Discussion Thread: Use synthetics for collateral to avoid centralization risks

It is desirable to onboard new collateral types that are uncorrelated with the price of ETH to create a more diversified collateral pool and to be better able to withstand drops in ETH price. A problem is that many of these uncorrelated collaterals (e.g USDC, DGX) have a centralization risk that people are uncomfortable with. (wBTC also has this same problem but is arguably highly correlated with ETH).

One solution to this problem is to use e.g synthetic XAU or even sUSD, sBTC from Synthetix. (I know some people view this as a competing platform, but let’s ignore this issue for the sake of discussion.). These synthetics are decentralized and their security depends primarily on the price feeds and the value of SNX (currently they require a collateral ratio of 800% to back the synthetics). They also have the advantage that they can be auctioned instantaneously at the spot price and do not require separate markets with their own liquidity.

What do people think about using sXAU, sUSD, sBTC as collateral types to improve collateral diversity without having to worry about a centralized authority that can either steal the stored collateral or black list maker deposits?


I like the post latetot. I honestly am not hot on ‘synthetics’ itself.

One thing I realized though is there is a different way for Maker to use what one might consider as ‘synthetic’ collateral example is cUSDC vs. USDC. I know this adds smart contract and centralization risk. BUT in this case since the token is not USDC directly but cUSDC we heap somewhat the circle blacklisting on to compound or a 3rd party intermediary. Personally I trust Compound a bit more than Synthetics at this point. But the point here is that it might be actually better to heap the centralization risk on to other parties if possible. Heck if more DeFi protocols offer deposit tokens that represent claims on systems these actually may be a better way to offload and spread risk in such a way as to make it difficult for centralized token providers to blacklist effectively.

This is completely off the top of my head thinking inspired by above post, even if I am not entirely hot on synthetix itself, conceptually the idea of using synthetic assets as deposits seems an interesting way to spread centralization risk. The risk here is we are heaping not just centralization risk, but also second centralization as well as smart contract and liquidity risk on these things.


Agree - cUSDC is slightly lower risk than USDC and also has the huge advantage of enabling CDP holders to earn interest on their deposited collateral.

I still like sXAU though. I think this it the best way to get gold onboarded as a collateral type.

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Don’t synthetics have the problem of having just eth as collateral still? This is all the same type of risk as having eth backing dai, and so nothing new is added. I don’t think that there’s a good way to remove centralization risk for physical assets. Maybe if there was a token that was backed by several independent centralized custodians? Then the risk would be spread out instead of having a single point of failure. This is essentially how we overcome the oracle problem.

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Not really. On the Synthetix platform, the value of the synths are backed by SNX with a collateral ratio of 800%. So even though the price of SNX is correlated with ETH, its not a perfect correlation (the value of SNX should ultimately be related to fees generated from trading on the Synthetix platform), and the very high collateral ratio gives a lot more protection than with current CDP collateral ratios.

I share the discomfort with centralized collateral but I dont think the design of Synthetix is robust enough to be used as collateral in core infra like MakerDAO.

That said, I think synthetics would be great collateral for MakerDAO, especially inversely correlated “short ETH” tokens. Would rather wait for robust long lived synthetics implementations though.

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800% also seems excessive, I doubt there will be much demand for a platform that offers such low use of locked funds. But primarily the idea of onboarding synthetic collateral that is backed by cryptocurrencies only to diversify pure cryptocurrency collateral seems circular to me. We could essentially achieve the same thing by just increasing the LR on eth in cdps.

It looks like the synthetix token itself has a decent market cap though. Perhaps this token would make a good proposal for collateral?

Most of the synthetix tokens are locked up to provide that 800% ratio (or for liquidity on uniswap.)

I have to agree with this, the whole system relies on the value of the SNX token. The SNX token is currently inflating in order to provide staking rewards (and incentivise liquidity) before trading fees take off.

Details here: https://dashboard.synthetix.io/
Some points worth mentioning:

  • Only $15M synths minted.
  • This is mostly sETH (which is subsidised through inflation on the uniswap pool)
  • And sUSD (which is subsidised through inflation on Curve)
  • $8M in fees is more than I expected actually, though this is from Dec 2018.

Probably true, but this risk can be mitigated by setting a low ceiling for the synthetics. Since synthetics solve one of the biggest problems in new collateral types (centralization risk), we should be helping the new platforms grow.


lol. “The entire thing right now is essentially a backdoor” - Kain Warwick, Synthetix CEO.

Also, in general, I think people who see competition in this space just aren’t thinking straight. Synthetix, if they ever do release admin control of their contracts, has a significantly different design and aim from Maker. This is mostly caught up in the fact that they have only one collateral pool, which (arguably) increases both risk and liquidity. I honestly wish them the very best, and hope that they succeed, believing that there is more than enough room for both Maker and Synthetix, but I would be against using any of those tokens as collateral while “the entire thing [remains] a backdoor”.


Lol, the guy talks about how he wants the platform to be fully decentralized and unregulateable, then brings up that his team has unilateral control over everything all in the same breath. Totally wild.

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I avoid Synthetix because it is a ticking timebomb. Two problems with Synthetix:

  1. No liquidations. The system can go undercollateralized and stay that way, invalidating the value of all synths.
  2. SNX is the only collateral it accepts.

Imagine if Dai was backed by MKR instead of ETH. Holders would be no recourse in the event of a shutdown.

I think they have only SNX as collateral.


Possible but just to be clear with the 800% collateralization ratio, the system has never been close to having to default on the synths, SNX minters are incentivized to restore the ratios so that they can claim their dividends- but agree that there are failure modes, but all systems have those to some degree.

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It’s even worse than this, they have zero mechanism for ensuring synth_price == underlying_price. Maker, BitMEX, Deribit, Binance have the funding mechanism (for Maker it’s SF & DSR), UMA has cash settlement, SNX has thoughts and prayers.

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I’m generally against most synthetix tokens at this stage as in my view there are better options to get exposure to pretty much all of the synthetics that they offer…

That said i am kind of interested to see what peoples thoughts are around iETH. Seems interesting to me given that we see tons of people using DAI to lever up on their long ETH position. Seems possible that there are also people interested in shorting ETH that might be willing to take on leverage in a similar manor. Just curious what peoples thoughts are around their inverse token offerings.

FWIW there is about $240k worth of ETH being borrowed atm through compound which says to me that there is at least a small market for levered shorting.

Regarding the synthetix peg.

I’m a bit new to the synthetix ecosystem. And it’s a bit new too. But they’ve been subsidizing liquidity providers, mainly through the curve susd contract now. This helps provide deep liquidity for susd, and the synthetix ecosystem. (Side benefit of also providing liquidity for DAI)

And they do have some tools for maintaining the 1 USD = 1 sUSD peg. They could adjust the global collateralization ratio, add/remove incentives for holding synths.

So the more accurate statement is:

SNX has thoughts and prayers and a temporary centralized subsidy.

Ehh, so they did raise the SNX collateralization ratio to 800%, if there’s not enough demand for synths they could always raise it higher. (Stakers would need to buy up sUSD if they want their weekly rewards)

Also having deep liquidity on curve does make a big difference for maintaining the peg.

I mean your points aren’t wrong but I’m talking about the system from a fundamental perspective.

It is fundamentally flawed, while it currently kinda works in practice. The inflation rewards won’t last forever, let’s hope they address the fundamental flaws before then

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So the take away is we are not convinced enough of synthetix as a technology to be interested in any of their token offerings? Even if one that supposedly has a -1 correlation with ETH price?

It seems to me that some of these concerns that have been discussed so far could likely be mitigated through higher liquidation ratios and/or lower debt ceilings, but that is just my opinion.