Chainlink Web3 Summit HackerNode: Synthetic Assets

– Hey everyone. So, uh,
I'm gonna give just a brief introduction on Synthetix for
anyone that's not familiar, then we'll do a bit of a
walkthrough of the system. Uh, so, Synthetix is a synthetic
asset platform on Ethereum. Uh, Essentially what we allow
people to do is have exposure to uh, a bunch of different assets: crypto-assets, fiat currencies,
commodities, etc. and you know, hold them on Ethereum as a synthetic asset without having exposure or having to hold the underlying asset. So, for example, we've got a gold token.

So you can hold that token
and it essentially represents the price of one ounce
of gold without having to actually have custody
of the gold itself. And we got some more,
I guess, exotic assets that we have just launched recently. So we've got an index of exchange tokens if you are really into
centralized exchanges or shorting them we've got an index of BNB, LEO, (mumbles), OKEX, and uh KuCoin. So, if you think
that that sector of the token industry is of value you can basically buy a token that would give you inverse exposure, so if the price goes down the value of the token goes up or vice versa, you can hold the token and it goes up then the price
of the token would go up. And the way that this
works is similar to Maker. So, Maker you lock in
your CDP and then you issue a synthetic US
dollar or die against it Our system works very
similarly, you've got our token which is SNX, you lock that token and you issue debt in the
system the big difference is that at the moment
we have user price feeds so hence the pertaining conversion, the ability to reprice that debt.

So you can start with debt that's priced in US dollars and you can convert it into synthetic BitCoin or exotic assets. We'll do just a quick
walkthrough of the system uh, so this is Mintr, which is
our CDP creator if you will. So this is where uh holders
of the SNX token go to lock their SNX and issue
new debt into the system. So we'll connect via (mumbles)
so you've got a balance of SNX which is worth
about $30,000 so this is on coven I think at the
moment, so we've got roughly $30,000 worth of collateral
that's in this wallet and against that collateral we're going to issue some debt.

I think
at the moment we've got about $2,000 worth of
debt that's already owed and there's about $4,000
worth of debt in this wallet. The collateralization
ratio, here, if you're familiar with Maker
and you know that Maker has a target threshold of 150%, so if you fall below 150% collateralized you get liquidated, with us our target is 750% so it's a lot larger buffer and the reason for that is that ETH is a lot more liquid than SNX so there's more risk with the SNX of the value dropping or moving, it's
a more volatile asset. What we're going to do is,
we're gonna go and Mint some new debt in the form of sUSD and we're going to essentially lower that collateralization ratio to 750 which is the target rate that
we've got in the network. So hopefully (mumbles)
Can go quickly for us Okay, so basically what
we've done is we've, from a 0X address, we've
just created this new sUSD so it's been minted and it's now in the
wallet and if you go back you can see that the debt
that's owed is now $4000.

In order for you to release
all the collateral and be able to transfer it again
you need to earn about $4000. So, that's kind of the I
guess the basic mechanics of issuing debt into the system but that's not really
the point of the system. The point of the system is to allow people to have exposure to
these different assets. So, okay great you've got sUSD now which attracts US dollar but if you go over to Synthetix Exchange we can see where all the good stuff, the fun stuff happens. So we'll connect to Synthetix Exchange and you can see this wallet has, wow a bunch of different things in it, you can trade a lot of it it looks like. So we've got an inverse Tezos Token so he's a bit bearish on Tezos here. We've got some gold, we've got some USD and we've got some Bitcoin. So basically all of these different assets are tracking the prices via a price feed, by a market feed and being pushed into Mintr
or in this case our feed.

So what we're going to do is we're going to buy the
centralized exchange token if we go down here, so
we're long Leo at this point so we can– the centralized exchange token is a basket of tokens that tracks about a $1000 price target so it's made up of a certain number of units of each of the different tokens that constitute the basket and the price target is about $1000, so it's about down to 950 so maybe we should buy their inverse one before the markets go the other direction on this. So we can buy the $1000 inverse centralized exchange token so if you want to go ahead
and do that transaction.

And so essentially what's happening here is the contracts are taking the sUSD and burning it, so it's taking that debt that exists in the
system and burning that value and then its going to issue this new inverse centralized exchange token basically we've synth'd
zero zero USD and then we've minted the new value of the
centralized exchange token and then down here there's another transaction which is
happening, which is the fees.

So the exchange charges fees and this is how minters, the people in the system providing the collateral and who are collateralizing
their work are rewarded. For every single exchange that happens there's a 30 basis
point fee that's charged and that's paid to collectively the pool of people staking their work. So, they're the ones that are essentially taking the risk and facilitating the transactions and allowing people to trade. So yeah– so if we go
back to Mintr you can see Rewards there so on a weekly
basis all the fees are pooled and based on your portion of the debt so based on how much value you've created in the system you're
able to claim your fees.

It looks like we've got about $11 worth of fees to be collected here and then on top of that we also have and inflationary supply so that's in the early phases,
as we're bootstrapping as we're waiting for the transactions on the network to be sufficient to, you know, incentivize people to stake we've got this inflationary supply so you're paid in SNX tokens for taking this risk right now and that inflation over time, in the next four years declines and eventually we hope to get to a point where the actual transaction fees themselves are sufficient to support your network. – [Man With Baseball Hat] We should probably look at the SNX values, so probably back to Mint again – Yep. So we'll claim those from Orbits. And then we've got more collateral so we've got some sUSD that's been claimed from the fee pool as well
as this inflationary supply that will increase the
collateral value in the wallet and be can be minted against, and so I guess, the intent here is that you have something similar to UniSwap in that you've got this pool to collateral model where anyone sitting here can purchase debt and trade against the contracts essentially and so all the people who are staking SNX providing collateral
of this pooled counter party, so we're all sitting over here saying, "Anyone who turns over the contracts can trade with as much value as they've got in debt and can reprice that debt and we will act as a counter party to those trades." And we're rewarded with fees from the transactions the
same way that liquidity providers in UniSwap put up ETH in tokens and allow you trade against that and then collect the
fees from those trades.

– [Man In Baseball Hat] Are you fine if I switch our shares to those? – Yeah, so this ratios a little bit higher and he can mint again if he wants. And so the– I guess at the moment we've got about 30 different assets that you can trade, a bunch of different cryptocurrencies, so you can see on the Synthetix exchange we'll just go back over
there. That's the list of all the assets, we've
got some fiat currencies, commodities, crypto and
then now some indexes, but eventually the idea is that we'll also have things
like synthetic Tesla. Right, so if someone who doesn't have access to a brokerage account , they're in a larger market or for whatever reason they
can't access a broker, they would be able to theoretically, provided they've got ETH, come to Synthetix exchange and get access to Tesla or Apple or some other equity or potentially even, like S&P 500.

And the way that that works is that the counter parties, the SNX holders who are providing collateral would essentially act as the counter party to those trades to allow people to access these more traditional assets and then against– against those assets they would hedge them, so in order to– in order to I guess
maintain that equilibrium within the network, Us,
who have brokerage accounts could potentially act as market makers are able to keep the system in check essentially, and we're
paid a fee for that.

So over time we expect that there will be a whole bunch of
different assets, indexes, traditional assets, cryptocurrency, etc. And anyone in the world who has got access to ETH and have
got (mumbles) Wallet would be able to get
exposure to those assets. So that's it. Any questions? (Clapping) – [Attendee] What kind
of assets can end up as collateral is it only ETH? – It's actually SNX, so it's our token and that token derives
it's value from the feeds. So it's from a fee or from that. – [Attendee] So when the
first block of Bitcoin was found there was, you
know, the headline for the New York Times (mumbles)
– Yeah. – Isn't this pretty much the
mechanism that, blockchains and cryptocurrency
wanted to move away from? As a user, that form of exposure (mumbles) can, say that some token that exists clears a token already (mumbles) In theory I can buy it here but not like, there are anything on the actual supply route so that you will have
virtually infinite supply and therefore, (clattering
drowns out speaker) But if you get enough traction you would effectively get an inflation even in
the stationary tokens.

– Yeah, that's actually a good point. So the question was, "what's the impact on the actual swap market,
what's the impact on the token market, if you're creating these derivative that are synthetic, that are not sort of tied to the actual underlying collateral?" And I think we have that in traditional markets, like gold swap market are much smaller than a futures market. – [Attendee] Definitely, we have that in traditional markets as well. – And so I guess the question is, "Does that introduce
risk into the systems?" I suppose that the way the system is sort of calibrated is that the debt is capped by the value of the collateral.

Right, so the collateral
constrains the supply. So it can't just infinitely expand and we can't increase the
value of the collateral unless there's more
activity being captured. So, it's a little bit like backing derivatives based on the actual transactions happening on
the derivatives exchange. It's somewhat circular but it is also constrained in what it can accommodate. – [Attendee] Yeah but effectively if I think about a SNX, I'm a wave right, if I buy a lot of SNX
then I will (mumbles) on my SNX, which increases
the supply of the SNX and will drive up the
price of the SNX token and will effectively drive down the price of whatever giving myself exposure to because I will then be able to sell this on the market if they accept these tokens as an
alternative to the actual underwrite tokens that also represent then you're kind of
inflating this by (mumbles) kind of assets.

– Potentially but because the price is derived from a price
feed from the swap market it would– it's somewhat hard for that, the derivatives market, in this case to kind of feedback
into that, because it's not a counter party based market. – [Attendee] By– either
you have the swap market or you can buy something
here. If I'm choosing to just get the derivative
token then there's less reason for people to
hold the actual tokens.

– Correct, so in the
example of Tesla let's say. So Tesla, there's certain number of people that have access to
buying Tesla in the world. This would expand the amount of people who access Tesla, potentially, right? The question is, "would
it sort of cannibalize the existing demand for
Tesla on the swap market?" I think we see on the gold market that that doesn't really happen, right? The futures market is still
driven by the swap market same thing with oil, like you know, the things that are being traded on the swap market are constrained by reality. We're just
taking feed from that counter party based market and then allowing people to have
access to those same assets. So, yes potentially in the long term There could be some feedback mechanism between the two, but I don't know that it necessarily spirals out
into some huge inflation of the supply of that asset because of the way that the prices are derived. – [Attendee 2] Because like the market makers need to interact with the swap– the market makers for the derivatives need to interact with the swap market (mumbles) Some kind of margin protocol – To hedge or whatever yeah,
ideally, to keep it in line.

– [Attendee 2] You need
to work your (mumbles) – Yeah I mean, so again if you take the example of Tesla and imagine that right now the latent
demand in the existing market for people who hold Tesla is 'X'. And if we expand that to every single human that can access an Ethereum wallet maybe it's 2X, 3X, whatever, how does that feed back into the swap market? It's through the market makers sitting on the other side trying to hedge. So if this significantly decouples from the swap market, they'll go into the swap market and buy but obviously you need massive scale and we're
not there it's still early. – [Attendee 3] Hiya, Greg Godard, just wondering have you guys had many issues from a regulatory perspective? – Yeah, when we're talking about providing access to regulated assets like equities and things like that then that becomes potentially problematic. We have some level of permissioning the system at the moment.
So we provide the oracles but obviously we're here kind of get away from that a little
bit and decentralize that.

I think there is some
level, some sufficient level of decentralization where, it's running on Ethereum, the oracles
are decentralized, the governance, the
protocols are decentralized and you know, you can somewhat
avoid regulatory issues. One of the reason why we've been able to avoid it to date is that we're not matching counter parties. We're not providing a trading venue per say, the debt never
leaves your wallet. So, you've got debt priced in gold and then you just reprice it in silver. There's no auto-matching going on there. – [Attendee 3] You're
not the counter party? – We're not the counter party, yeah.

Yeah, exactly so that's how we kind of avoid it for the short
term. Once you start listing Tesla and Apple
and things like that then it gets– it become interesting. – [Attendee 4] Are the assets listed elsewhere right now or
is it all Synthetix? – That's a really a really good question so you can imagine you've
got this venue right, where people bring debt and they can trade that debt but they need to be able to get in and out right? And so you a bridge between Ethereum and this(mumbles) market and the way we've set that up is through UniSwap.

So we've got the 4th
largest pool in UniSwap. Similar to wrapped ETH to ETH, where people use that a bridge to get into (mumbles) Protocols
and what have you. Our synthetic ETH is matched in UniSwap to ETH and we've got about 5000ETH on either side of that pool so you can move sort of $10000-$15,000 with pretty low slipped
in and out of the pool. – [Attendee 1] Ah, so if I have synthetic ETH and I want to move it out I can withdraw actual ETH? – Correct, yes, it's a
bidirectional bridge that way.

I mean, again it's still fairly liquid, but if it's 10 or 20 grand then it's usually pretty good so. If you want to go out to three months you can see– so that's part of the growth of the pool over the last three months as we've incentivized people to put ETH into this user pool. – [Attendee 5] So, if
I understood correctly you are the market maker
right now? If everyone goes and buys Tesla, you try to catch it and from outside you kind
of equalize the market? – So we're not, so all
of the token holder are. So collectively there's
about a thousand people that are minting right now. We don't have those equities yet, so there's no real need to kind of hedge out into the swap market, but eventually over the long term, yeah, we would need market makers that were essentially hedging their exposure to the pool of debt in the system,
external to the system.

– [Attendee 5] I'm just trying–, so it sounds like you can get into this trade and there doesn't have to be another party to take deficit so the market it's self can be directional within the system, which means that if you have, like a small number of people supporting the market, the Makers, they can become directional as well in the opposite direction and once that happens it can go down
– Absolutely – So it's not– it's not neutral so how do you kind of deal with this risk? – Yeah, so I mean I guess
if you sort of imagine it in the traditional market, it's like you've got this clearing house, right? And you're internalizing all of the flow through that clearing house and kind of, hedging it externally.

One way we avoid that is, there's just a large buffer, right? So, you know, I think the second largest asset is ETH the other way is that most of the assets being held are crypto
and SNX is also crypto so, you know they're highly correlated. But eventually, over time as we launch the next version there will be built in balancing mechanisms so if you have a position open in Bitcoin for example,
there will be a margin cost to maintain that position. And then we'll, like a
futures exchange, pay people who have taken the other side of that. But, ultimately there still needs to be some hedging outside the system and we expect as the system scales that more sophisticated market makers would come in and take that over because if you're just sitting there there internalizing the flow then eventually you're at risk right? – [Attendee 5] So you're hoping that big institutions or investors will come in – Or even crypto hedge
funds, you know crypto marker makers, there's
fairly sophisticated actors in the market now already that I think would be
able to, if not perfectly hedge, at least hedge enough that the trading fees would be sufficient to offset the risk.

That's the idea. Cool, okay, thanks very much,
Everyone. Appreciate it! (clapping).

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