In the previous week’s post, we covered the Derived native platform token “DVDX”, you can read about it here. In this week’s post, we will attempt to explain the Derived Architecture and how the platform works behind the covers. To keep the explanation simple, some assumptions might be made and we will probably look over the complex parts, but the core concept is still the same.
What are Derived (Synthetic) Assets?
Derived (synthetic) assets like in traditional markets allows users to own the underlying assets / instruments without necessarily having to hold them. In crypto currency markets, this gives the user to gain exposure to the assets, giving investors the leverage to trade digital and traditional assets, while staying in the crypto ecosystem. For example: we can have xUSD and derived token to USD or xBTC as a derived token for BTC or xAPPLE as derived token for apple shares, so on and so forth. The applications of derived tokens are limitless. There can also be a basket of synthetic assets (example: Synthetic S&P 500, Synthetic NASDAQ etc.,). By theory anything that has a stable, definite and price feed can be synthesized. Synthetic assets are not backed by the real assets, there is no peg and you do not need to deposit your real asset in any smart contract and that is why it is called a derived (or synthetic) asset.
Derived — “Behind the scenes”
The platform works in a really simple way:
- You buy the DVDX tokens;
- You put those DVDX tokens in to a Smart Contract;
- You mint xUSD that you can use to trade on the Derived platform.
The xUSD is minted with $DVDX as collateral. With collateral comes the collateralization ratio, which is the ratio that you should maintain as security for minting the xUSD, and liquidation ratio, which is the ratio under which the collateral (staked DVDX Tokens) will be liquidated to maintain the peg of xUSD. Sounds simple? Wait! There is more.
Every time you mint xUSD, you also get a “Debt”. Let’s understand this with an example: You mint xUSD worth $100 and also get a $100 debt. This debt should be paid before un-staking the staked DVDX tokens. The debt can only be paid by burning the $100 worth of xUSD. This debt makes sure that users can not withdraw their DVDX tokens, without returning the xUSD. Now, imagine multiple users on the platform with each having debts equivalent to their minted xUSD. A sum of all this debt on the platform is known as the “Debt Pool” (DP). Now, imagine there are a 1000 users on the Derived platform having $100,000 worth of xUSD and thereby the platform combined Debt Pool (DP) is $100,000. You basically own 0.1% of the entire debt (i.e. $100 out of $100,000) and this 0.1% of debt needs to be repaid before un-staking your DVDX tokens.
The Derived platform brings in multiple features like 0% slippage and unlimited liquidity. This is made possible thanks to the “Peer to Contract” trading system. In any conventional market system, there is always a buyer for a sell order and vice versa. The amount of buy and sell orders on any exchange defines its liquidity, which becomes extremely important for executing any order of considerable size. When a large order is placed on any decentralized exchange (like Uniswap) there is usually a price slippage (often denoted in percentage). Slippage is just a “fancy term” for explaining the loss that a trader incurs because it cannot get the fair market price for its order, due to thin order book or low liquidity (i.e. lack of buyers or sellers). This also creates a chicken and egg problem for every trading platform.
The “Peer to Contract” mechanism of Derived solves these issues as the user is trading with the contract and not against an actual user, thus the name Peer to Contract system. But, if contract is buying and selling how is the contract getting the money to execute those trades? Lets go back to our initial example where you minted $100 worth of xUSD. You initially held $100 worth of debt in xUSD, but when you swap it to xBTC then instead you hold the same $100 debt in xBTC. Thus, the Debt Pool (DP) and thereby the individual Debt composition keeps changing when users swap to these different assets. Your transaction is just reorganizing the composition of the Debt. As the value of these assets will rise or fall, the value of the Debt Pool on the platform will also vary. To cover this variation and to incentivize the staking, the platform DVDX token stakers receive staking rewards and a share in the fee generated on the platform.
But, this gives rise to more questions: Why use xUSD instead of USD or why use synthetics at all, instead of the actual asset. We will try to cover these questions and more in the upcoming post.
Got more burning questions that you want answered? Comment below or jump into our social media channel on Telegram or Twitter and we will try to cover all your questions in another post.
