Everything Can be Minted

Future steps for DeFi: Duet protocol, a new paradigm for synthetic assets

Abstract:

Decentralized Finance (DeFi) has added value to the digital world through the over-collateralization of assets, catalysing the latest bull market. Based on the existing DeFi mortgage paradigm, a novel synthetic asset protocol Duet was designed, exhibiting richer scalability and providing more options for users. Duet Protocol bridges the gap between the real and digital worlds and grants global users easy access to traditional assets, such as commodities, precious metals, and U.S. stocks, via a digital wallet.

Introduction:

A new era of crypto has come. DeFi, as a system of applications in crypto, has been booming since 2020. For that, many cheered on the arrival of bull markets for cryptocurrencies and they remain excited because of this phenomenon. In hindsight, the DeFi machine, Oracle or DEX, which are extremely liquid, completely marketed, and automated, only finished building the bottom layer of Web 3.0.

Many players have been eager to treat these infrastructure facilities just as a money game. However, they underestimated a grand scene that can be displayed by DeFi, regarding trillions of dollars in the traditional financial market. Synthetic assets have become a pioneer in linking the two worlds of digital and traditional markets together.

Among the current synthetic asset protocols, the two most active ones — Synthetix and Mirror, have evolved into their unique paths. Although their operating principles are different, they have a common feature that allows the assets mainly from their system as collateral, which creates a high barrier to entry. As a result, holders of Bitcoin, ETH, USDT, or other tokens have been restrained from getting into the systems. No evidence has shown the use of system endogenous assets ensures the robustness of the systems. Instead, it could increase the risk of large fluctuations and threaten the security of the systems.

Our team is the first to develop the Duet Protocol, aiming at solving the aforementioned problems. Duet has now come to the center of the stage.

What is Duet?

Duet Protocol is a synthetic asset protocol. The so-called synthetic assets are the reproduction of real-world assets in the digital world, in which the price fluctuations of physical assets and return on investment can be reflected in real-time. It is worth mentioning that Duet is the world’s first on-chain synthetic asset protocol with a hybrid mechanism (excess collateralization + algorithm burning), which supports the parallel casting of trillion-level off-chain assets without relying on centralized custody.

A duet in music is the same piece of music in which two people play different sounds or melodies. Similarly, in the concept of Duet Protocol, the returns and fluctuations of real-world tradable assets can be replicated, coordinated, blended, or evolved in a distributed financial system.

Therefore, the “core assets” of the digital world will be redefined. In Duet, assets that have growth, advancement, scarcity, availability, and programmability are called “Sharp Assets”. While those traditional assets with mature pricing (such as cash, real estate, bonds, stocks, and real estate) are called “Flat Assets” or real financial assets. Some of the “Flat Assets” have already been digitized, for example, Security Tokens.

The next stage of DeFi is to link “Flat Assets” and “Sharp Assets”. Duet was the first to pioneer the “excess mortgage + algorithm pegging ” dual asset casting model.

In this model, firstly, the existing digital assets are over-collateralized to cast a standardized investment tool — ”Neutral Asset” (DuetUSD, DuetEUR, etc.), or “sharp assets” such as dTSLA, dGLD are directly synthesized. Secondly, an advanced algorithmic stabilization technology is used to cast digital synthetic assets, which completely relies on the market arbitrage operation mechanism to support stable asset prices and anchor currency prices without human manipulation or redundant mortgages. The boundaries of digital assets will inevitably be broadened, as the financial assets are based on stable algorithms in the system with innovative mechanisms.

Duet Protocol believes the idea that “every token could be minted” is an inevitable direction of DeFi’s evolution, which differs from the existing synthetic asset protocols and is the biggest feature of Duet.

Compared to Mirror that only accepts UST and Synthetix that only accepts SNX/renBTC/ETH as collateral, limiting their underlying assets to hundreds of millions of dollars, Duet accepts more than a dozen high-quality assets such as wBTC, ETH, USDT, DAI, LTC, etc. as collateral, reaching out more than $1.3 trillion in underlying assets. In addition, Duet Protocol accepts assets unique in the DeFi world as collateral, including LP tokens in large swap protocol and deposit certificate tokens in the credible lending protocols to enhance the efficiency of users’ funds and the composability of protocols.

Duet Protocol is aiming to support any asset generation on the blockchain, with no need for complex and costly compliance procedures. DUET is using an over-collateralization model and broader collateral acceptance including yield-bearing assets (yToken, cToken, LPToken, etc.) to bring a larger number of more valuable investment vehicles to the crypto world.

Creation of a mirrored world of physical assets via over-collateralization

One of the biggest challenges DeFi faces today is how to chain real-world assets in a trusted way. The biggest revolution in DeFi is the introduction of “over-collateralization” to support “fixed value.”

In a traditional economic model, over-collateralization defines the situation where an asset value used as collateral on a loan exceeds the loan value. Over-collateralization is a strategy for risk management of cash assets, but it solidates cash value from the perspective of value precipitation. Suppose Alice spent $100 and bought a serial of code from Bob. The price of the “code” was $100, and what was the real value of the code? It was very hard to answer the question in a fluctuating market. Considering that Alice used $100 cash for the code, and based on a 30% discount of the original price, the market’s willingness to accept the exchange was significantly improved. It was shown that at the price of $30, a new consensus value was formed, which was much more stable than the original asset price.

In the Duet protocol, the container carrying the synthetic asset is the dAsset, which is used to anchor the corresponding “Flat Asset” in the real world. As a digital mirror of the real asset, dAsset reflects the price fluctuation of the “Flat Asset”. It also has the characteristics of “Sharp Assets”: infinitely divisible atomicity, which can be available at any time and shows high security and confidentiality protected by algorithms.

In Duet, dAsset’s synthetic “Flat Assets” (the investable targets) extend to all open markets with trackable fair prices:

1. DuetUSD, DuetEUR, DuetJPY, etc., are used as a standardized investment vehicle. In the initial stage, USDT is also acceptable as a stable currency in the system;

2. BTC, stocks, ETFs, bonds, commodity futures, NFT, and other assets that have high liquidity or acceptance are also eligible as collateral.

For example, if you want to mint Tesla’s stock token:

  • Deposit 1 ETH worth $1,500 (or any supported asset) and lock it into a smart contract (Collateralized Debt Position, CDP) as collateral.
  • According to collateral parameters (LTV of 1/3), a Tesla stock token dTSLA worth $550 can be generated (~0.83 shares at the current price of 600 USD per share).
  • At this point, you have four options:
  1. Sell dTSLA and exchange it into US dollars;
  2. Prepare the equivalent stable currency (USDT1) deposited into the swap protocol to become a liquidity provider (LP);
  3. Deposit DTSLA into a loan agreement in exchange for a partial loan, with the loan amount, be different in each agreement ;
  4. Do nothing, just remain the CDP fully mortgaged and get the growth gain from Tesla’s stock in the market.
  • To retrieve collateral (ETH), repay 0.83 shares of dTSLA and get back the locked 1 ETH.

All of the above actions do not require a stock account nor exchange US dollars, to obtain any particular share of the stock.

Dynamic debt pool and adjustable liquidation

The process of creating dAsset by users is, in fact, a process of debt to the CDP, and Duet smartly used the design of dynamic debt. In Duet, after users’ mortgage assets are cast, the value of dAsset is considered as a systemic liability, and the users’ debt will increase or decrease as the dAsset price rises or falls. These dAssets consist of indices, precious metals, stocks, encrypted assets, etc. This whole package of assets possesses a certain degree of positive or negative correlation, with different types of asset prices hedging against each other. The more variety the assets have, the more they can spread the volatility of the entire debt pool and reduce the risk factor.

Like all other CDPs, in order to reduce the impact of high volatility in encrypted assets, Duet has a minimum debt liquidation line, corresponding to the collateral rate c-ratio. The margin call obtains a quotation from the oracle every 5 seconds/time. When the c-ratio is lower than the secondary liquidation line, the user will have a buffer period of 30 minutes to replenish the collateral, before the assets in the user’s CDP will be auctioned off via an open market. Otherwise, when the system monitors the mortgage price for 30 consecutive minutes below the standard, the user’s CDP will be sent to the auction page or the third-party swap agreement for liquidation.

Unlike other static liquidations, Duet introduces a new adjustable liquidation model, which provides an open choice for users to improve the utilization of funds independently and maximizes the security of synthetic assets.

For example, in Duet, the user can pledge a certain amount of DUET to reduce the minimum pledge rate required by the system. The strength of the pledge adjustment of c-ratio is determined by the ratio of Duet to the amount of collateral in the position itself. As shown in the figure, the more DUET the user deposits, the lower the liquidation line of the position is and the more liquidity is released for the casting of assets.

Algorithmic pegging assets redefine the “invisible hand”

DUET will redefine the price of financial assets in an unprecedented way. In the Duet system, DUET tokens will also play the role of “national debt” for platform assets. All minted assets will be endorsed by the system token, DUET. The fluctuations in the price of minted assets can be passed to Duet, and the destruction and casting in the protocol will help the stability of minting asset prices.

In the Duet system, users are encouraged to adjust the price of minted assets through the arbitrage mechanism to keep the price pegging. Examples are as follows:

  1. When the price of 1 share of dTSLA is more than 1 TSLA, users can burn 1 share of dTSLA equivalent DUET token to the system to mint 1 share of dTSLA. The users can sell 1 dTSLA at the market price, obtain a premium, and push the dTSLA price closer to TSLA. In this scenario, the DUET token supply decreases and the price may increase;
  2. When the price of 1 share of dTSLA is less than 1 TSLA, users can use 1 share of dTSLA to mint a DUET token equivalent to 1 TSLA. Users cash out DUET tokens to obtain the price difference, which increases the demand for dTSLA. The price of dTSLA increases and gradually tends to be nearly equivalent to 1TSLA. At this time, the supply of DUET in the system increases, and the price of the token may decrease;

Duet Protocol creates this unique way of pegging asset prices, which does not need to mortgage additional assets, making full use of people’s profit-seeking characteristics. It relies solely on the “invisible hand”-the market will and algorithms, to regulate and make up for the low capital utilization due to the simple lock-up. In addition, considering the algorithm’s stable, decentralized, and anti-censorship features, a truly decentralized and stable digital synthetic assets can be realized for the first time.

Synthetic assets are a new starting point for Web 3.0

The tremendous liquidity of fiat money in 2020 has become the source of the excess value of DeFi, creating an environment for massive value migration onto the blockchain.

The emergence of synthetic assets is DeFi’s self-evolution. DeFi has gradually progressed towards its own solid foundation: the bottom layer has solidified value to form digital assets, the external rely on Oracle to depict the price fluctuations of physical assets, and the internal reliability on DEX to achieve no-slippage, high-depth of free exchange. With the rapid development of these infrastructures, it is possible for traditional financial assets to migrate to the digital world.

During this process, the mission of Duet is to help the “price” of physical assets to be linked to the chain. In the Duet synthetic asset model, there is no need to pledge or host the spot of underlying assets, instead, the price of assets on the chain can be generated based on the predictor. Therefore, the protocol can create financial derivatives with almost no friction costs, reduce the transaction cost in traditional regional financial systems, and “soft anchor” the price index for multiple assets through users’ arbitrage.

From the perspective of collateral, it is important for the DeFi industry nowadays to incorporate assets that are negatively or unrelated to the bull-bear cycle of crypto, which can reduce the leverage of the crypto-financial system while lowering the risk of holding one specific type of asset. The project also plans to incorporate off-chain assets as collateral to truly link blockchain to the real world.

From Bitcoin to the SP500, Tesla stock to gold, a variety of futures, insurance, and other derivatives can be created in Duet protocol, where the price information can be exchanged anytime 7 days X 24 hours, and crypto-assets are tradable anytime anywhere. For investors, the idea of deploying high-quality assets in different capital markets around the world only with a digital wallet is about to become true. It is conceivable that a trillion-dollar market will be created with much better productivity and lower social cost in the near future.

Therefore, in this new era, the prelude between the real world and the digital network has only just begun.

Follow and stay tuned @Duet~

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Duet is world’s first multi-chain synthetic assets ecosystem, enabling pegged assets from various markets including stocks, indexes, ETFs, and commodities #web3

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Duet Protocol

Duet Protocol

Duet is world’s first multi-chain synthetic assets ecosystem, enabling pegged assets from various markets including stocks, indexes, ETFs, and commodities #web3

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