Sirwin
Sirwin
Poison Finance

Synthetic assets. Part 1

By fmiren | Real World Assets | 6 May 2023



 

Introduction

To mature as an industry on its own decentralized finance (DeFi) should not be limited to digital assets only. Traditional finance is still much bigger than DeFi. Most people active in financial markets still trade financial instruments such as bonds, currencies, stocks, and ETFs. To unlock value worth trillions of dollars DeFi should bring those assets to blockchain. But how do you do it? Synthetic assets are the name of the game.

Synthetic assets are like derivatives represented on blockchain. Derivative contracts track the price of an underlying asset. Therefore, they allow users to get exposure to an asset without owning that asset. A synthetic asset is a tokenized derivative. Let’s say, you believe that Microsoft will perform well; that’s why you want to buy MSFT shares. But for some reason you don’t or cannot buy it through an ordinary brokerage account. What you can do is to purchase a token representing MSFT share on a synthetic asset platform.

Synthetic assets bring improved liquidity and lower transaction costs to investors. They also make assets accessible to retail investors who otherwise couldn’t afford to invest in them (e.g., precious metals). Synthetic assets can be used as a risk management tool for hedging as well. If you own GOOG (Google stock) but want to hedge against the downside price movement, you can sell a token representing GOOG share on a synthetic asset platform.

Protocols

Synthetix

Out of all synthetic assets apps the largest in terms of TVL (total value locked) is Synthetix. Synthetix Spot Synths are synthetic assets tracking the value patterns of real-world assets, which can be fiat currencies, cryptocurrencies, or commodities. For example, holding sETH gives an owner exposure to ETH price.

Since it’s the largest protocol of its kind it has been described many times. I won’t go deep into Synthetix.

Poison Finance

Poison Finance is a multi-chain synthetics protocol. Synthetic tokens on Poison are called Potions or pTokens and are collateralized by multiple stablecoins such as USDC, USDT, FRAX, and DAI. The issuance of Potions is allowed once collateral is locked in the Vault Contract. At the time of writing, the protocol allows to mint pTokens for three commodities (gold, silver, oil) and several high-tech stocks.

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Potion Finance is an overcollateralized protocol. It means that a Vault’s collateral value has to be higher than that Vault’s current minted tokens. For pGOLD and pSLVR the minimum collateral ratio is 130%; for other Potions a Vault should have at least 150% collateral ratio. Collateral ratio is calculated according to the following formula:

cRatio = collateral / (pToken amount * pToken price)

What this formula implies is that when the pToken’s price goes up, the user has to add more to her collateral to dodge liquidation risk. So, essentially this means that a Vault is a short position against the underlying asset.

Parcl

Parcl differs from other mentioned (and not mentioned) protocols in that it creates synthetic assets of the different asset class. Most synthetic asset protocols design products tracking the value pattern of fiat currencies, cryptocurrencies, stocks, or commodities. For Parcl the underlying asset is real estate. Built on Solana, Parcl allows you to trade price movements in real estate.

Through Parcl Labs, a Big Data and AI/ML company, the protocol brings tangible asset prices on-chain. The protocol gives users exposure to real estate in US cities such as Miami, New York City and Los Angeles. Toward the end of 2023 the protocol will offer real estate in several non-US cities, such as Paris, London, and Singapore.

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fmiren
fmiren

commodity trader interested in crypto & writing about it


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