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Debt Pools
Manage debt more efficiently
In synthetic protocols like Synthex, debt pools are an essential component that enables frictionless derivatives trading. In this type of trading, synthetic assets are pooled together, and upon issuing synthetic assets, all users share the debt through a global debt pool. This debt pool ensures that all users are liable for a portion of the overall debt associated with the synthetic assets in the pool.
Let's say, Alice and Bob both want to invest $100 in synthetic assets. Alice chooses to invest her $100 in BTCX (Bitcoin Synthetic) with the price of $10000 and Bob chooses to invest his $100 in USDX (USD Synthetic) with the price of $1.
When they issue these synthetic assets, as both are equal valued, they both share the debt through a global debt pool in 50-50 ratio. So, at the beginning, the total pool debt is $100 + $100 = $200 and both Alice and Bob are liable for $100 of the debt.
Now, let's say, the price of BTCX goes up by 100% to $20000. Now, Alice's holdings would be $200 (0.01) BTCX (Price $20000) and Bob's holdings would be $100 (100) USDC (Price $1). As the price of BTCX has gone up, the total pool debt becomes $300. So, now Alice's debt share is $150, and Bob's debt share is $150. By comparing the initial debt share, Alice made a profit of $50 and Bob incurred a loss of $50.
In this scenario, the debt pool allows Alice and Bob to share the risk of their synthetic assets and ensures that the overall debt remains manageable. This is important because it allows for a stable trading environment and ensures that the synthetic assets are backed by a sufficient amount of collateral.
In other protocols, a single global debt pool is used to group all synthetic assets together, regardless of their characteristics. This means that all synthetic assets are backed by the same pool of collateral, and all users share the same debt. This approach can be problematic when it comes to risk management because it does not take into account the unique characteristics of different synthetic assets.
For example, let's say that one synthetic asset in the global debt pool experiences a significant price drop. This can cause the overall debt in the pool to increase and make it difficult for users to manage their risk. Additionally, users who hold synthetic assets that are not affected by the price drop will still be liable for a portion of the increased debt, even though their assets have not decreased in value.
On the other hand, Synthex's approach of using multiple debt pools allows users to group together synthetic assets that have similar characteristics. This allows users to share the debt associated with these assets and manage their risk more effectively. Additionally, it ensures that the overall debt remains manageable and that synthetic assets are backed by sufficient collateral.
Furthermore, Synthex's approach also allows for the creation of debt pools tailored to specific types of synthetic assets, such as foreign currencies, stocks, and commodities. This allows users to invest in synthetic assets that align with their investment strategy and preferences, and reduce the risk associated with investing in synthetic assets that do not align with their interests.
In summary, other protocols that use a single global debt pool for all synthetic assets can be problematic when it comes to risk management. Synthex's approach of using multiple debt pools allows users to group together synthetic assets that have similar characteristics, manage their risk more effectively, and invest in synthetic assets tailored to their investment
To manage market risk, SyntheX assigns a volatility ratio for each debt pool. For example, a volatility of Crypto Market would be higher, so we assign a low volatility ratio (say 0.6) and a stable pool like Forex would have a higher volatility ratio (say 0.95). The account's debt value would depend on the volatility ratio. If you issue $1000 worth of debt from CryptoMarket, your adjusted debt would be $1000/0.6 = $1666. But if you issue $1000 worth debt from Forex pool, your borrowing power would be $1000/0.95 = $1050.
Last modified 2mo ago