Simply Teleport your Coins

You may or may not have heard of synths – sounds quite sci-fi. Usually people will think of robots, or futuristic androids or something along those lines. But what actually are synths? And how can they be used in the context of cross-chain communications? Let’s find out!

Disclaimer: This is not investment nor investment advice. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.

TLDR

• Synthetic assets are tokenised derivatives of the underlying asset they represent.
• They can represent anything – crypto assets, fiat currencies, oil, gold, etc.
• Synthetix are looking to implement a multi-chain solution using synths and oracles.
• Synths are minted by depositing some sort of collateral.
• This debt can be tracked and confirmed across chains, allowing them to be moved easily between chains since the information is shared and validated across multiple chains by a decentralised oracle.

Synthetic Assets

A relatively new means of cross-chain comms is the use of synthetic assets. First off, a synthetic asset is a tokenised representation, or derivative, of whatever asset has been minted as a synth. For example, sUSD (synthetic USD) is a derivative of USD that is pegged to the price of USD. Unlike other forms of pegged assets, like USDT, synths are backed by any asset held in reserve and the price of the synthetic asset is determined using oracles.

The use of oracles to determine the price of a synth derivative, rather than having to hold the underlying related asset like a spot ETF, allows greater flexibility in terms of what can be used as collateral. For example, on the Synthetix network the SNX token is used as collateral to mint any synth. But where do cross-chain communications come into this?

Synthetix Be Improvin’

Synthetix Improvement Proposal 165 (SIP-165) was a proposal put forward and implemented for the Synthetix network that allows an oracle to be used to query the debt ratio and the total amount of synths issued on-chain. The key part of the proposal was that it lays the groundwork for Synthetix to be able to use a multi-chain oracle (Chainlink) to query the debt across all chains that Synthetix is operating on, not just Ethereum.

The benefits of this are that there will never be liquidity issues when trying to use this system to move wealth from chain to chain. In other solutions, such as bridging, liquidity is held in the sending chain and an I.O.U is minted on the receiving chain. We’ll get into bridges later in the series, however, think Wrapped BTC on Ethereum as an example. However, synths can be burnt on one network and minted on another without having to pay off the original debt first - essentially “teleporting” synths between chains.

To simplify, what this means is that going forward Synthetix will know exactly how much debt is held on what chain, as well as how many synths have been minted on each of those chains. Using this information Synthetix users will be able to take a deposit on one chain and mint a synth on any other supported chain as well as move those synths around at will – achieving cross-chain communications using synthetic assets.

What Synthetix is doing is a huge step for cross-chain comms, however they are still quite early in development. We don’t expect a fully implemented solution till the latter half of 2022. The use of oracles to provide a price feed for assets that cannot exist on the blockchain (fiat currencies, oil, gold, etc) is one of the reasons we invested in SNX back in 2020. What we didn’t expect was for them to move into the multi-chain sector and so it will be exciting to observe how that product develops.

THOR.Synths

THORChain Synths (THOR.Synths) are derivative assets that are minted on the THORChain network. THOR.Synths differ from the Synthetix model in that they are backed 50% by the underlying asset, and 50% RUNE. This is also where their pricing comes from and so they also depend on the ratio of the Liquidity Pools for their price peg.

The Cosmos IBC (Inter-Blockchain Communication) basically allows tokens to be transferred between Cosmos chains (think THORChain, Osmosis, etc) creating an interconnected network. THORChain is built using the Cosmos SDK and so the chain is IBC-enabled. What this means is that THOR.Synths can theoretically be used on any other IBC-connected chain. The versatility and reach of synthetic assets minted on THORChain cannot be understated and they are redeemable at any time 1:1 for the underlying asset.

What’s in store?

Using synthetic assets for cross-chain communications is a fairly recent development, although the concept has been around for a while. We are just now reaching implementation with Synthetix already connecting Ethereum Mainnet and Optimism L2. Although Chainlink is being used as the consensus component for cross-chain price oracles and debt tracking (which occurs off-chain), the use of synths, in this case, is more secure than a lot of bridges since the debt values are eventually settled on-chain. Essentially the synth model works because of the validity of cross-chain messages, rather than the validity of an I.O.U locked on one side of a bridge.

Take the Wormhole exploit, for example. The exploiter managed to mint 120,000 wETH (Wrapped ETH), sell some of it, and redeem it for real ETH because the bridge couldn’t tell the difference between the newly minted wETH and existing wETH. This would be impossible with the synthetic asset infrastructure since the exact number of synths minted, and the debt held by those who minted the synths is validated. Essentially the information must be valid on both chains, and the oracle, before any minting/movement of synths is allowed.

Regarding THORChain synths, they share basically all the same benefits as the Synthetix model. The only downside is that THOR.Synths are limited to IBC-capable chains. However, THORChain’s approach uses a combination of the liquidity pool model and the synthetic assets model so there is the best of both worlds there. We expect THOR.Synths to be composable with IBC-chains sometime this year.

Over and above using synths in the context of cross-chain communications, the implementation of a derivatives market that is multi-chain is not too far away. For some more context about how important derivatives are, have a read of our DeFi derivatives thesis here. The versatility of synthetic assets is huge – the versatility of multi-chain synths is even bigger.