How Beyondfi Synthetics work
How Beyondfi Synthetics work
Beyondfi synthetic products track the underlying asset price of the asset. Each synthetic product is backed by Beyondfi (BYN) tokens and a shared pool of collateralized BYN tokens are used to back the synthetic products with a collateralization ratio of 300%.
The initial collateralization ratio is set to be 300% to ensure that there will be sufficient collateral when liquidating BYN tokens if there is a margin call on debt incurred by users who issue synthetic products. This initial collateralization ratio can be reduced further to 150% in the future as liquidity is developed. Beyondfi is able to achieve low collateralization ratios by providing incentives to deepen the liquidity pool for various BYN related pairs.
To create a synthetic product, users will send their BYN collateral into a shared pool which is used to back all synthetic products created on Beyondfi. Our integration with Chainlink and other price oracles determines the exact amount of BYN required to create the synthetic products and the number of issued synthetic tokens. The user creating synthetics will incur debt which records the total amount of synthetic tokens owed by the user. (e.g. a user locks 3 USD worth of BYN tokens to issue 1USDb of debt).
These created synthetics exists as ERC20 tokens on the Ethereum blockchain and will track the price of the underlying asset. For users who are creating a brand-new synthetic product, they will also be required to seed the initial liquidity for the synthetic product by being a liquidity provider on the exchange. This is to ensure that the price of each created synthetic product will have liquidity for trading and can track the underlying asset prices accurately.
These created synthetic products can also be converted back into BYN tokens through a similar mechanism. Users will simply have to repay their debts by sending their owed synthetic tokens into the smart contract and their BYN tokens will be unlocked.
Orderly Liquidation Mechanism (OLM)
Technically, each synthetic issued on Beyondfi represents a claim on the underlying collateral used to create the synthetic. Under normal circumstances, the claim can only be made by the same user that created the debt. However, there remains the possibility that the collateral used to create the synthetic may fall below the value of the synthetic, resulting in a less than 100% collateralization ratio. This can potentially erode the market confidence in the value of the synthetic hence an orderly liquidation mechanism is needed.
Beyondfi OLM works as such:
• If collateralization ratio falls below the threshold of 150%, a margin call will be posted to the users with existing debt.
• If no additional collateralization is provided, and collateralization ratio falls below the threshold of 125%, the OLM will start to liquidate the collateral automatically through designated liquidity pools within the Beyondfi Protocol.
• The liquidated BYN tokens will be used to repurchase the synthetic debt owed through the Beyondfi Exchange and repaid.
• A 2% penalty fee will be levied and added into the insurance fund and excess funds will be returned to the user if any is left.
The liquidation mechanism has these features built in:
1. Liquidation Insurance Fund: In the event that a liquidation occurs, excess proceeds of the liquidated collateral will be added into the liquidation insurance fund which will be used in the event of the unlikely scenario where the collateral is insufficient to liquidate the debt. This also provide users with the incentive to do a safe payment of their debts or to add more collateral to their positions resulting in a healthier ecosystem.
2. Partial Liquidation: As opposed to liquidating the entire position of the user, the system will only liquidate enough BYN tokens to bring back the collateralization ratio back to the acceptable risk level of 150% collateralization ratio. This reduces the chance of users losing everything and helps to protect the assets of the users.
3. Oracle and Time Delay: The liquidation engine uses secondary price feeds from multiple sources to determine the value of the collateral to prevent potential exploits and forcing liquidation. We also include a time delay mechanism of 15 minutes to ensure that liquidation only occurs if the collateralization ratio for the debt remains below 125% for more than 15 minutes. This prevents potential exploits from malicious actors who may seek to manipulate the price of BYN tokens or synthetics to force a liquidation event and cause losses to the users.
Synthetic pegging mechanism
Maintaining and tracking the underlying asset prices accurate is of utmost importance for Beyondfi. Hence, the price of each synthetic is maintained through the following mechanisms:
1. Arbitrage: If the price of a synthetic deviate from the actual underlying asset price, there are opportunities for arbitragers to profit. For instance, if the price of the synthetic is higher than the underlying asset price, arbitragers can issue additional synthetic tokens and sell it directly on the market. Conversely, if the price if the synthetic is lower than the underlying asset price, arbitragers can buy the synthetics and use it to unlock the corresponding value of BYN tokens.
2. Synthetic Auctions (Experimental): If the arbitrage opportunities are insufficient to eliminate price inefficiencies, users will have the opportunity to buy synthetics at spot prices using BYN tokens to eliminate price premium. Conversely, users can buy synthetic at existing low prices and redeem it for BYN tokens at spot prices to eliminate price discounts. These synthetic auctions will take place once there is a price discrepancy of more than 10% from the underlying asset price and quantum of buying/ selling opportunity depends on the volume that is expected to be needed to restore equilibrium in prices for the synthetics. This auction mechanism will be pre-funded by the Beyondfi team with BYN tokens to ensure equilibrium. We expect that the total number of BYN tokens in the auction funds will remain neutral in the long run.
Incentive for Investing Synthetics and providing liquidity
In the ideal scenario, majority of BYN tokens will be staked and used to invest synthetic tokens. This ensures that there is a large variety of synthetic products being created and there is sufficient liquidity and depth for users. The incentive provided for investing synthetics are:
1. When BYN token are staked, tokenholders will be rewarded with additional tokens, in line with the staked period and staked amount
a. Staked BYN tokens can be used to vote on governance protocols to steer the direction of the Beyondfi protocol. Non-staked BYN tokens cannot be used for voting.
b. Users must have voted on governance protocols within the past 30 days to qualify for receiving rewards.
2. Each synthetic token that users generate will be rewarded with BYN, distributed from the reward pool as an added incentive.
a. The purpose of this is to reward users for high gas-fees on the ethererum blockchain, when creating synthetics.
b. For prevention of exploits,the ratio of reward is priced at approximately 75% of the total cost of creating the synthetic. This subsidizes the cost of creating synthetics but does not create but does not create a dilemmma where users may be able to gain from creating and destroying synthetics.
c. At the early stage of platform operation, a higher rate of rewards could be utilized to promote to early users. By actively staking, they will provide sufficient liquidity to guarantee stabilization of the exchange. During this period, in order to mitigate the risk of potential inflation from the higher rewards, mechanisms are in place to prevent early redemption could be implemented until the stabilization of the platform is guranteed.
3. Liquidity pools, such as BYN-ETH, BYN-USDT, BYN-WBTC, will be created on decentralized exchanges including Beyondfi Exchange and Uniswap. This list may be expanded in the future and liquidity pool contributors will receive reward in the form of newly issued BYN tokens.
a. Liquidity pools are incentivized to create deep liquidity for BYN tokens which in turn, reduces potential slippage when liquidating BYN tokens in the event of under-collateralization and liquidation. Hence, lower collateralization ratios can be used where there is deep liquidity for BYN tokens.
b. Lower collateralization ratios make it less capital intensive for users of BYN platform to invest synthetics, hence providing significant value to the BYN community.
Overall, this mechanism ensures that BYN tokens that are on centralized exchanges or that are not actively participating in the Beyondfi protocol activities cannot be rewarded with additional BYN tokens.
The same BYN token can qualify for rewards in multiple pools. For instance, BYN tokens which has been staked to mint synthetics, will be rewarded with additional BYN tokens in line with the staked period and amount. In addition, receive newly minted BYN tokens as reward for minting synthetics. Also, if they use their staked BYN tokens for voting, they will also be rewarded additional BYN tokens for active participation in governance.
The Universe of Synthetics
These are the planned categories of synthetics to be included into Beyondfi. Note that the list is not exhaustive and there are plans to include more than the specific synthetics listed below:
Foreign Exchange Currencies – e.g. synthetic currencies such as
a. 1 USDb = 1 USD
b. 1CNYb = 1 CNY
c. 1 JPYb = 1 JPY
a. Brent oil synthetics
b. WTI oil synthetics
c. Gold/Silver synthetics
a. Bitcoin synthetics
b. Ethereum synthetics
a. Inverse/leveraged products synthetics
b. Futures/options synthetics
c. Structured products synthetics
d. Volatility index synthetics
a. NASDAQ, S&P index synthetics
b. Shanghai SE, Hang Seng index synthetics
c. Major global single stock synthetics (i.e. Tesla, Google)