Synthetic CDP on Ethereum

Summary:

Create a collateralized debt position for synthetic real world securities such as S&P 500 or TSLA

Abstract:

Should this proposal be implemented, a collateralized debt position for synthetic product will be created. The fees generated will be used to reward YFI staked in governance.

Motivation:

There is a real world demand for these products. This a way for crypto holders to gain exposure to real world financial assets to meet their investment objectives. These real world (hedgeable) assets can be tokenized and brought into the Ethereum blockchain ecosystem.

YFI needs more products to generate fees as yields for vaults are low in the current environment. This is a family of new products (synthetic replicas of real world securities) that will make YFI great again.

Specification:

We first need a price feed for the underlying asset we are trying to synthetically replicate. (S&P 500 in this example)

  1. Deposit DAI.
  2. Mint Synthetic token.
  3. Contract is forced to close if underlying price * 1.25 > DAI in CDP by using the DAI to buy the token on open market.
  4. If price of token drops, DAI can be taken out, but at least maintaining 150% collateralization ratio.
  5. If price of token increase, need to deposit more DAI least maintaining 125% collateralization ratio.
  6. Dividend is payed out in DAI from the deposited DAI pool subtract by an expense ratio fee 0.5%
  7. Financial risk can be hedged by buying the real asset (s&p 500 in this case)
  8. We can turn off the ability for contract to be closed if the underlying that Synthetic is tracking is not tradable. Therefore we will always get the accurate market price.

The mechanism will be described in details below using S&P 500 as an example.

By depositing DAI, synthetic minters will get a yS&P token back.
Users can mint these synthetic tokens at 150% par value of the supported types.

To redeem the synthetic token, they must close the CDP. If the value of the synthetic token appreciates above collateralization ratio of 125%, minter must re-collateralize or have their collateral liquidated so yS&P can be bought back from the open market to closed the smart contract.

If Investors long S&P500 in their brokerage account, creating this CDP will give them 0 risk exposure. They can then deposit S&P 500 into Aave to farm yield or sell on open market.

Difference between this proposal and what (synthetix network SNX) is that all synthetic token on synthetix network is backed by SNX. This means the amount of synthetic token that is issued is limited by SNX marketcap as its used as collateral to back the tokens.

With this proposal, DAI can be generated by a CDP using many collaterals. People can begin to issue synthetic real world asset using whatever collateral they want to back it.

For: Create synthetic CDPs for real world (hedgeable) assets to bring them into the blockchain

Against: Do nothing

Poll:

  • For: Create synthetic CDPs for real world (hedgeable) assets to bring them into the blockchain
  • Against: Do Nothing

0 voters

1 Like

I’m for this, but there is a lot more that goes into fulfilling this and it would shift the focus of $YFI in general. $SNX is already doing this and they have yet to implement TSLA. It is all far fetched for the time being, until ETH 2.0’s launch happens.

1 Like

@Darehwinston

Thanks. I understand the concern that this isn’t in $YFI’s wheelhouse. I think this is an experiment and innovation. If successful, can spawn a family of synthetics which can then be farmed, loaned out, and create vaults with. I don’t think its far-fetched as I believe that the proposal is using the legos that currently exists in ecosystem.

Difference between this proposal and what (synthetix network SNX) is that all synthetic token on synthetix network is backed by SNX. This means the amount of synthetic token that is issued is limited by SNX market-cap as its used as collateral to back the tokens.

With this proposal, DAI can be generated by a CDP using many collaterals. People can begin to issue synthetic real world asset using whatever collateral they want to back it.

3 Likes

I agree. If I could convert some of my TSLA to tokens I would certainly do it, assuming a level of dependability.

But this is a very big shift from allowing people to worryfree deposit tokens and gain yield.

Innovation is important t but so are baby steps.