SYNTHR PROTOCOL ARCHITECTURE Part I: Yield-Bearing Collateral, Debt Pool Modeling, and Liquidations.
SYNTHR Protocol allows users to create, manage, and speculate on synthetic derivative tokens that can represent any financial instrument in the world. On-chain oracle price feeds allow the digitization of assets such as crypto, stocks, foreign currencies, bonds, and commodities. In this article, we look at the three of the central components that make up the entire protocol ecosystem — Yield-bearing collateral, the Debt Polling model, and Liquidations & solvency-maintaining Stability Pools.
The protocol starts with users who post highly liquid assets as collateral such as ETH, USDC, and USDT. By posting collateral, users now own CDPs within the system and can mint synthetic tokens (syAssets) against their collateral at an average c-ratio of 150% — the overcollateralization ensures robustness and solvency within the ecosystem.
But first, what are CDPs ?
CDPs or Collateralized Debt Positions are placeholder tokens that represent a form of collateral which assets are minted against. SYNTHR provides the opportunity for users to deposit ETH as collateral to mint a syAsset with up to 150% collateralization ratio such as syUSD, which they can use to purchase other synthetic assets, and lend syUSD, or deposit liquidity in vaults to earn extra yields.
1. Yield-Bearing Collateral
SYNTHR allows users to lockup CDP to take advantage of yield bearing opportunities within the SYNTHR Protocol. This allows users to earn yield all while maintaining full ownership of their CDP asset. For example, ETH used as collateral can be used to mint syUSD, which can then be deposited into liquidity pools allow for yield generation through the protocol all while benefiting from price appreciation of ETH.
2. Debt Pooling Model
SYNTHR Protocol takes Synthetix v2 — which structures CDPs in the protocol in a capital efficient way, by eliminating the need for AMMs by allowing sUSD to be swapped with other synthetic asset debt within the entire debt pool with no slippage costs — and builds on it.
SYNTHR users are not held back on staking only one asset (in Synthetix v2, this was SNX; their native token). Users can stake highly liquid assets such as USDT, USDC, and ETH. Those CDPs can be used to mint SYNTHR Protocol’s synthetic assets such as syUSD, syBTC, or syETH etc. (With highly liquid assets, this greatly reduces the liquidation risks and a death spiral-like events akin to Terra-Luna). This also does not gatekeep the users from risking capital in an asset they might not want to hold.
However, like the Synthetix v2 debt pool model, SYNTHR users that mint any synthetic asset also share a proportion of the total debt pool. The users share of the debt pool is tracked by the issuance of debt pool share tokens upon minting syAssets. An increase in the value of the debt pool can result in changes to the debt owed and the collateralization ratio. This is important because not meeting the 150% collateralization ratio threshold can result in CDP liquidation.
To track debt pool shares, the calculation used is as follows:
Where TotalShares represent all debt share tokens issued, and TotalDebtPool represents the syUSD value of the debt pool upon minting or burning to issue or burn the correct number of debt shares.
To calculate the debt percentage and their respective syUSD debt owed, the following calculation is to be used:
The amount of syUSD debt can be calculated as:
3. Stability Pools, Liquidations, Recovery Mode
Stability Pools are vaults of syAsset liquidity deposited by users which plays a pivotal role in maintaining fiscal discipline and solvency within the SYNTHR Protocol. Stability Pools make it possible to maintain full collateral backing of syAssets by repaying debt from liquidated collateral. Stability Pooldepositors can get a return on their deposits for providing liquidity during the liquidation process.
When the collateralization ratio goes below the threshold requirements, the liquidation process is enacted if the user has not topped up collateral or partially liquidated collateral to pay debts. The collateralization ratio can be calculated as follows:
All syAssets are minted at a minimum initial collateralization ratio, or C-Ratio of 150%. However, in order to prevent liquidation, the absolute minimum C-Ratio of 120% to prevent forced liquidation.
Note: during recovery mode, the C-Ratio minimum can be higher than 120% temporarily until the entire protocol is above 120% C-Ratio.
When a liquidation occurs, the deposited syAssets in the Stability Pool are burnt to relieve bad debt from the debt pool. Effectively, this is a method of repaying bad debt. Since the C-Ratio is restored, this allows Stability Pool participants to liquidate the CDP by withdrawing the collateral that is of equivalent value of the syAsset debt. The Stability Pool participants also collect 10% of the collateral as a penalty fee. The remaining collateral is left with the user that collateralized the asset.
To maintain full syAsset backing the syAsset debt share that was created when the syAsset was minted, gets burnt. Since the liquidation system liquidates CDPs at a C-Ratio of 120%, the collateral should always be worth more than the debt.
To protect the protocol from a downward spiral during volatile market conditions, Recovery Mode is used to urgently protect the protocol from insolvency. It is automatically triggered when the C-Ratio of the protocol drops below 120%. This is not a desirable state for the system, nonetheless, there are many processes preventing the system from ever reaching this state. During Recovery Mode, collateral top ups, and partial liquidations are encouraged. Any CDPs with a C-Ratio above 120% in order of least collateralized are marked for liquidation. Liquidations will continue to occur until the protocol achieves a weighted average C-Ratio of 130%. It should be noted that during normal liquidation processes, a C-Ratio of 120% will cause liquidation.
The above — the protocol’s design for minting syAssets via overcollateralization, issuance of debt-pool tokens and share in the GDP of the ecosystem, and how these are regulated via liquidations and Stability Pools to maintain protocol solvency — are key aspects of SYNTHR’s architecture.
Follow this space for subsequent parts of this article series to learn about the protocol’s slippage-free swapping engine, the role of Oracles in the system, our price stability maintenance model, opportunities to earn real-yield within the ecosystem, and more.
About Synthr
Born through a collaboration of DeFi experts and traditional investors with real-world trading expertise, Synthr is a synthetic asset protocol with the goal is to enable traders to thrive without the restrictions of traditional finance via the application of DeFi solutions and to transform trading into a truly universal and omi-accessible market.
