In order to gradually realize the vision of ChainX becoming the largest derivative platform of Bitcoin, the PolkaX team is accelerating the advancement of synthetic assets. The first draft of the synthetic asset project ‘ShadowX’ has been completed. It is now in the stage of detailed improvement and code development. ShadowX will integrate into the Polkadot ecology with ChainX. The big advantage is being able to create a synthetic asset system with BTC as the anchor.
What are synthetic assets?
Synthetic assets are the product of mirroring cross-chain, simulation of certain assets. For example, cUSD is used to represent U.S. dollars, cGold is used to represent gold, and cSP500 is used to represent the S&P 500 stock index. It can also represent digital assets, such as cBTC means BTC, cETH means ETH, and so on. Currently, most synthetic assets have copied the price of the anchor. With the improvement of the digital infrastructure, we believe that it can gradually grow to synthesize offline assets.
Why do you need synthetic assets?
Synthetic assets expose global digital asset holders to a wider variety of assets such as Nasdaq stocks, gold, stock index options and commodity futures, which can be traded with less friction and without switching between multiple systems. In addition, traders can now trade a basket of assets, make asset portfolios, hedge, and go long or short very conveniently. The debt pool model under the synthetic assets does not need a direct counterparty. The counterparty is the entire system. There is no need to worry about insufficient liquidity and slippage problems, and overall is a good experience for its users.
Synthetic asset market status
In the traditional market, the derivatives market is several times larger than the spot market. In the crypto market, it is still the opposite, meaning there’s a huge potential market to be explored. 2021 may become the year of digital currency derivatives. As a new star in the crypto derivatives market, synthetic assets saw their market value and TVL repeatedly hit new highs. The market value of Synthetix, the leader of Ethereum’s synthetic assets, has exceeded US$4 billion, TVL has surged to US$2.3 billion. Terra’s Mirror’s TVL also exceeded the 10 billion dollar mark. With the market’s acceptance and optimism about synthetic assets, investors’ perception of such projects has gradually changed from “air manufacturing machines” to “efficient investment tools”. But whether it is Synthetix or Mirror, there are some short-term insurmountable obstacles. For example, Synthetix requires “mandatory purchase of SNX” in order to use the platform. It has high gas fees and a difficult balance between longing and shorting, resulting in inaccurate income. Other issues include things such as Mirror’s impermanence based on AMM and uneven distribution of handling fees. Although the synthetic asset ecology has achieved fruitful results, it still has a long way to go. In the future, we will also publish an article describing the difference between ShadowX and the two synthetic asset projects in more detail.
Why choose BTC as the anchor?
The two biggest arguments for this are eliminating currency risk through directly using Bitcoin and lower mortgage rates with increased ease of use:
Create an open synthetic asset ecosystem to further expand Bitcoin’s layer 2
The mainstream synthetic assets all use strong-linked tokens as collateral, which is not in line with the concept of “open finance” in the DEFI world. We believe that BTC is more qualified as the base currency of the digital world. To put it in simpler terms: It would be better to use BTC as the anchor. Which is also more in line with Chainx’s vision to become the largest Bitcoin Layer 2 platform.
Among the mainstream synthetic assets, Synthetix uses a 500% pledge rate to pledge SNX to generate the ruler currency USD for synthetic asset transactions. Mirror uses the destruction of LUNA combined with algorithm stability to generate the ruler currency UST for synthetic asset transactions. The entire synthetic asset ecology is strongly related to its own token. This has forced many users who wish to invest in cross-fields to purchase currencies such as SNX, UST, and LUNA, and are then forced to bear the risk of fluctuations in ecological market value while using these currencies to invest in synthetic assets. It also puts long-term Bitcoin holders in a dilemma: They will have to either use Compound Maker or Uniswap and pay large gas fees to participate in synthetic asset investment and bear the risk of being liquidated; or replace BTC with SNX or UST after waiting for an entry into the market, giving up their BTC, exposing them to Currency Risks. This is not the most ideal solution, so instead, we choose BTC itself as the anchor to balance the needs of all parties as much as possible.
Create a synthetic asset ecosystem with more stability
Currently and for a large part of the foreseeable future, BTC will be a market-recognized indicator, the core object of value storage, and the broadest consensus in the digital currency world. Choosing BTC as an anchor to synthesize assets can not only eliminate people’s concerns about the ecological fluctuations of synthetic assets, making the entire system more stable but also greatly reduce the cognitive threshold of users. They only need to hold BTC, cross-chain it to Polkadot and the investment in synthetic assets can begin in the ChainX network. In addition to the stability of BTC, the current parameters of ChainX allow ShadowX to greatly reduce the mortgage rate compared to Synthetix’s rate. From 500% on Synthetix to 200% or perhaps even lower, providing much more liquidity.