financial products and services similar to traditional financial markets for the crypto world is essential to the health and success of the crypto market. SynLev’s goal is to provide leveraged ETFs similar to traditional finance for the crypto world, initially supporting crypto assets, and expanding to stocks, indices, and commodity assets in the future.
The highlight of SynLev is to allow cryptocurrency users to freely create leveraged positions based on specific assets, without margin and without liquidation risk. In order to maintain the stability of the system, SynLev has launched liquid mining rewards and adopted a unique and creative adaptive leverage mechanism and a “purchase reward and sell penalty” mechanism. So, is SynLev worth participating? What are the risks? Please read today’s five-minute series of chain smells.
SynLev is a decentralized leveraged token platform based on Ethereum. It provides an encrypted version of leveraged ETF financial instruments, allowing cryptocurrency traders to go long or short ETH with a leverage of 1.5 to 4.5 times.
Similar to FTX’s leveraged token mechanism , SynLev currently allows users to freely create a default leveraged position of 3 times based on specific encrypted assets, without margin, and there is no liquidation risk. For example, users can use ETH as collateral to cast a BULL token (3X BULL ETH/USD) that is three times longer than ETH. If ETH rises by 1%, ETHBULL will rise by 3%. For every 1% drop in ETH, ETHBULL will fall by 3 %.
However, unlike FTX, SynLev is censorship-resistant, transparent, license-free, and KYC. Compared with spot transactions, this feature is more important for financial derivatives, because the latter involves leveraged delivery, the amount of funds involved The risk is often magnified several times, and once a centralized fraud event occurs, the loss will be even greater.
In addition to decentralization, an important feature of SynLev is that no margin is required, and there is no common leveraged liquidation risk.
How does SynLev achieve these two points?
According to SynLev’s official article, this is mainly achieved through a non-continuous price calculation. The asset price will be synchronized with the latest price update of Chainlink, which will obtain a time delay to readjust the leverage ratio and maintain the leverage ratio at 1.5 to 4.5 times Therefore, even if the price fluctuates sharply, there is no need for margin call and no risk of liquidation to zero.
So, how does SynLev’s unique and creative adaptive lever mechanism work?
SynLev Adaptive Leverage Mechanism <br/>In SynLev, the target leverage (L) refers to the expected leverage of the asset pair, usually 3 times, and the actual leverage (the actual leverage (La) ) may be based on different assets and The specific situation is automatically adjusted, and the actual leverage La depends on the change of the equity ratio K value.
At any time, the actual leverage of a 3 times leveraged token asset will never be higher than 4.5 times, nor will it be lower than 1.5 times.
In order to reduce the pressure on the price of any leveraged asset to zero, SynLev has implemented a loss limit , which stipulates that in any given price cycle, the price of an asset cannot fall by more than 90%.
Purchase reward and selling penalty <br/>In order to improve stability and ensure that the actual leverage (La) is as close as possible to the target leverage (L), the system can adjust the loss limit. In addition, another adjustable parameter is net assets Equity ratio K value, SynLev uses the “Buy Bonuses and Sell Penalties” mechanism to encourage the actual leverage to be equal to the target leverage, so as to ensure that the k value is as close to 1 as possible.
The principle of this mechanism is as follows: When a leveraged token asset is sold and destroyed, resulting in a K value greater than 1, the system will trigger the sell penalty mechanism , and the fine is defined by the following equation 3. All penalties for selling are transferred to an Ebal, which is used for purchase rewards. The selling penalties can vary, and the hard cap is 15%.
In order to obtain these fine rewards, traders will buy and mint the leveraged token assets, thereby pushing the K value back to 1, and the rewards for the buyer are determined by the following equation 4. The amount of buy-in rewards depends on the amount of selling penalties generated.
In other words, the more the equity ratio K of leveraged tokens deviates from the target value 1, the more fines will be generated. At this time, sufficient motivation will be generated to attract traders to buy, thereby reducing the K value Return to the target value of 1.
SynLev allows traders to choose any supported trading pair to deposit ETH to create virtual BULL and BEAR tokens to become liquidity providers. These virtual tokens are deposited in the vault contract to stabilize specific asset pairs. In order to ensure that the liquidity provider will never be bullish or bearish on price trends, whenever liquidity is added or reduced in the pool, the pool will perform a rebalance to maintain the equity ratio of BULL or BEAR tokens at 1:1.
In return, the liquidity provider obtains the corresponding LP share based on the amount of ETH deposited. This share represents the share of the liquidity provider in the total virtual BULL and BEAR tokens. The LP share certificate can be obtained This transaction generates half of the cost of buying and selling transactions, and the earned fees can be withdrawn at any time without eliminating liquidity from the asset pair, as well as 0.2% of all SynLev transaction fees.
The advantage of this is obvious, that is, a single counterparty is not required for leveraged transactions in SynLev. In fact, the counterparty of the BEAR token of a specific asset is the BULL token of the asset plus all the assets of the liquidity provider Net worth, which can greatly reduce the counterparty risk. In addition, the trading pairs of each specific asset are separated, so severe price fluctuations will not affect the liquidity of the entire system.
However , the biggest risk taker in the SynLev system is actually the liquidity provider. Since all liquidity providers share the price of LP shares, once a certain asset fluctuates too much, the amount of bullish and bearish deviates greatly, and the leverage on both sides is different, which will cause the leverage of BULL tokens and BEAR tokens to be different , Which ultimately affects the decline in the price of LP shares, which means that the liquidity provider who acts as a balance bears systematic risks in disguise.
Just like the case demonstration presented by SynLev in the article “SynLev Liquidity Working Principle” , if there are more outstanding Bull Tokens than outstanding Bear Tokens in the market, and the price of ETH increases, the price of LP shares will fall.
In this case, the market sentiment is bullish, and traders will mint more Bull Tokens through SynLev. For example, there are currently 100 ETH outstanding Bull Tokens, 50 ETH outstanding Bear Tokens and 400 ETH liquidity (balanced at a ratio of 1:1 to 200 ETH “Bull Virtual Tokens” and 200 ETH “Bear Virtual Tokens”). At this time, under the Bear Token leverage ratio of 3.3 times, if the price of ETH increases by 1%, the net value of Bear Token will fall by 3.3% (8.25 ETH). At this time, through the leverage mechanism automatically adjusted by SynLev, the net value of Bull tokens increased to 102.75 ETH, the net worth of Bear tokens decreased to 48.35 ETH, and the net value of liquidity decreased to 398.9 ETH (including 206.6 205.5 ETH Bull virtual tokens and 193.4 ETH Bear Virtual tokens). As a result, the price of LP’s equity share fell by 0.275%.
In SynLev, the main function of the liquidity pool is to help real Bull token and Bear token holders stabilize risks and improve their ability to cash out. Although it is a liquidity pool, the LP actually does not participate in the transaction. Bear most of the risks in the system. Once the market’s bullish and bearish sentiments deviate too much, they will passively assume unilateral risks.
At present, only handling fees and mining incentives are far from enough. Only by increasing sufficient incentives, encouraging more traders to participate in liquidity mining, and expanding the asset pool, can this risk be minimized. Probably low.