Long Tail Innovation of Synthetic Assets: How to Invent New Assets That Don't Exist in Traditional Finance

Original author: Hart Lambur, founder of the UMA protocol

Original translation: overnight porridge

Long story short: Having defined synthetic assets, I think synthetic assets will allow DeFi to invent "new things" that cannot be achieved in traditional finance. In the same way YouTube has allowed new forms of long-tail video content to flourish, synthetic assets will create new types of financial products we never thought possible.

A common question we have at UMA is how to define a "synthetic asset". On the Bankless podcast earlier this year, David, Ryan, and I gave a simple model: synthetic assets are alchemy.

The so-called synthesis is the transformation of one asset type into another asset type.

Specifically, this alchemical process looks like this:

< p>It boils down to this: Collateral is combined with a payout function to create a synthetic asset. For example, the following is an example of Maker's DAI:

When you step back and generalize this concept, it becomes very powerful. What happens if you fill in any collateral and an arbitrary payout function?

You can synthesize an asset for anything.

In other words: any collateral + any payout function = any synthetic asset

< /p>

Some examples of synths

Want to build synthetic gold? very simple.

Collateral (USDC) + payout function (USDC * 1 ounce of gold) = synthetic asset ($GLD)

Follow Bankless Twitter Tokens for fans? Of course you can.

Collateral (USDC) + payout function (USDC * Bankless Twitter followers) = synthetic asset ($BNKLES)

Synthetic NFT Index Tracking Tokens? No problem either.

Collateral (ETH) + payout function (ETH * NFT index value) = synthetic asset ($NFTINDEX).

This is the magic of synthetic assets on Ethereum, you can create a financial asset for anything.

What made it possible?

The magic of this alchemical process lies in what I called above the "spend function", which is the function that defines the synthetic asset, which means Your ability to create any possible synthetic asset is limited to what that payout function can spit out.

And this is where the UMA protocol shines, allowing developers to define almost any spending function they can imagine.

This is because the UMA contract does not require on-chain price data, and the design of UMA only needs to provide on-chain price data when a "dispute" occurs. (Fun fact: In the 10 months that UMA has been live, there have only been 6 instances of disputes).

In other words, UMA allows you to define almost any arbitrary spending function without pushing any data to the blockchain. This means you can build almost any type of synthetic asset in an afternoon.

Four types of synthetic assets

I like to divide synthetic assets into four categories, the fourth Classes are unknown types, because every day I am amazed by the things being built.

Category 1: Stablecoins or synthetic assets related to stablecoins

Maker’s DAI is a project designed to anchor $1 All fiat-backed stablecoins fall into this category, including recent algorithmic stablecoins (ESD, FEI, RAI, etc.). These types of synthetic stablecoins have obvious utility and demand for them.

And a similar (but not identical) product is a zero coupon bond, also known as a Yield Dollar. Following the format above, they would look something like this:

Collateral (ERC20 Asset) + Payout Function (USD/ERC20 Asset) = Synthetic USD

The result of creating a synthetic dollar is that you can use any collateral type and allow users to borrow against it.

This is a powerful way to enable lending and borrowing of ERC20 assets: For example, the team at BadgerDAO is using UMA synths to build CLAWS, a Synthetic assets as support. This allows Badger stakers to borrow against assets they hold. These products can be created by collateralizing LP tokens, vault tokens, or any ERC20 token.

Second category: Crypto-related synthetic assets

I define "Crypto-related synthetic assets" as helping users trade, Products for hedging and leveraging crypto assets.

My favorite example: altcoin call options. UMA is used to create call options on $UMA, $BAL, $UNI, and $xSUSHI, the applications here are endless and I expect demand for these option types to grow significantly as the altcoin volatility market develops.

Another example is BTCDOM, a product launched by Domination.finance that allows you to express a position on the relative dominance of Bitcoin compared to other markets.

Another example to consider is uGas, launched by Degenerative.finance, which allows you to hedge the cost of gas on the Ethereum network.

Another crazy example: ethVIX. With UMA, you can buy tokens that track the volatility of Ethereum.

I also put synthetic cryptoassets into this category, such as synthetic bitcoin on the Ethereum network, many existing methods (eg renBTC, WBTC) rely on Rather than locking up actual bitcoins, it is entirely possible to create purely synthetic BTC or other cryptocurrencies.

An example here is Mario.cash created by the YouMyChicFila team, which is a pure synthetic BCH on Ethereum.

Category 3: Real World Synthetic Assets

Synthetic assets are often associated with real world assets: i.e. synthetic gold, synthetic Crude oil or synthetic S&P 500. Many people are very excited about the idea of bringing traditional investment products to the blockchain. And here's my point: real world assets are kind of boring.

People in the crypto industry today actually don't care about trading gold on the blockchain, gold with a daily fluctuation of less than 10%, for today's degen So stable. An exception is the uSTONKS launched by the Yam Finance team: a token that tracks the top 10 stocks on Reddit WallStreetBets.

Category 4: Unknown Synthetic Assets

This is where things get interesting. My point is that synthetic assets will give builders the ability to invent new assets that don't exist in traditional finance.

Think about what YouTube has done for content creators. Before YouTube, it was ridiculously expensive to make a movie or a TV show, and you had to be a Hollywood studio to do it. YouTube has made it cheap for users to distribute their own videos, which has spawned a whole stream of long-tail video content that never existed before.

No one expected the popularity of unboxing video, Twitch stream or TikTok before. User-generated content invents new things that no one would have guessed.

YouTube is open and license-free. In either universe, Hollywood studios wouldn't be putting out these shows that grab the attention of millions. This entertainment is "emerging," that is, no top-down entity could have created it.

My point is that the same thing will happen with DeFi and synthetic assets. UMA and other DeFi protocols make it possible to build a financial asset for less than $1,000. By contrast, it costs Wall Street banks millions of dollars to launch a new financial product.

This creates the conditions for "user-generated financial products", the builders in this field will invent new products that we cannot predict today.

Here are some of the crazier ideas that came to mind:

1. Tokens for tracking important crypto metrics such as total value locked in DeFi or the total market cap of all NFTs;
2. Tokens that incentivize collective behavior, especially among governments and citizens. I previously suggested creating a token to track human feces seen in San Francisco. The idea: The city of San Francisco could issue a "shit coin" dedicated to tackling homelessness (and, if successful, make a profit). Residents of the city of San Francisco can buy this "shit coin" as a "hedge," allowing them to make money should problems worsen. Could "collective action" tokens be used to fight rainforest deforestation, ocean pollution, or other thorny global problems? I would love to give it a try.
3. Tokens to incentivize COVID-19 vaccines. A Las Vegas casino will pay up to $1 million if 80% of its workers are vaccinated by May 1. The DeFi version can be built using KPI Option Token.
4. Tokens that incentivize hiring and referrals. UMA recently launched a "Talent Referral Option" program. If the referee joins the UMA core development team and stays here for 1 year, the referrer will receive a token that can pay 25,000 US dollars, which is a decentralized Recruitment attempts.

Innovation is what excites me the most.

If the cost of building a financial product is close to zero, what will the Internet be like?

I'm excited to explore the answers.

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