Synthetic assets are all the rage. Many projects advertise high APY rewards that entice users to buy a synthetic asset with little utility and high risk. For example, Iron finance was a stable coin ecosystem that was partially collateralized. Their collection of synthetic assets had no purpose besides farming rewards. There is no use of having synthetic Eth because it has no utility as gas.
After learning about $Arth, a value coin designed to keep peg with a basket of fiat, gold, and bitcoin, I realized the real purpose of synthetic assets is to create true new value and provide a product not available in any other token.
One very obvious application of synthetic assets is to provide a peg to a moving average. This would be valuable to users that want exposure to tokens without the extreme day to day price volatility. For example, a peg to the Bitcoin 20 week moving average would be a slow exposure to bitcoin price. The bitcoin 20 week in particular would be an excellent moving average to follow.
How this could work on the protocol side:
- When $20WK is above the BTC 20 week EMA, the protocol mints $20WK sells to reach peg.
- When $20WK is below the BTC 20 week EMA, the protocol buys $20WK and burns to reduce supply.
- Algorithmic reserves could keep collateral sufficient to keep the peg in times of bitcoin volatility to the upside or downside. The issue with collateral for a volatile moving average is that it must change allocation to keep up with collateralization. One way to do this and profit is to buy and sell in proportion to extension from the 20 week EMA. The 20 week has historically been a good indicator of the market. When bitcoin is above the 20 week, it is usually a bull market and a bear market when it is below. Having the protocol change reserve allocation between USDC and WBTC in response to this would allow profits from slowly buying BTC in a bear market and selling slowly in a bull market. The profits could increase collateral to keep the peg and be passed onto users(liquidity providers of $20WK-USDC)
This is just a brainstorm idea that may or not be successful. It could potentially be promising for users as a way to have a more stable exposure to bitcoin and profit from bull and bear market trends through algorithmic reserves.
Thank you for reading!
-Dr. Degen
