Shade Protocol — A Community Series: Synthetics
Article #7
author: VJ
Shade Synthetics: A Privacy-Preserving Synthetics Assets Marketplace
If you already have some exposure to synthetic asset protocols, you are likely either:
- An accomplished financial juggernaut with some well-deserved swagger. You’ve been in the game for a while.
- A total prodigy who already knows everything (aka — an overconfident newb about to get wrecked by what you don’t know you don’t know)
The reason for those profiles is based on the inherent dangers of traditional synthetics marketplaces. Holding a synthetic typically means you are in a leveraged position. And the reality is 80+% of leveraged traders lose money… sometimes all of the money.
But Shade has gutted, renovated, and rebuilt this cruel house of torture. And the result is a space that eliminates leverage for users and makes synthetics accessible to everyone. We know you will like this place. But first, we have to go back and revisit what synthetics looked like pre-Shade…
The Cruel House of Torture
Everyone who walks in is thinking the same thing, “I am going to make so much money in here.” But, again, the vast majority leave liquidated and disappointed. Not a great user experience.
When you walk in the door, to play the traditional synthetics game, you enter a collateralized debt position in order to mint your synthetic asset.
Let’s say I want to trade synthetic gold. If I want $100 worth of synthetic gold, I would need to put up, perhaps, $150 in collateral. (Collateral needs to be significantly more than the minted asset to account for market volatility). Without such terms, the value of the synthetic is illegitimate because it is under-collateralized.
Let’s say you collateralize $150 of ETH and mint your shiny new synthetic. You now have $100 worth of synthetic gold.
But it’s a red day… uh oh. As I write this, ETH has dumped 12% in the last 12 hours. So now your collateral is only worth $132.
Now you need to either lock up more ETH as collateral, make debt payments, or give back some of your minted assets to decrease your liquidation price point. Um, wat?!
Yes, in your initial agreement you were advised that there is a liquidation price point. Back when you entered the cruel house of torture and you signed the guest book and the bouncer gave you a piece of gum, remember that?…
The liquidation price point is the point at which your synthetic gold is incinerated AND you lose all the ETH you put up as collateral because it dipped below the acceptable value threshold.
And in this vulnerable moment of loss, we’ve gotta tell you one more thing too… all of this is public. No, wait. That’s not strong enough. You were literally targeted for this liquidation event. A real person with better tools, more money, and more experience did this to you.
Because your transactions took place on a public-by-default chain, a seasoned pro took advantage of this data, saw the key liquidation thresholds, and then dumped ETH to create cascading liquidation.
It’s like you were fishing with a rowboat, stick, and string. They were fishing with sophisticated deep-water radar, thermal imaging, fish pheromones, and when they went to sleep each night one robot massaged their feet while another kept steering the vessel into fish-rich waters.
Truly, truly, this is a broken system.
Synthetics don’t need to be collateralized and users don’t need to be in leveraged positions.
Transactions don’t need to be public if the platform’s smart contracts are programmably private.
We are done with users getting wrecked by traditional synthetics protocols. We’ve built the world’s first algorithmic synthetic asset protocol and would love to introduce you…
Your New Synthetic Experience on Shade
First off, privacy. No more Uncle Pennybags or Alice the Whale targeting users for liquidation events. That is no small benefit. Shade is the only synthetics protocol in the world where users have their privacy preserved. This utility can’t be overstated.
What is totally new in Shade’s approach to synthetics is that the weight of risk shifts from the shoulders of individual users to the market dynamics.
There is no collateral. No debt position. No leverage. No risk of liquidation.
Simply mint a synthetic asset directly using SILK (Shade’s algorithmic stablecoin pegged to a global basket of assets and currencies).
In traditional synthetics marketplaces, the stabilization mechanism for the asset is the liquidation of under-collateralized users. The architecture of collateralized/leverage-based synthetic markets is flawed — constantly trying to reconcile risk profile discrepancies and pricing premiums via long and short mechanisms. User experience suffers as a result.
Conversely, Shade synthetics use stabilizer tokens in the same manner as Shade/Silk or Luna/USDT.
These synthetics will track the real-world price (via Band Protocol, a cross-chain oracle) with a corresponding stabilizer token. (As an aside, we should mention that most DeFi synthetic protocols actually have significant price discrepancies between the synthetic asset and the real-world price in order to reflect the risks of leverage and collateralization).
These mechanics create something new for synthetics: a nice arbitrage play (that is also privacy-preserving!)
Synthetic gold or synthetic Tesla would read as:
S-Gold
S- Tesla
The stabilizers for these assets would be:
s-Gold
s-Tesla
Instead of exploiting the liquidation risk for other users, this is an opportunity to cash in on real-time price discrepancies in the market (and, incredibly, such arbitrage will actually help align the market price with the target peg).
We have moved on from that cruel house of torture. We gutted that place and are building a marketplace that works for everyone.
This architecture is sustainable. Prices will be accurate and reflexive. Transactions are private by default. Instead of leverage, users are welcomed with new arbitrage opportunities.
There is no limit to what assets the protocol could offer. For starters, there might be S-tokens and stabilizers tokens for S&P500, NASDAQ, Gold, Silver, Bitcoin, Ethereum, or a Top 100 crypto index.
Oh, and when a new synthetic is hitting the marketplace, Shade holders will receive the corresponding stabilizer token via airdrop.
All of this coalesces to provide a massive upgrade for users seeking exposure to synthetic assets.
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