Synthetic Assets - DXdao, UMA and Swapr

Synthetic assets can expand the DeFi trading universe immensely. They can track anything as long as there is a reliable oracle data feed. Synthetic assets could be an opportunity to drive trading fees to Swapr and also serve as interesting collateral and arbitrage opportunities with Omen.

UMA is a synthetic asset platform that uses UMA’s optimistic oracle as a data feed. It’s ‘optimistic’ because it does not constantly push on-chain data (like Chainlink) but assumes that oracle data is correct. If there is a dispute, there is a challenge system, where UMA token holders vote on the outcome. The system is similar to the combined efforts of reality.eth and Kleros, but supposedly more efficient.

Like other synthetic assets on Ethereum (Dai, Synthetix), UMA synths need to be funded and over-collateralized. Minting synths is akin to taking out a loan denominated in that asset and selling the synth would give a trader a short position.

UMA is incentivizing use of its synthetic assets through “Developer Mining” which gives UMA tokens to those that mint synthetic assets on its platform.

I think this is an opportunity for DXdao to offer novel products on Swapr and use the UMA developer mining rewards to incentivize Swapr LPs or book as revenue for DXdao.

One idea (from @mike) to have tokenized DeFi indices on certain metrics, such as those on Coingecko’s ‘DeFi’ page:

  • Long/short DeFi as % if overall market cap
  • Long/short DEX as % of DeFi marketcap
  • Long/short lending platforms as % of DeFi marketcap
  • Long/short DEX volume dominance % vs. CEX
  • Long/short Chainlink DeFi Dominance %
  • Long/short ETH as an overall % of Crypto Market capitalization

DXdao could collateralize these synthetics themselves, or create a front-end for others to do so as YAM Finance has done with their Degenerative Finance platform. Of course, if DXdao does mint the synthetics it creates much more risk. Creating long/short tokens would minimize the risk, but DXdao would need to monitor the balances, as Synthetix has had to do.

It would also be interesting to create the same markets on Omen. This would create an obvious arbitration opportunity between the two markets.

Another interesting idea from @luzzifoss is mint synths as impermanent loss insurance. DXdao could mint a synth that tracked the DXD/ETH ratio and pay out to Swapr LP’s as a staking reward. This could be an attractive way to get projects to launch their liquidity mining campaigns on Swapr as the impermanent loss insurance as a reward could become an attractive feature.

Just some ideas to get the conversation started.

Next steps would be to continue discussing the possibility of synthetics and if there’s community support, narrow down to 1 or 2 synthetics to experiment and then discuss further logistics and developer mining rewards with UMA.

9 Likes

I like the last paragraph most. The synthetics markets have fallen to pieces in the legacy markets in the past and companies have gone out of business. Limiting this fantastic opportunity to just one or two really popular and highly used synthetics could give us an openness to the opportunity but insulation from going broke.