSD, chain note: UMA’s yUSD product has now been renamed uUSD).
In addition, anyone can create any type of financial contract on UMA. E.g:
- Crypto asset contracts: crypto asset futures tokens, yield curve, perpetual swaps, etc.
- Tokens that track cryptocurrency or DeFi indicators: such as BTC market share, DeFi TVL table, DEX market share and any other indicators
- Traditional financial products: US and global stocks (TSLA or APPL tokens), private pension plans, insurance and annuity products
- Novelty products: “Shit” trading, pop culture, meme culture, etc.
UMA is positioned as a novel and creative “long tail” financial market agreement. Like “shit coin” transactions, this type of contract can fundamentally improve the incentive scheme. This is innovation from zero to one.
Note: UMA is one of the companies invested by Coinbase Ventures
Synthetix
Synthetix is an agreement that can create global liquidity for Ethereum synthetic assets. Synthetix promotes the generation and trading of a large number of types of assets, which can be encrypted assets, stocks, and commodities, all on the chain.
Tokens that track the price of such assets can be bought and sold in the Synthetix ecosystem, with a mix of mortgage, pledge and transaction fees in the operation. The important thing is that the Synthetix ecosystem has become completely governed by the DAO structure, and the SNX token is the core of the entire ecosystem. SNX can be pledged to generate pledged synthetic assets and accumulate transaction fees. SNX can also be used as DAO community governance.
As the leading synthetic asset platform in the DeFi ecosystem, Synthetix currently has issued synthetic assets of more than US$150 million . Among them is the stable currency sUSD of the platform, with a market value of close to 100 million US dollars.
Synthetix currently mainly provides synthetic assets of sETH and sBTC encrypted assets, as well as sDeFi and sCEX index tokens that track a basket of assets. The success of synthetic assets on the platform is mainly due to its unique market design. Assets are traded at oracles, so there is no slippage in buying and selling.
Other platforms
There are many other synthetic asset platforms that have choices and are under development according to their own unique design concepts. Such as Morpher, DerivaDEX, FutureSwap, DyDx and Opyn, Hegic or Augur.
Note: DerivaDEX is one of the companies invested by Coinbase Ventures
in conclusion
With the maturity of the Ethereum and DeFi ecosystem, synthetic assets become possible as a new primitive. Now is just the beginning, don’t ignore the inherent risks:
- Smart contract risk: Smart contract vulnerabilities may be exploited, synthetic assets are the key target of attack
- Governance risk: Most of the platforms are governed by centralized participants, relatively unverified on scale
- Oracle risk: Many synthetic assets rely on oracles to operate normally, which brings their own trust assumption and failure mode
- Platform risk: Ethereum and other underlying blockchains will encounter the problem of carrying capacity. The more efficient the network is, the busier the network and the worse. The fee market is inefficient, and preemptive transactions or grieving attacks can become problems
But there is always a balance between potential and problems. Synthetic assets represent the open and globalized future of existing financial markets, and are an important primitive in themselves. Going further, you will see the innovation behind the “tokenization of everything” market.
We may use these primitives to build a new financial market, fundamentally adjust incentive programs, and change our existing lifestyle.
Source link: blog.coinbase.com
