Coinbase Opinion: Analysis on the Potential and Risks of Encrypted Synthetic Asset Platforms such as UMA and Synthetix

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Most decentralized finance (DeFi) applications today appear to replicate traditional financial products. Tokens can be exchanged for each other, borrowed or lent in the currency market, and even traded with margin and leverage on exchanges.

But DeFi is far from that. Blockchain is a global open platform that essentially carries programmable value assets. Sooner or later, DeFi will produce truly unique products that have no connection to the traditional world.

Let's look at one possibility: synthetic assets.

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What are synthetic assets?

• Synthetic assets are new types of derivatives. Derivatives are assets whose value is derived from a different asset or benchmark. Like futures and options, buyers and sellers trade contracts that track the future price of an asset.

• DeFi has made a little adjustment on this basis: "synthetic assets" are digital tokens for derivatives. Derivatives are financial contracts that are customized to obtain positions in specified assets or financial products, and synthetic assets are the tokens of these derivatives.

• Therefore, synthetic assets have the following unique advantages:

• Easy to use and transferable: synthetic assets can be freely transferred, traded

Global liquidity pool: the global nature of the blockchain itself allows anyone in the world to use it

Risk of no centralization: centralized medium with no control privileges

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Synthetic assets tokenize physical assets, bringing physical assets into the blockchain world, giving them all the advantages mentioned above. Imagine that anyone in the world can buy tokens that track the S&P 500 index, and can use these tokens as collateral in Compound, Aave, MakerDAO and other DeFi products. This pattern can be extended to gold or rice, TSLA stock, SPY index, government bonds and so on.

There are also refreshing and novel financial tools that are no longer out of reach, such as the pop culture market, meme culture market, personal token market, etc., which can all be traded through synthetic assets.

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At the end of 2019, several developers thought of an idea and released a

: What if there was a synthetic asset that tracked defecating on the streets of downtown San Francisco? More defecation in the streets, token holders profit. The urine and urine are reduced, and the token issuer makes a profit. Use an oracle to report the amount of poop.

This token market could incentivize the San Francisco local government. If the San Francisco city government issues "shit coins", it will incentivize the government to clean the streets and make a profit. On the contrary, if the streets do not become cleaner, citizens who buy "shit coins" can at least make a profit and compensate for the bad mood.

Universal Market Access (UMA)*

This is just a simple example to illustrate the potential of synthetic assets and explain the "tokenized everything" market.

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Currently the most common synthetic asset platform

UMA is a synthetic asset protocol that allows anyone to recreate traditional financial products, novel encrypted assets, and other products.On the UMA platform, two counterparties can use and create arbitrage financial contracts without permission. Contracts are secured by economic incentives (mortgaging), executed through Ethereum smart contracts. The characteristics of Ethereum's global open blockchain greatly reduce barriers to entry and bring about a "universal market use" protocol.At present, UMA community members are focusing on building a tokenized yield curve first (such as yUSD, Lianwen Note: UMA’s yUSD product has been renamed uUSD).

• In addition, anyone on UMA can

• Create any type of financial contract

• . For example:

• Encrypted asset contracts: encrypted asset futures tokens, yield curves, perpetual swaps, etc.

Tokens that track crypto or DeFi metrics: e.g. BTC market share, DeFi TVL table, DEX market share, etc. any other metric

Novelties: "shit" deals, pop culture, meme culture, etc.

Synthetix

UMA is positioned as a novel and creative "long tail" financial market protocol. Like "shitcoin" transactions, such contracts can fundamentally improve incentive schemes. This is innovation from zero to one.

Note: UMA is one of the companies invested by Coinbase Ventures

secondary titleSynthetix is ​​a protocol that creates global liquidity for Ethereum synthetic assets. Synthetix facilitates the creation and trading of a large number of asset types, be it crypto assets, stocks, and commodities, all on-chain.Tokens that track the price of such assets can be bought and sold within the Synthetix ecosystem, with a mix of staking, staking, and transaction fees. Importantly, the Synthetix ecology has become fully governed by the DAO structure, and the SNX token is the core of the entire ecology. Stakeable SNX generates collateralized synthetic assets while accumulating transaction fees. SNX can also be used as DAO community governance.

Synthetix, as a leading synthetic asset platform in the DeFi ecosystem, has issued synthetic assets

Over $150 million

. Chief among them is the platform’s stablecoin sUSD, which has a market cap of nearly $100 million.

There are many other synthetic asset platforms that have trade-offs and are being developed with their own unique design philosophies. Examples include Morpher, DerivaDEX, FutureSwap, DyDx and Opyn, Hegic or Augur.

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Note: DerivaDEX is one of the companies invested by Coinbase Ventures

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• in conclusion

• With the maturity of Ethereum and DeFi ecology, it becomes possible to use synthetic assets as new primitives. This is just the beginning, and don't ignore the inherent risks:

• Smart contract risks: Smart contract vulnerabilities are entirely possible to be exploited, and synthetic assets are the key attack targets

Governance risk: Most of the platforms are governed by centralized participants, and relatively none of them have been verified on a large scale

Oracle risk: Many synthetic assets rely on oracles to function properly, which brings its own trust assumption and failure mode