Our vision — disrupting traditional finance and bringing extra liquidity to Ethereum

Software eats the world. Blockchain eats Finance. Synthetics eat Traditional Financial Assets.

Over the past year, we’ve seen a huge wave of interest in decentralized finance. DeFi is the beginning of the transition from traditional finance to a new world of network-based finance. A more open and programmable financial services sector is the natural path we have followed in the financial technology arena over the past two decades.

Ultimately, this will lead to a massive improvement in product quality for DeFi users and new finance legos use cases that we can’t even fully consider today. This, in turn, will lead to Finance “migrating” to the blockchain and, in particular, to Ethereum as the dominant DeFi platform.

However, today a very limited number of financial assets are available on Ethereum: Ethereum itself, various synthetic assets on BTC and a synthetic dollar. But this is a negligible share of financial assets in the world.

Source: https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization-2020

The achievable market size for synthetic assets is significant, given that the synthetic version of any asset can be transferred onto the blockchain. As a benchmark, the total trading volume in the global market in the first quarter of 2020 is around $ 32.5 trillion, which can be partially replaced by synthetic versions traded on a global pool of liquidity with open and free access for everyone.

The trend for the creation of synthetic assets on Ethereum is obvious today. In 2020, more than $30 billion of synthetic assets were issued. But in practice, there’s a number of limitations.

First of all, the existing approaches to creating synthetic assets require “100% and even more collateralization”. In this regard, the chicken-and-egg problem arises — on the one hand the “creators” of the asset are needed, who will lock the collateral and release it on Ethereum, and on the other hand, the consumers of this synthetic asset. The chicken-and-egg problem is a fundamental problem for all multi-sided platforms, and a huge amount of work has been written on how to solve this problem:

The main hack almost always relies on starting from one side. We decided to start from the side of consumers of synthetic assets, and to automate the side of “creators”. Our approach is to use all the advantages of programmable money: the ability to increase the supply of synthetic assets when the market needs it and implement monetary methods to stabilize prices if the demand for a synthetic asset decreases.

The trick is also in the importance of liquidity over collateralization. By itself, collateralization is a self-centered mechanism that doesn’t expand the market. Imagine what the world would have been without credit today? Innovation and growth would be close to impossible. The reason for collateralized systems was to start with something very trusted in the world of anonymity, and to make users familiar with the possibilities. But eventually even systems like MakerDAO understand that strong collaterals still require liquidity, so that the reserve assets [being ETH] can be re-utilized and used to grow further and bring liquidity to Ethereum, but what if you already have liquidity? This is the concept of fractionalized banking where ample liquidity begets liquidity and escapes the need for overcollateralization. It essentially jumps to stage 2 from the beginning.

Upcoming value of synthetic assets

Synthetic assets can tokenize physical assets, transfer them to the blockchain, and provide all the benefits of programmable money. Imagine someone in the world buys a token that tracks the price of the S&P 500 and can use that token as collateral in other DeFi projects like Compound, Aave, or MakerDAO. The model can be extended to commodities such as gold or grain, stocks or indices, and debt instruments. In addition, the synthetic asset platform can be used to create financial derivatives — leveraged positions and options.

Synthetic assets on Ethereum are the best model to improve the current financial system and make it more robust and rapidly developing.

In the following articles we’ll cover our protocol design and product go to market strategy. Stay tuned!