Intro to Crypto Synthetic Asset Trading

/ Chris Collins / 04.15.2019 /

What if you wanted to trade non-crypto assets, but had limited/no access to do so through traditional brokerages (basically most people on the planet)? Wild developments are taking place in the blockchain ecosystem that will hypothetically enable the average person in a country like Venezuela (or any other underbanked population for that matter) to seamlessly participate in the global financial markets through synthetic instruments in a censorship-resistant way.

Specifically, decentralized exchanges are being developed that focus on synthetic assets for any traditional asset (like stocks and bonds), and support derivatives (such as futures, leverage, and shorting). The counterparty for each trade could be someone on the network, but alternatively a trader could decide to create a bridge between their DEX account and their traditional fiat-based brokerage.

Where is this heading? Truly democratized access to financial markets. Two projects I’ve come across that are working toward this are UMA Protocol and Rainbow Network.

UMA Protocol

UMA Protocol was co-founded by Hart Lambur and Allison Lu. It takes the approach of creating ERC-20 tokens for traditional assets and managing synthetic exposures via smart contracts and uses DAI for margin on the synthetic tokens. In late March, the team announced the creation of USStocks, an ERC20 representing ownership of the top 500 publicly listed US companies by market cap (similar to a S&P 500 ETF).

See below Twitter thread for a simple example of how a contract would work.

1/ How @UMAprotocol enables "Trustless Tokenization", aka how to create an ERC20 token for synthetic crypto or *real-world* asset exposure in ETF-like format. Mechanics below for creation, re-margining, and redemption (or default): pic.twitter.com/FZYpUV3DTt
— Hart Lambur (@hal2001) December 6, 2018

Rainbow Network

Announced more recently, the Rainbow Network is in development by Dan Robinson, Research Partner at Paradigm. It aims to be implementable on Ethereum or on top of the Lightning Network, allowing for off-chain transactions. Its reliance on payment channels increases throughput and decreases transaction costs.

See below Twitter thread for Dan’s announcement of Rainbow Network.

Today I'm publishing a new design for an off-chain decentralized exchange built on synthetics: the 🌈 Rainbow Network 🌈

- Supports any liquid asset (even non-crypto)
- Supports leverage and shorting
- Implementable on Ethereum, or on top of Lightninghttps://t.co/JunlYDqCOE
— Dan Robinson (@danrobinson) March 20, 2019

Intro to Crypto Synthetic Asset Trading

Rainbow Network

See below Twitter thread for Dan’s announcement of Rainbow Network.

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