Written by: Synthetix Community

Synthetix’s debt pool is a more complicated design. In order to better understand, let’s start with the liquidity pool in AMM (Automated Market Maker).

Traditional liquidity pool design

The so-called liquidity pool is the pool of funds generated in order to ensure the stable realization of transactions in DEX. If you want to trade between A token and B token, you need to prepare enough A and B in advance, and according to the exchange ratio Set a value k so that the product of the number of A in the pool x and the number of B y is always equal to k. In this way, when x increases, y decreases accordingly, and vice versa. In this way, the exchange between A and B is realized.

Take Uniswap the ETH / USDT example, you first need to transfer transaction pool and ETH USDT enough, assuming 1 ETH = 500 USDT, the pool has 100 transactions and ETH 50000 USDT, x = 100, y is 50000, k is 5000000, if I want to buy a bitcoin with 500 USDT, the liquidity pool will change as follows.

From the above examples, we can summarize the two most important foundations of a DEX: liquidity & price stability.

Uniswap will reward liquidity providers with transaction fees to ensure that the pool has sufficient depth. When the price deviates from the CEX price due to the change in the number of tokens in the pool, arbitrageurs will return the price to the normal level by moving bricks. Such a profitable transaction greatly improves liquidity and guarantees almost real-time price stability. .

Synthetix’s trading model & debt pool

The problems of the general AMM model are very obvious. When the depth of the liquidity pool is relatively small or the amount of funds to be exchanged is relatively large, there will be a deviation between the actual exchange ratio and the price. In the above example, the amount of ETH actually obtained is less than 0.01. We call this situation slippage. Of course, the reason for slippage is not limited to this one. Since smart contracts are used for transaction confirmation, price changes may occur during the confirmation period on the chain, which will also cause slippage problems.

Synthetix’s trading model avoids the first slippage problem mentioned above. In the Synthetix transaction, the price is directly fed by the oracle, so when you use 500 sUSD to exchange for 1 sETH, there will be no slippage due to the depth of the liquidity pool (the price within the confirmation time on the smart contract chain) Volatility is still unavoidable).

In a sense, Synthetix cannot even be said to be a transaction in the traditional sense. The essence of buying any sToken with sUSD is the destruction of sUSD and the casting of sToken.

The debt pool is also born with this “transaction” model.

Let us first explain what a debt pool is.

When you pledge SNX to mint sUSD, the minted sUSD is considered to be newly generated debt, and after sUSD is traded into sToken, the debt will rise and fall as the value of sToken increases or decreases. Synthetix uses a dynamic debt model, which means that all SNX mortgagers share the debt of the entire network.

Let’s take an example:

从 AMM 流动性池设计分析,Synthetix 为何选择债务池机制?

In the end, both the debts of A and B have become 150 sUSD, but the value of A’s assets is 200 sUSD, and the value of B’s assets is still 100 sUSD. At this time, A sells sBTC to get 200 sUSD, and only needs 150 sUSD to redeem SNX, and B also needs to buy 50 sUSD to redeem the mortgaged SNX.

From this point of view, Synthetix’s debt pool model is actually a dynamic zero-sum game within the contract. The profit may come from the rise in the price of one’s own assets, or the fall in the price of other people’s assets; on the contrary, the loss may come from one’s own. A fall in asset prices may also be an increase in other people’s asset prices. Therefore, the users participating in the pledge need to be more experienced traders in trading and risk control, who can skillfully use hedging methods on traditional platforms to hedge risks.

Why choose a debt pool?

As a synthetic asset project, Synthetix has its own advantages in terms of liquidity and price stability.

Synthetix is ​​fed by an oracle machine, so there is no need to worry about price fluctuations in AMM. In terms of liquidity, similar to Uniswap, Synthetix users receive pledge rewards by providing liquidity. The difference is that Synthetix’s debt pool design allows transactions to have no slippage at all (except for price changes within the confirmation time on the chain), while Uniswap’s The AMM mechanism causes serious slippage.

The sharing of the debt pool encourages users to continue trading and forge new sTokens, because once your asset price increases do not outperform the increase in total value, you will lose money. This encourages traders to continue to pursue asset appreciation to improve liquidity and create new assets. Synthetic assets. At the same time, with the continuous enrichment of synthetic asset types and the continuous increase in the number of users, and the significant reduction in network fees after the launch of Layer 2, the current unilateral tilt of the debt pool to sBTC and sETH will be properly resolved. Therefore, the price of personal assets The impact of changes on the overall debt pool will be infinitely diluted, so that the actual amount of profits and losses will be closer and closer to the true amount.

Of course, users still face the risk of liquidation. Although the value of SNX tokens over-collateralized by users has a buffer space of 2.5 times from the liquidation price, the sharp drop in the price of SNX and the sharp increase in the total debt of the debt pool may cause the value of the mortgage currency to fail to support the synthesis. Circumstances of asset value. Therefore, pledge rewards are very important: users who receive sufficient rewards and incentives will be willing to bear potential debts and liquidation risks, as well as the cost of managing hedging positions, and participate in pledges. Synthetix uses this incentive mechanism to achieve almost unlimited transaction depth based on over-collateralization.