Synthetics Deep Dive: Panel Talk

just to get a quick take who has no idea what a synthetic acid is either in crypto sense or in or in financial sense in general cool and who is kind of curious about it I've heard some things and just wants to learn more all right so you're not going to everything in the next 25 minutes but hopefully we're gonna get you guys to a place where you're well-equipped understand who are some of the leading projects and be able to ask better questions so this is a panel so we have some of the leaders working in synthetics here today come up in a second for those of you guys have never heard the term I'm gonna do just a super quick 30 second level setting and then maybe they can correct me so if we're talking about share of Berkshire Hathaway for example which is an asset that costs somewhere around $100,000 and that's the only unit in which you can buy it that's obviously not accessible to a lot of people so you could issue a different type of asset that is denominated in some percentage of what Berkshire Hathaway costs and basically you can buy a dollar of it or $2 of it or whatever else which obviously opens the opportunities for people to own something that's backed by the price of Berkshire Hathaway but accessible and much larger set of markets and budgets so that's kind of where we're gonna start that's all I'm gonna say and then I'm going to turn over to the experts so keen charlie Allison you guys come on up here please Madison I think is running late so unfortunate have to start without her so just to begin can you like super quickly just give us like who you are for you with what you do is everyone I'm a partner at paradigm we're crypto investment funds I spend a lot of time on the early-stage side of things and have focused on unintentionally focused on deep eyes and synthetics over the last like two or three years very closely came from synthetics so we started off as a state project and kind of evolved the market involved and market shifted towards a synthetic asset Papua so now have an index it allows you to trade synthetic assets like awesome so here comes called synthetics let's see probably the best person is it correct or max by definition what is this inventor I thought it was a good definition I really like the book share angle as well totally do that I think accessibility you know I mean that's a bit of an edge case right like a single shares belt always shares not divisible but you know a few synthetic asset is it certainly is that a guy said on etherion we're building on its kind of any asset that is tracking the price of an asset that is not on here or even potentially all material and allow someone to have exposure to the price of it without actually holding the underlying asset is that what's also known as a derivative there's a synthetic derivative just probably guys what's where does the line start you're doing a stableboy and derivative innocent life a driven always has somebody who's long and somebody whose shirt so the way I think about a synthetic acid is just take one of those positions either the long or the short and all the margin and associated obligations with that account and in our case tokenize it for distribution does a synthetic acid all we have to be collateralized is that is that a feature of it is that a it's kind of a deep topic but I would say so far today we've been able to build pretty interesting things with fully collateralized protocols and I actually think we're still pretty we're still very very early understanding how far you can push that and some of the team and maker and others have put some really interesting work out on sort of like what being fully collateralized means in an abstract and it's like how far can you push this can you share liquidity between different synthetics through a clearinghouse likely a curry doesn't make more sense to structure them as independent ones I think practically as of today we have like 500 projects working on identity on aetherium and like them that work at all and so it's probably going to be a long time before we have the ability to assign any kind of credit risk on an individual level so for anyone for any users that are using synthetic asset protocols today I expect they'll remain fully flower eyes for the most part on at least one side but I think and before we get to the point where we have like actual credit in the ecosystem you'll probably see people issuing credit to Dallas like maker or others where they have some notion of an identity in a selling point around them community concisely if you were to offer to sell me a bond day as I'm calling this aetherium person there's no way I would buy it because there's no way I would underwrite your credit risk if maker Dow as a community were to say we're gonna issue bonds in the form of a token right now I would probably purchase it like I would be able to assign some credit risk to it so like TLDR uncollateralized synthetics collateralized derivatives are probably I bet they get issued by Li Dao is and like credit starts with organizations and set of individuals so you can talk about users you guys both run user-facing platforms who are the users of synthetics today and who do you want the users with and synthetics to be in the near term who's the platform accessible to so for us yes if we started up state warming project and you know I mean you can see my shirt kind of funny but like Heather is kind of like a synthetic asset how do you feel about another I think you know the issue issue haves there's kind of two sides to this right there's this credit risk counterparty risk like who is the who or what is providing the value right and then you've got this other aspect which is where is this price feed or you know where is the mechanism coming from the showing the price is it an auction mechanism and if the market might like to be traded is it an Oracle which I think most of the the cool stuff happening at the moment is around like this article problem we have there a problem a lot of people have it and it's something that I think needs to be solved but you've got these a few different components that kind of come together to give you an asset on the theorem as an example like synthetic Bitcoin and to kind of contrast that we wrapped a Bitcoin which is another Bitcoin implementation one of them uses Bitcoin in custody for big dough and we have some various other components to give people price exposure to Bitcoin on aetherium which is a nice thing to have because you don't need to leave the etherium ecosystem and you can get its motion a Bitcoin price with us we use an Oracle to get the same kind of price exposure without actually having custody and those are kind of two different approaches yeah but you need those three things right to kind of this thing but to come back to your your questions like who's using it I think right now and for the foreseeable future like speculation is still the main use case and so for us we've kind of gone into you know crypto synthetic assets so like inverse indices of Bitcoin Eve and B and V as well as like long tokens so you know people want to be able to trade that kind of thing because it's speculation all right and that's that I think in the short term is we're going to see the most activity but things like you know equities you know being uphold out of shares or Tesla shares Alberto shares on etherium are really cool but I don't know why they're yeah for users come into that cool so I want to come back the Oracle problem cuz I think it's fascinating to be explain it to the audience a little bit but before that Allison do you sort of do you agree and how do you see the use cases maybe geographically and demographically success depends users actually finding utilities existing but you know currently the level of financial sophistication that's required to track their protocol is somewhat high right like a even a really simple financial derivative there's some risk and you know it's not quite a system where we feel like it would be in the community's best interest the permission list right now without further education so right now the users of our our system are basically financially sophisticated like fun and market makers other liquidity providers that want to create some sort of fancy derivative that now find it easier to do so using our infrastructure ultimately they're the ones that are you know meeting real end-user you know needs which as Kay mentioned given the current user base of crypto typically centers around speculation and volatility but I definitely think that kind of longer run if we really want to get kind of broader adoption mainstream adoption but really rather through genuinely stable censorship resistant yielding store and value and other sound investment products oh I'll give that I'll give a controversial response to that I would say I root that in the long term however today what is working looks a lot more like gambling and there are some interesting like the specifics of like what we're required to do today do give like a pretty good intuition for why that might be the case so like let's thing about people have built option protocols on top of it they're here today and none of them like there are no options on how to the theory today their option protocols but there are no options and why is that like for the most part people don't really care about those these types of products where like the payoff bounds relative to the fact you have two fully collateralized these things like no one really cares the ones willing to take on the opportunity cause no one wants the premiums they're so small Arthur pays wants to build knock out barrier options for aetherium which are basically just gambling it's the equivalent of ethers at $200 also you knock out barrier at a thousand at 5% today so I'll give you a 20x payout on one ether for a 5% premium if it breaks $1,000 in the next year that's like a gambling contract it's not normal product challenging its head it is head yeah I'm not joking the point I just made is for better or for worse both in terms of what users want and just structurally like how much inefficiency there is to like the actual transaction cost in the system not having access to credit literal transaction costs on top of the theory on like how frequently people want to be transacting in these markets and how efficient they can be like clearly the market is pushing us towards you know loitering is at this point like those kinds of products and I would expect that those are the things that work in your tournament got it so I want to come back to another huge potential inefficiency know the problem this baseball - Oracle problem so just to get everybody on the room on the same page so let's say that Kane's company synthetics they have an asset that is mapped to gold so essentially they collateralized something and one unit of that thing we call it since one synth is essentially equivalent to one unit of gold somehow they have to get the price of what gold is in the commodities market and usually that or metals market and that will come from an Oracle so another company could pop by and also have a synthetic asset that also represents gold and they could collateralize it similarly or differently but they'll have to do it equivalently presumably but they might use a different price Oracle there might be web network latency issues so the the actual price of these sins might not be the same across every synthetic provider in the world so to turn that over to you guys how is that problem playing out right now what are some of the solutions is that something where you think developers should focus their attention I'll give a super ok great like it's different synthetics issued by different issuers with different characteristics should trade at different prices like even with the same price Oracle like if you are gonna underwrite different levels of credit risk to different issuers for example and they are the major competitor like clearly die anti competitor version like should trade at different prices and the Oracle component is like an art canoe just a crypt a specific example of like credit risk what types of thing you don't right yeah I guess I'm gonna back up frame the Oracle problem again so I actually see it as kind of two problems one is literally defining the data set and getting it securely from wherever it currently lives onto the blockchain in a usable format that's our contracts can interact with and the other is really around recourse upgrades arbitration etc so if you think about kind of like your traditional financial world you know derivatives exist all those derivatives also need Oracle's from the fiat world and basically what happens is that generally speaking people find themselves able to come to an agreement either through natural language or some standardization and that's happened over the years but they also know that if there's a disagreement they can go to each other and that's actually kind of what makes financial products historically really hard to transcend Geographic quarters and the paperwork and all that other stuff that's required makes it really hard to kind of serve slightly down slightly lower on the financial pyramid so if we take all this stuff in to kind of the blockchain space like lots of solutions currently exist for how to eat or are in the works for how you create you know fault tolerant safe secure ways of getting data from point a on to the blockchain but I see kind of the problem that needs more here solving and what we're working on at luma around like arbitration and recourse so we kind of think of it as fundamentally there you know any Oracle that you don't no matter how robust are well designed or whatever it is there's probably some configuration of the world in which it can actually either become corrupted or just no longer relevant and so the system that we've built is basically like a system that uses economic incentives to ensure that that any corruption that you try to engage in on an Oracle will actually be economically and profitable if you buy into our before system so yeah I'm just Stephani bein like one step back and say I think fundamentally the issue is you have you know the real world right and then you have this trustless world or what should it be trust less and you're trying to join them together right and it's a question of the trade-offs between how much do I as a user of this system want to trust where this dot is coming from the Oracle and so you know you can have mechanisms where there's operation and recourse and all those things but ultimately what we really want is a trustless Oracle right because that's that's where you're kind of breaking the system right you're you're putting these assets into a trust environment but then there's this like the red of trustfulness that kind of connects back into the real world and it's a hard problem there's a lot of people working on that I know Hayden's working on some stuff with crypto assets you know this chain link is working on you know different mechanisms you guys are working on it for us it's not a problem that we are trying to solve directly we've kind of just put up our hands and said we've got a proprietary article it is trustful right now it allows the system to work the system is very experimental it's small-scale and we're working as quickly as we can to kind of move away and edge away from that transpose but that's the fundamental issue you know we want a fully trust the system it's self-contained and that's a hard thing to do when need information Brad you're welcome do you guess so I was gonna just follow up directly do you think there's a sort of arms race that's gonna happen for who is gonna be the decentralized oracle I hope so I hope you like keep working on it I think it's like a fairly decent chance that there's no optimal design for this that it's in the same category of problems as like quote-unquote like incentive compatible identity which is like like very probably just like not a tractable problem it's more of a like heuristic solution problem and people will continue to pick like the best available option for them at the time so if you look at like auger seems like reasonably okay has a very like good it probably works on like a pretty low resolution or like low tech frequency time scale isn't oracle like yet to see anything that's not at least somewhat trusted that like pushes it towards like what we want as like a general decentralized oracle now that being said even it's not possible like maker exists today and it works like we have a clear path here of like we do we this is not the hill we need to die on in trying to build these products and if in five years we get to the point where we have the arms race and like we've been trying to create a perpetual motion machine like would that be the end of the world no probably not like all this stuff would still work it'd be a little heuristic and annoying but it would still work yeah not to say that we shouldn't attempt it but just like this is i do not view this as like if we don't figure this out like Oracle matters only if it's being used for something and even though we all stay like we all have the Oracle problem more contracts need an Oracle it's kind of like most projects are focused on delivering product to meet end-user cases first and then going back so for those of us in the room that are interested in sort of how crypto will affect global financial systems and flows if synthetics because they're so open potentially to everyone they could actually become higher in volume than a lot of the underlying assets that they are derived from so if you have more synthetic gold trade trading all over the world globally then you have gold are you giving the ability to traders of those synthetic assets to actually affect the price of the underlying commodities so if all the synthetic traders short gold cents is the price of gold possibly going to drop I mean you already have that right like that's it like that that is the reality right so I guess the question is do we want to transplant that reality where you know synthetic versions of gold futures etc traded in an open market and like where's kind of seeing this interesting thing at the moment we've got a trading competition where people are trading and you know the trading on theory so everyone who's in this competition can see all the positions of everyone else right and they're using that information to kind of see where is the market going like what's happening and that kind of transparency I think is really powerful and the fact that you don't have a central clearinghouse or need for arbitration etc obviously this trade offs but you know I think a market place where it is much more open and transparent what's going on will be very powerful because that's the status quo like I give two answers on this the first would be yes absolutely synthetic markets impact physical markets like look at that max or gold or silver or whatever like begum are hidden like whether futures you affect the weather but whatever like of course that's going to happen and I think the crypto part of it is an interesting argument because the reason like the amount that these synthetic markets unduly or like the amount they influence these physical markets not entirely but largely is about the like inherent transaction costs to the physical markets themselves and so it's like why would I take out a synthetic dollar yen loan as a Japanese company as opposed to like actually going to access you ask credit markets like dollar terms transaction costs largely same thing with like physical gold trading the fact that in like US equities are have this like regular mode on settlement that sucks like that's why generally like the size of the synthetics on any given market is related a transaction costs underlying the actual market and like how hard how much inefficiency there is in them because of that like that is a problem but whatever it's one it's always existed so in this case I made two points here Urbo is interesting because the underlying assets when they are actually like repetitive are like have substantively lower transaction costs from market efficiency perspective then like any physical markets do and so you should see that effect less in the in crypto markets than you do in traditional markets for the most part and then to like it's pretty clear I think at this point that this is the way that we like get to scale an integration with traditional markets like I I think it is far far more likely that like the graveyard of secure izing you know traditional equities protocols whatever things like like that then in five years from now we look back on that as the graveyard and say like oh well the way that we actually started influencing traditional markets were synthetics I'm like Oblivion real estate index that is like totally just people wanting to put on risk positions without needing to like deal with any of this legacy stuff like and all of the like headaches that entail so in your traditional world or the underlying spot markets and yet you do actually see our opportunities exist so continue to exist for some period of time either because like like even in the crypto world sure transaction costs are lower but like there is still some cost integration and maintenance and like the development of the code and the testing of the code and all these other things and you know the hope the goal of course is for all of that to and if they shouldn't be able to really quickly towards robust solutions but like you know creating an index that just automatically replicated like a hundred different tokens 25 of whom are on their own blog chains another 25 that are like station tokens that have different staking protocols our farm is like that we way more convenient than like literally going out there and doing cool so before we wrap up one last final question you guys have been very helpful explaining some Fed Ex to us what how can we be helpful to you who are you trying to hire fire fund build what is what is your priority and how people get in touch with you College give an answer on something I'd like to see built on certain right now you have a bunch of protocols that are coming out where I think the best example of this are like 0x bundles and then token sets where like you can create an equivalent product on both of them but we don't actually have like a language by which to express their equivalent today or to prove it you could say the same thing of like dydx option protocols versus like we can go spin off one right now maker and die versus like a competitor or whatever like basically I think the coolest protocol as someone could build and define the next ten year to be like a language by which to express the equivalencies between different products and then you can imagine something like I forget the name but the thing you can do like flash lending on an earring Rene where you can like it's actually like do provable arbitrage and then like we all just throw money into a bank that's like alright we're only gonna fund trades that like over some time period have like these risk parameters hey that'd be super cool cool okay yeah for us I mean we're live right so you can come and use it that exchange to buy some Bitcoin or Forex a little bit whatever so yeah use a platform and give us feedback coming to discord complain about stuff we will Allison protocol on the next thing that's going to get more equipped up involved in so curious to hear what [Applause]