Synthetic assets are an important part of a decentralized ecosystem. They allow decentralized infrastructure to offer assets that track the price of any system.
Right now existing protocols for synthetics (like Synthetix and UMA) require you to put your assets into a base token in order to collateralise the creation of your synthetic asset, taking on risk and losing your exposure to the underlying assets of your choice.
Instead of this, we are allowing users to use their LP tokens to create synthetic assets, so they will still have their exposure to the underlying assets and the LP fees from that trade pair.
Despite these inefficiencies the market for synthetics on Ethereum is already >$1B marketcap and >$1B TVL.
We believe BAO will increase that dramatically by making it practical to partake in synthetic asset creation.
Most people do not understand synthetics.
They think that derivatives are only good for synthetic stocks. They just want to buy stocks like $APPL or $GME on the blockchain 24/7.
While that is a good part of synthetics, it is just replicating our existing market on the blockchain. What is far more powerful and exciting is that with synthetics we can do something new.
With synthetics you can turn any quantifiable discrete event into a financial feed that people can buy and sell.
You can create an asset based on the “Unemployment Rate in Hong Kong” or “Average Annual Rainfall in Seattle” or the “Number of iPhones Sold Annually”.
These synthetic assets allow you to buy long or short depending on if you think the number will go up or down, and this creates powerful use cases.
You could now give anyone in the world performance rewards based on specific criteria.
Imagine the Mayor of a city that in addition of his base salary, could also get a bonus package from a basket of tokens representing the inverse unemployment rate, the city happiness score, and the inverse crime rate in their city. The better results they create for their city, the more their tokens are worth.
Once you have synthetics, you own the financial data stream to anything because you can incentivize liquidity to make it more accurate.
Those who own financial accuracy can then pick any finance business they want to start. Goodbye Moody’s, Meridian, Experian, Fannie Mae, and others.
We use the terms "soft" synthetics and "hard" synthetics to refer to two different types of synthetic asset, defined below. We will implement them separately, as you can see from our roadmap.
Soft synthetics are indexes. Well known indexes in the space currently are DPI, Indexed.Finance (CC10, ORA5, DEGEN, etc.) and PieDao. The ponds feature that will be implemented by Panda is our first soft synthetic mechanism we will create, based on Balancer v2. An index of the meme coins, the "memedex" will be featured on BSC.
Hard synthetics are synthetics assets that links price to data. That data could itself be a price, like $TSLA stock price, the price of 1 once of gold, or something more exotic like the number of goals Neymar Jr scores, rainfall levels or crime rates etc. The value of the synthetic asset is backed by collateral. in BAO's case, we will be focusing on allowing the use of LP tokens as that collateral.
To enable the users to create synthetic assets, the Bao Finance team will be creating a fork of the Balancer and Synthetix ecosystems. Instead of this synthetic asset ecosystem being required to have a single token (like SNX) users will be able to create synthetic assets using a combination of bao tokens and their LP tokens as collateral.
The specific collateral cap for each asset, and the overall collateral cap will be decided upon by users.
Synthetic assets will rely on oracles for their pricing information and will support:
Uniswap V2 Oracles
Augur Outcome Oracles
Band Protocol Oracles
The Bao team will create and deploy the synthetic asset contracts, but the activation for this protocol will not take place until the BaoDao is handed over to the management of the community.