Since 2020, we have not only witnessed the explosive growth of DeFi, but also witnessed the inclusion of the blockchain as one of the representatives of new technology infrastructure into the “new infrastructure” by the central government. Encryption currency and blockchain not only “out of the circle” with wealth effects, more and more countries and regions are beginning to pay attention to and develop blockchain and its applications, and the global blockchain competition has begun.
However, most of the current DeFi applications are more simple copies of traditional financial products, and derivatives are a sector that has not yet been fully explored.
The price of traditional financial derivatives depends on changes in the value of the underlying subject matter. They are generally constructed in the form of forward contracts, futures, options, and swap contracts to hedge risk exposure or leverage speculation; the subject matter covered includes stock indexes, Individual stocks, interest rates, foreign exchange, bulk commodities and alternative derivatives developed based on commodity indices, credit, housing, inflation, weather, etc.
In addition to providing leveraged long-short trading channels for leveraged transactions (similar to margin trading and securities lending), perpetual contracts, and options products, DeFi makes full use of the programmable asset characteristics endowed by smart contracts, and fully expands DeFi in the form of synthetic assets. The form and application scope of derivatives.
1. What is a synthetic asset?
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 an asset.
DeFi made a little adjustment on this basis, and defined synthetic assets as digital tokens of derivatives, and derivatives were financial contracts that were customized to obtain positions in designated assets or financial products, and synthetic assets were the tokens of these derivatives.
Therefore, synthetic assets have the following unique advantages:
1. No permission required: Blockchains such as Ethereum and HSC allow anyone to build synthetic assets;
2. Simple to use and transferable: synthetic assets can be transferred and traded freely;
3. Global liquidity pool: The globalization of the blockchain itself allows anyone in the world to use it;
4. No centralization risk: there is no centralized medium that controls privileges;
To cite a few examples, Synthetic Assets certifies physical assets and introduces physical assets into the blockchain world, giving them all the above-mentioned 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, and so on. 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., all of which can 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 a synthetic asset, and anyone can freely trade in the global liquidity pool without restriction.
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 urination on the street, and token holders profit. Urine and defecation are reduced, and the token issuer makes a profit. Use an oracle to report the number of bowel movements.
This token market can incentivize the local government in San Francisco. If the San Francisco city government issues “shit coins”, it will motivate the government to clean the streets and make a profit. On the contrary, if the streets have not become cleaner, the 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 “all things can be tokenized” market.
Many people suddenly asked a question after using it: Is it possible to trade traditional assets in such a market? In fact, just like the primary battery technology in the laboratory was activated by electric vehicles, Moneta, the synthetic asset protocol that began to enter the synthetic asset at the end of 2020, is one of the earliest innovators.
2. What is Moneta? Why choose Moneta?
Moneta is a synthetic asset issuance agreement based on the Hufu Smart Chain HSC. Synthetic assets currently supported for issuance include legal currency, cryptocurrency, commodities, and so on. Based on the user’s contribution, the system will proportionally pay the transaction fees generated in the transaction to the holders who participate in the mortgage MNA and issue synthetic assets, thereby encouraging users to hold the locked MNA.
Moneta is not only an agreement to issue synthetic assets, but it is also a trading platform for synthetic assets. For example, if a user expects that a certain crypto asset (such as BTC) will rise, then they can obtain an opportunity to earn income by purchasing a synthetic asset (sBTC) of the asset. The price is the same as the actual asset price, which means Once the user purchases it, he also accepts the possible rise or fall of the asset.
Can these needs not be met directly through the exchange? Why should it be done on Moneta? Here are a few user needs: transactions on Moneta are carried out in a decentralized mode, and there is no need for counterparties, and there is no need to worry about liquidity and slippage issues. The transactions on its exchange are all executed through smart contracts, which are transactions on smart contracts, not order book transactions. These have their unique trading experience and some advantages. The exchange rate of synthetic assets comes from oracles.
In addition, through synthetic asset trading, it is possible to realize the transaction of the asset without actually holding the asset, such as not holding BTC or holding Apple stock. This kind of transaction can reduce the friction of asset exchange, and can quickly exchange between different types of assets, such as Tesla stocks, gold, soybeans, bitcoin and other different assets. Therefore, synthetic assets can help investors Reach a larger range of assets.
Finally, arbitrage can also be achieved. sUDS is pegged to USD, but sUSD is traded on the open market and may be lower than 1 USD. MNA mortgagors generate synthetic assets by collateralizing MNA, and also create debts. After they sell synthetic assets, when sUSD is lower than 1 USD, they repurchase and use it to destroy and reduce debt, thereby arbitrage.
Moneta’s operating mechanism
Moneta, like other asset issuance agreements, also requires asset collateral to issue. For example, the MakerDAO protocol needs to mortgage ETH to generate DAI. Moneta is similar, but it pledges its native token MNA. Users only need to lock a certain amount of MNA in their smart contract to issue synthetic assets. Among them, its pledge rate is very high, which is 800% of its issued assets. Only when the target threshold of 800% is reached can there be a chance to receive transaction fees and MNA new token rewards.
Similar to MakerDAO, when an MNA mortgager creates a synthetic asset, it generates “debt”. And this “debt” is variable.
For example, if 100% of the sBTC in the system is sBTC, assuming that the price of sBTC is halved, the total debt in the system is also halved, and the debt of each mortgager is also halved. Conversely, if the sBTC price doubles, the total debt in the system also doubles, and the debt of each mortgager also doubles. If sBTC takes up half, if the relative price of sBTC increases by 50%, then ultimately, the debt of all owners will increase by 25%. As the sBTC synthetic assets increase by 50%, there is still a 25% gain relative to the increase in debt. The other half of the synthetic assets increased their debt by 25%, but their prices did not increase, which resulted in a loss of 25%. In other words, this mechanism causes the MNA mortgager to become the counterparty of all synthetic asset exchanges. The mortgager needs to bear all the debt risks in the system.
The Moneta system is essentially a system for the generation, trading and destruction of synthetic assets. For the operation of the system, the most important participant is the equity pledger who pledges MNA assets to issue synthetic assets. It is different from MakerDAO in that users who issue synthetic assets not only don’t have to pay stability fees, but they can also get transaction fees from the Moneta exchange. The result of this mechanism is to encourage MNA holders to lock MNA and synthesize assets. This also means that MNA can capture the transaction costs of its synthetic assets.
The main purpose of users using synthetic assets is to trade. To synthesize assets, first mortgage assets.
1. Issuing synthetic assets
To issue synthetic assets, the prerequisite is to mortgage enough native asset MNA (currently, a mortgage rate of 800% is required to get rewards). When users hold MNA, they can mortgage their MNA tokens in the Moneta protocol to generate synthetic assets.
After the mortgage, the mortgage rate and debt records are generated, and a corresponding proportion of rewards can be obtained according to the contribution. This ultra-high mortgage rate incentive mechanism is mainly to ensure that the mortgage assets supporting synthetic assets can cope with large price fluctuations.
In order to encourage mortgagers to maintain a sufficiently high mortgage rate, as mentioned above, Moneta currently stipulates that in order to be rewarded with transaction fees, its mortgaged assets must be 800% of the issued assets. If it is lower than this threshold, the pledger will not be rewarded with transaction fees. This will prompt mortgagers to increase their mortgage rate, deposit more MNA, or destroy synthetic assets.
Mortgage debt is the amount of synthetic assets generated. They are stored in Moneta Drawing Rights (XDR), and the price of these synthetic assets fluctuates according to the price of the oracle, that is, their debt is variable.
When the debt is allocated to the mortgager, the Moneta smart contract will issue a new synthetic asset and add it to the total supply. At the same time, the new synthetic asset will also be allocated to the user’s wallet. Since synthetic assets are over-collateralized with MNA, it has a target threshold of 800%. If the value of the MNA increases, the MNA can be unlocked accordingly, and of course more synthetic assets can be issued.
2. Trading synthetic assets
The process of trading synthetic assets is essentially the process of destroying the original synthetic assets and generating new synthetic assets. Assuming that sUSD exchanges sBTC, first destroy the corresponding amount of sUSD in the user’s wallet address, and update the total supply of sUSD; then after the exchange rate is determined according to the oracle price, a part of the transaction amount (such as 0.3%) is sent as the transaction fee To the fee pool (claimed by all MNA mortgagers in proportion), and the remaining part is issued by the smart contract of the target synthetic asset to issue sBTC, and at the same time update the user’s wallet balance and update the total supply of sBTC.
It can be seen from the above process that the transaction of synthetic assets is mainly to interact with smart contracts, there is no order book, and no counterparty. As far as the system is concerned, its asset transaction is only the exchange of debt from one type of synthetic asset to another. In this way, users do not have to worry about liquidity issues.
3. Destroy debt
When an MNA asset mortgager wants to reduce debt or exit the system, it needs to destroy the synthetic asset first. For example, the mortgager generates 1000 sUSD through MNA mortgage. In order to unlock the mortgaged MNA, the user needs to destroy the 1000 sUSD first. If the debt pool changes during the mortgage period (and personal debt will also change accordingly), then this may result in users needing to destroy more or less sUSD to destroy their debts. The operation process is completed by a smart contract. The Moneta smart contract will determine the user’s sUSD debt balance, then delete it from the “debt register”, destroy the corresponding sUSD, and update the sUSD balance of the user’s wallet and the total supply of sUSD. After that, the MNA was successfully unlocked.
4. Dynamic debt pool
Under normal circumstances, MNA holders will always generate or destroy synthetic assets, which means that the system’s debt pool will change. The system will determine the debt of each MNA mortgagor at any future time based on the generation and destruction of synthetic assets, and it is not necessary to actually record the changes in the debt of each mortgagor. Because it updates the “cumulative debt incremental ratio” in the “debt register”, it can track the debt percentage of each mortgager. Every time a synthetic asset is generated or destroyed, the system multiplies the number of tokens in all synthetic asset smart contracts by the current exchange rate to calculate the total issued debt.
MNA value capture
First of all, MNA is the only collateral asset for the current issuance of synthetic assets, which is equivalent to working tokens entering the Moneta system. Users holding MNA tokens naturally enjoy the governance and voting rights of the Moneta protocol.
Second, MNA can capture transaction fees. A transaction that occurs on Moneta, such as a user exchanging sBTC for sETH, will incur a transaction fee of 0.3%, which is deposited in the fee pool as XDR. And MNA mortgagers can claim fees in the fee pool according to their own staking proportion (distributed according to the proportion of each mortgager’s issued debt) every week. From December 2018 to the time of writing, a total of US$3.2 million was incurred. If a mortgagor issues 10,000sUSD debt, assuming the total debt is 20,000,000 sUSD, then its debt ratio is 1/2000, assuming the total cost of the period is 3,200,000 US dollars, then the mortgagor can get a fee reward of 1,600 US dollars.
Finally, MNA holders can enjoy new token rewards. MNA is an inflation token, and the new tokens will be proportionally rewarded to MNA mortgagers whose mortgage rate is not lower than the target threshold (currently 800%, which may change in the future).
3. Building a highway connecting the world and traditional financial markets on the chain
Moneta has built a bridge to the traditional financial market of trillions of billions for the world on the chain, allowing users to easily access assets with certain thresholds such as precious metals and U.S. stocks through Ethereum, while avoiding cumbersome intermediate processes. It also reduces transaction friction caused by policy and regulatory issues. More importantly, transactions between assets with clear boundaries such as indices, precious metals, stocks, and encrypted assets, which are almost impossible to achieve in traditional markets, can be realized on Moneta.
In addition to the convenience of transactions, Moneta has cleverly integrated the design of transaction models and economic models. The user to cast an sToken needs to mortgage an MNA that is several times the value of the sToken itself. On the one hand, it forms the scarcity of MNA, and on the other hand, it also creates a deep liquidity pool for transactions.
In traditional DEX, liquidity is provided by the trading pair itself, such as BTC/USDT. Both liquidity pools need to be deep enough to ensure price stability and transaction security. The Moneta platform provides liquidity through a dynamic debt pool, and through the design of inflation on the economic model, users who provide liquidity for the debt pool can receive pledge rewards.
With the maturity of public chains such as Ethereum and HSC and the DeFi ecosystem, synthetic assets become possible as a new primitive, but the current synthetic asset agreement still faces the following risks:
1. Smart contract risk: Smart contract vulnerabilities may be exploited, and synthetic assets are the key target of attack;
2. Governance risk: Most of the platforms are governed by centralized participants, relatively unverified on scale;
3. Oracle risk: Many synthetic assets rely on oracles to operate normally, which brings their own trust assumption and failure mode;
4. Platform risk: Ethereum and other underlying blockchains will encounter the problem of carrying capacity. When efficiency is needed, the busier the network may be, and the situation will be worse. The fee market is inefficient, and preemptive transactions or grieving attacks will become problems;
The overflow of the liquidity of the Moneta protocol not only increases the supply, but also increases the demand. These demands are developed around two levels of risk exposure and utility enhancement. Assuming that there is no liquidity, there is no demand, no liquidity, no one will create synthetic assets, and no one will trade when making them.
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. On this basis, a variety of futures and option derivatives transactions are constructed from traditional financial assets, and everything can be tokenized. It is conceivable that this is a big market in the future, and the potential of Moneta will be very worth looking forward to.