Crypto Market Commentary
6 June 2019
Doc's Daily Commentary
Doc’s latest “Trade School” video from Friday 5/17 was about Options and is posted in the Trade School archive. Due to travels Doc will not be doing any trade schools until Mid-June.
Our most recent “ReadySetLive” session from 5/16 is listed below.
The Mind of Mav
DeFi Use Case: Synthetic Assets
Decentralized finance has taken the cryptocurrency world by storm over the last few months, with many new protocols breaking onto the scene. The vast majority of DeFi protocols currently focus on providing decentralized leverage and lending, and are all quite similar to each other but with different UI, UX, and lending rates.
More recently, a differentiated crop of DeFi protocols have appeared, focusing on the creation and proliferation of synthetic assets.
Synthetic is the term given to financial instruments that are engineered to simulate other instruments while altering key characteristics. Often synthetics will offer investors tailored cash flow patterns, maturities, risk profiles and so on. Synthetic products are structured to suit the needs of the investor.
Products used for synthetic products can be assets or derivatives, but synthetic products themselves are inherently derivatives. That is, the cash flows they produce are derived from other assets. There’s even an asset class known as synthetic derivatives. These are the securities that are reverse engineered to follow the cash flows of a single security.
Synthetic products get far more complex than synthetic convertibles or positions. Synthetic CDOs, for example, invest in credit default swaps. The synthetic CDO itself is further split into tranches that offer different risk profiles to large investors. These products can offer significant returns, but the nature of the structure can also leave high-risk, high-return tranche holders facing contractual liabilities that are not fully valued at the time of purchase. The innovation behind synthetic products has been a boon to global finance, but events like the financial crisis of 2007-09 suggest that the creators and buyers of synthetic products are not as well-informed one would hope.
Below I highlight a few interesting approaches to synthetic assets:
UMA Protocol: UMA is the first decentralized protocol I came across that offers synthetic instruments, and does so in an interesting way (albeit flawed in edge cases). The basic premise is that two people enter into a contract for *any asset* with one going long and the other going short.
Both people post a certain amount of collateral to that smart contract and based on the way the position moves, they are required to post additional collateral to the smart contract to avoid liquidation.
There is a fee associated with the collateral that is exercised if the position moves against you and you don’t post additional collateral. This theoretically incentivizes people to add collateral so that they have a shot of retaining their full position if the underlying asset begins moving in their favor again.
This obviously falls apart if one counter-party’s view on the asset changes and they believe it’s now heading in the opposite direction of their initial trades, but is still probably good enough for low volume assets.
Synthetix: Synthetix is a nutty protocol that is already up and running, offering a multitude of both synthetic cryptocurrencies and stocks.
Synthetix has a token (SNX) associated with the system, and requires users to stake SNX as collateral in order to create “Synths”. Staking SNX entitles you to a portion of the fees that the network generates and allows you to mint their synthetic stablecoin, which you can trade on their DEX for other synths (this is where the fees come from)
Each “Synth” has its own smart contract associated with it, unlike UMA which has separate smart contracts for each trade.
Abra: While not decentralized, I believe that Abra deserves a mention here for their pioneering work on synthetic assets.
I spent a long time trying to understand their infrastructure, which they outline in a series of great posts. Abra seemingly offers exposure to a multitude of different assets on their platform, but in reality there are only three assets that Abra truly holds the real, non-synthetic version of: Bitcoin, Litecoin and Ethereum. The rest of the assets are all synthetically created using smart contracts and Abra’s trading desk. Abra offers both cryptocurrencies and traditional equities on their platform, and is a great bet for those more comfortable with centralized solutions. I mean, where else can you punt stocks with Bitcoin?
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An Update Regarding Our Portfolio
We are pleased to share with you our Community Portfolio V3!
Add your own voice to our portfolio by clicking here.
We intend on this portfolio being balanced between the Three Pillars of the Token Economy & Interchain:
Crypto, STOs, and DeFi projects
We will also make a concerted effort to draw from community involvement and make this portfolio community driven.
Here’s our past portfolios for reference:
RSC Managed Portfolio (V2)
RSC Unmanaged Altcoin Portfolio (V2)
RSC Managed Portfolio (V1)