Editor's Note: This article comes fromEthereum enthusiasts (ID: ethfans)Editor's Note: This article comes from

Ethereum enthusiasts (ID: ethfans)

Ethereum enthusiasts (ID: ethfans)

, Original author: Dmitriy Berenzon, translation & proofreading: stormpang & Min Min, reproduced by Odaily with authorization.

Although speculation is still the main use of blockchain assets, I don't think this is a bad thing. Speculation is a key driving force for the development of traditional financial markets and still plays an important role in the current development of the financial industry. More importantly, speculators are able to bring liquidity to the market, making it easier for participants to enter and exit the market. In addition, speculation reduces transaction costs and increases access for market participants.

• Currently, the blockchain asset market is still immature and illiquid. Unlike assets in the traditional financial system, most blockchain assets are only a few years old and do not have a liquidity benchmark built over decades. Taking the 24-hour US dollar trading volume as an example, the Bitcoin trading volume is about 700 million, and the Apple stock trading volume is about 5.3 billion. The lack of liquidity of blockchain assets limits the practicality of its underlying protocols, and this problem is also exposed in decentralized exchanges and prediction markets.

• The blockchain asset market will develop in a similar way to traditional financial markets. For investment institutions and retail investors, more complex financial instruments, especially synthetic assets ("synthetic financial instruments") are required.

• The main content of this article is as follows:

The first part mainly introduces the definition and examples of synthetic assets. If you are familiar with this part (or find financial engineering too boring), you can skip this part and read directly to the second part.

What are synthetic assets?

Synthetic assets can be used to simulate other financial instruments. In other words, the risk or return of any financial instrument can be simulated by a combination of other financial instruments.

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• What are synthetic assets?

• Synthetic assets consist of one or more financial derivatives whose asset value is based on the value of the underlying assets (financial derivatives), including:

Contingent claims: options, credit derivatives (eg: credit default swaps, credit default swaps - CDS) and asset-backed bonds.

There are many reasons why investors choose to buy synthetic financial assets. For example:

• financing

• text

• financing

admission to market

financing

Let me explain with examples from traditional finance. Note that these causes can coexist.

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• financing

• Total Return Swap (Total Return Swap, TRS) is a financing tool that uses existing assets as collateral for finance. The party holding the assets can use the existing asset pool to obtain funds, that is, this part of the fund pool is used as a guarantee to obtain funds, and the swap counterparty obtains interest based on the funds provided. In this context, a TRS is similar to a secured loan because:

the party that sells the security and agrees to repurchase it is the party that needs the financing, and

The party that buys the security and agrees to sell it is the party that provides the financing.

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Synthetic assets can be used to inject liquidity into the market, reducing costs for investors.

A very typical example is the credit default swap (Credit Default Swap, CDS). A CDS is a derivative contract between a credit protection buyer and a credit protection seller. The buyer pays the seller a series of cash and obtains the seller's promise to compensate for credit losses caused by "credit events". For example: payment failure, bankruptcy or reorganization. This gives CDS sellers the ability to synthetically go long an underlying asset, and CDS buyers the ability to hedge their credit risk on an underlying asset.

In this article, the authors argue that the CDS market is more liquid than the underlying bond market. One of the main reasons for this is standardization: Bonds issued by a given company are often divided into many different types, with different coupons, maturities, terms, and so on. This division reduces the liquidity of these bonds. The CDS market provides a standardized place for the company's credit risk.

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admission to market

• Synthetic assets can reproduce the cash flow of almost any kind of securities through the combination of instruments and derivatives, thus opening up a relatively free market.

• We can use CDS to replicate the exposure to a bond. CDS come in handy when bonds are difficult to obtain in the open market (for example: there may be no tradable bonds).

• Taking Tesla's 5-year bond as an example, its yield is 600 basis points higher than that of US Treasuries, then we can:

Enter into (sell) a 5-year CDS contract for $100,000.

After the contract expires, you will receive interest on US Treasury bonds and an annual premium of 600 basis points for CDS.

If there is no default, the US Treasury coupon plus the CDS premium will get you the same yield as a 5-year Tesla bond. If the Tesla bonds default, the portfolio is priced at US Treasuries minus the CDS payout, which equals the default loss on the Tesla bonds. Therefore, no matter what happens (default or not), the return of the investment portfolio (US Treasuries + CDS) can be equal to that of Tesla bonds.

What makes a good synthetic asset?

In some cases, synthetic financial product development is only possible after the underlying assets have reached critical liquidity. If the liquidity of the underlying assets is too low, then developing synthetic assets does not make much sense and may reduce economic returns.

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What is so magical about the combination of synthetic assets and DeFi?

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Extended Assets

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Improve liquidity

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extension technology

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Expand users

While traditional synthetic assets are only available to large and sophisticated investors, smaller investors can also profit from synthetic assets on a no-barrier smart contract platform like Ethereum. Synthetic assets allow more traditional investment managers to enter the DeFi space by adding to the risk management toolset.

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• Synthetic Assets in DeFi

• Purple: real assets

Abra

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MakerDAO

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UMA

Maker’s Dai stablecoin is probably the most influential and used synthetic asset in DeFi. MakerDAO By locking ether as collateral, users can create a synthetic asset — Dai (which maintains a soft peg to the U.S. dollar). In effect, holders of Dai gain synthetic price exposure in USD. Similar to the design in Abra, this "collateral-backed synthetic asset" model is popular in many other protocols.

UMA proposes a total return swap protocol on Ethereum and provides synthetic exposure to multiple assets.

The smart contract contains the economic terms of the bilateral agreement between Alice and Bob, the termination clause and the security deposit requirements. It also requires a price oracle to obtain the current price of the underlying asset.

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The MARKET protocol allows users to create synthetic assets through oracles to track the value of any reference asset. This “Position Token” provides limited long and short exposure, and it provides a return structure similar to bull market spreads in traditional finance. Similar to Dai, long and short tokens represent ownership of the collateral pool.

Rainbow network

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Synthetix

In Rainbow channels, each state represents a CFD, similar to a total return swap.

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Native Derivatives of the Currency Circle

The synthetic representation of real assets is a very important step. I believe that financial derivatives in the currency circle have a very large design space and are basically undeveloped, including: traditional financial derivatives designed by various participants in the blockchain asset market , and cryptocurrency derivatives that previously did not exist in traditional financial markets.

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Bitcoin Difficulty Swap

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Hash computing power swap

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Electricity Futures

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Stake yield swaps allow Proof of Stake networks validators to hedge their market exposure to blockchain assets of their choice. Similar to Hash swaps, validators need to sell some of their stake in exchange for cash. This enables validators to earn a fixed amount of revenue from locked assets, while buyers also gain exposure to staking revenue without staking.

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Slashing Penalty Swap

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Stable Rate Swap

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Airdrop options

Lockup Airdrop Forwards

Summarize

The lock-in airdrop forward is a bilateral agreement that enables buyers to purchase blockchain assets at a certain price. In this type of contract, the buyer's option fee to the seller reflects the liquidity price of the locked asset (or the opportunity cost of the locked position), however, this also allows the buyer to not hold the basis required for the locked position airdrop The assets will participate in the lock-up airdrop.