Synthetic assets refer to tokenized derivatives that anchor the value of another asset and are generally issued in the region. on the blockchain. Broadly speaking, wrapped tokens and stablecoins also belong to the subcategory of synthetic assets (since they anchor the prices of other assets), but what people often refer to as synthetic assets are: Made ofOracleA derivative token that anchors the prices of other assets by feeding prices.

Synthetic assets generally require a DeFi protocol to help users issue them, and exist on a certain blockchain in the form of standardized tokens. Synthetix Protocol (formerly known as Havven Payment Protocol) is the first DeFi protocol to invent such derivative trading instruments. In theory, any asset whose price can be provided by an oracle can be minted into a tokenized synthetic asset.

For ease of understanding, you can think of protocols such as Synthetix as a large Casino. The games they provide are: players use the chip simulation plate to speculate in stocks and coins.

How does synthetic asset work? What is the principle of synthetic assets?

The gameplay of synthetic assets is divided into two steps: asset mortgage casting and trading. To facilitate understanding, we explain it from the perspectives of two market participants.

The minter (borrows money and assumes debt)

What to do: Over-mortgage an asset (own native asset/ETH) in the agreement, cast Synthetic stablecoin assets, such as 750% over-collateralized $SNX to mint $sUSD, are equivalent to mortgage loans, but only synthetic stablecoins such as sUSD can be lent. After issuing sUSD, the system will record an account to the minter: how much is owed, what is the ratio to total accounts receivable (total debt), and what is the value of the collateral.

What can you get after staking:

• Some synthetic assets of stable coins;
• Earn a certain handling fee ( Share according to proportion);
• Assume certain variable debts.

What you can do after getting it:

• Become a synth trader, speculate on other synthetic assets or hedge your own debt risk ( See below for details);
• Become a market maker in the synth OTC market;
• Sell directly over the counter.

Staker is a player who obtains chips (sUSD is equivalent to chips) through the official channels of the casino. The way to buy chips in this casino is to over-collateralize the casino's own stocks to cast them. The system will keep accounts for the caster, indicating how much chips you create and how much share you hold. At the same time, the total value of the mortgaged stocks must be more than 7.5 times the value of the chips. In order to encourage players to use official channels, casinos distribute transaction fees to players who cast chips in proportion.

Example: Alice has SNX worth $75,000, pledged to Synthetix and minted 10,000 sUSD. At this time, Synthetix will record to Alice: assets $75,000 SNX, liabilities $10,000 sUSD, and the mortgage rate is 750%. At this time, Alice has started to earn fees in proportion. She can also become a trader and trade sUSD for other synthetic assets. She can also hold it unchanged, or she can choose to enter Uniswap in the over-the-counter market and sell sUSD for sUSD/ USDC market making and more.

What is the risk: All minters share a changing total debt pool. If the total debt continues to rise and the debt allocated to your own account continues to increase, there will be a risk of liquidation.

All synthetic assets add up to form a large chip pool. The value of this pool should be exactly equal to the total debt value on the account, so it is also called a debt pool. It is not difficult to find that the total debt amount has been changing with the changes in the number, type, and anchor price of synthetic assets. The total value of collateral should always remain at 7.5 times or more than the total debt pool. The increase or decrease in the debt pool will be allocated to each minter according to its share, and the system will directly modify the debt balance of the minter each time (although it is a fixed balance when minting a loan).

The real situation is: the system tracks the debt pool by issuing/burning special tokens for their debt share when minting or burning sUSD. A minter's debt share is his debt token balance divided by the total supply of debt tokens.

When one's own debt balance decreases, the mortgage rate increases, and the minter can cast new chips to lower the mortgage rate. When their debt balance increases and the mortgage rate decreases, the minter can destroy some chips or supplement collateral to increase the mortgage rate. When the mortgage rate is too low and operations are not performed in a timely manner, the system will force liquidation.

Therefore, Alice’s $10,000 debt balance is changing at this time. Assume that the total debt pool is worth $20,000. When the value of the sBTC synthetic assets increases by $5,000, the total debt pool will also rise to $25,000. Since Alice's debt ratio is 50%, she will pay half of the new debt, which is $2,500. So Alice's new debt balance after the increase becomes: $12,500. Alice's net loss is -$2,500. If Alice does not replenish collateral or destroy some sUSD at this time, the collateralization rate will be lower than the required 750% collateralization rate, but still less than the liquidation collateralization rate.

The difference between traditional casinos is the difference in counterparties: in traditional casinos, players make money from players, and the casino takes a commission. In this DeFi protocol, the pledger's assets are the counterparty to the total fluctuation of all synthetic assets. Therefore, when the overall market rises, the banker who pays the gamblers is the minter himself.

Use over-collateralization for two reasons:

• Collateral volatility is high, and over-collateralization can reduce the risk of insufficient collateral value. If the value of the collateral drops too much, the system will Liquidate and sell the collateral in advance before the minimum requirement is reached.
• Total debt volatility is high. Even if the value of mortgage assets is stable, if the total debt pool rises too fast, there will be a risk of insufficient collateral.

Synth traders

What are the conditions: Hold synthetic assets, so minters can become traders directly.

Players who do not want to go through official channels to obtain chips (and do not want to take on debt) can buy chips directly off-site. Some synthetic assets have certain liquidity in external AMM pools (such as sUSD/USDC in Curve, sETH/ETH in Uniswap, etc.) and can be purchased directly.

What you can do:

You can speculate on synthetic assets and earn the difference.

• Advantage 1: Reduce the friction cost of operating spot goods. If you want to speculate in gold but don’t want to hold spot, because holding spot will bring a lot of trouble and cost, you need to consider specific trading venues, storage costs, transportation costs, security risks, etc., you can choose to trade synthetic assets $sXAU (synthetic Gold) token, which tracks the price of gold by using the Chainlink oracle, and its price performance is consistent with gold spot. If you want to go long BTC, short ETH, long XRP and other complex combinations at the same time, but do not want to use a centralized exchange, directly purchasing synthetic assets such as sBTC, iETH, sXRP, etc. will greatly reduce the friction costs caused by various operations.
• Advantage 2: No slippage when trading synthetic assets. Since the price of synthetic assets comes from oracles, holders do not need to worry about the liquidity of the asset, and there will be no slippage in trading.
• Transaction process: Real Synth transactions do not occur with other players, but are the process of system accounting, destruction, minting, and accounting again. All transaction prices come from external oracles, and Synth’s own market does not have independent prices.

After having the chips, the player holding the chips (sUSD) wants to buy which stock and pays the chips if he is optimistic about the price. The system will calculate based on the external real stock price (from oracle) Quantity, issue players the correct number of stock/crypto notes (sBTC, etc.). When players feel that their stocks have risen enough and they have made enough money to close their positions, they can exchange the notes back for chips. The system will update the accounting internally.

Example: Alice has 10,000 sUSD in her hand and wants to purchase all sETH. The system will first destroy 10,000 sUSD in Alice's wallet ➡️ Update the total supply balance of sUSD (-10,000) ➡️ Oracle determines the ETH exchange rate (assumed to be $1,000) ➡️ Collect fees ➡️ Mint the corresponding number of new sETH (about 10) and send it to Alice's wallet ➡️ Update sETH total supply balance (+10).

Can hedge the risk of loss from debt fluctuations. (For minters only)

The Synthetix protocol has a synthetic asset that specifically tracks the total debt pool index. Purchasing this asset can hedge the minter's losses due to the increase in total debt.

What are the common synthetic asset protocols?

Common synthetic asset issuance protocols and their synthetic assets are listed below:

• Synthetix, a protocol on Ethereum, requires over-collateralization of ETH (150%) or native generation Coin SNX (750%) to mint synthetic assets.
  • sUSD, sBTC, sETH, sBNB, etc., anchor the price of the corresponding legal currency or crypto.
  • iBTC, iETH, etc., reverse anchoring corresponds to the price of crypto (equivalent to 1x shorting).
  • sXAU, sXAG, etc., synthetic assets with anchored commodities.
• Linear Finance, over-collateralized native token LINA (500%) to mint synthetic assets.
  • lUSD, lADA, etc.
• Mirror protocol is a synthetic asset project on the original Terra Classic chain. It was established by Terra Labs and uses over-collateralized UST (150% - 200%, Lol) to mint mAssert , mAsset is generally linked to real-world assets. However, in August 2022, the oracle protocol Band protocol announced that it would permanently stop support for Terra Classic’s price feed service, which includes the Mirror protocol. The protocol no longer operates without oracle price feed support.
  • mAAsset, usually linked to stocks, includes mAAPL, mTSLA, etc.
• Synthetify is a synthetic asset protocol on the Solana blockchain. Similar to Synthetix, synthetic assets are minted with over-collateralized native token SNY.
  • xSOL et al.