How Duet Achieves 100% Capital Utilization with a New Model of Mortgage + Calculated Stable DeFi Synthetic Assets

Duet Protocol, the first synthetic asset protocol to use a hybrid mechanism of collateralization and algorithmic stabilization, may bring a new paradigm to synthetic assets.

The real world and the crypto world were considered two parallel worlds for quite some time, with cryptocurrencies like Bitcoin held by only a few and traditional assets uninterested in Bitcoin. As the total market cap of cryptocurrencies has grown larger and larger over the last year as central banks around the world have been releasing water, more and more traditional institutions have begun to lay claim to the crypto space.

In addition to the rise of cryptocurrencies themselves, decentralized finance (DeFi) is becoming more accessible to more users and funds with the popular mining (Yield Farming) movement of the last year. DeFi can also offer yields that far exceed those of traditional assets, regardless of the rise in cryptocurrency prices.

The various factors mentioned above have led to traditional funds being accelerated into the cryptocurrency market, but there is still no good solution for traditional assets such as real estate and stocks to enter the crypto space, except for fiat currencies, until Synthetix introduced trading of commodities, fiat currency exchange rates, etc. to the blockchain by way of synthetic assets, and Mirror also introduced stocks to the blockchain for the first time last year, allowing all cryptocurrency users to trade.

However, the existing DeFi synthetic asset protocol has many shortcomings. From the asset side, the distribution of assets in the blockchain world is barbell-shaped, either stable coins that won’t go up or down, or digital currencies that are extremely volatile, with a scarcity of assets with medium risk returns. The STO process and compliance of traditional assets on the chain is still extremely complicated, which does not reduce any cost and cannot play the advantages that blockchain should have. From the existing mechanism, basically all synthetic assets are using the over-collateralization model, with low capital utilization and high risk of users being liquidated. This is because of the high demand for on-chain leverage, resulting in high liquidity rents and highly volatile yields. And in terms of token value, many of the economic models are designed to be absent, resulting in a lack of endogenous value for DeFi tokens.

And recently, the emergence of Duet Protocol, the world’s first synthetic asset protocol using a hybrid mechanism of collateral and algorithmic stabilization, which is hot in the market, may bring a new model to synthetic assets.

Collateral + Algorithmic Stabilization Mechanism to Secure Synthetic Asset Prices

Synthetic assets are undoubtedly an excellent way to combine traditional assets with crypto assets. Since the project runs decentrally on the blockchain and is jointly maintained by all miners, it can avoid cumbersome compliance procedures and can be purchased without permission compared to the centralized purchase of stocks on the chain. There are currently two main types of synthetic asset projects that can trade real assets, Synthetix through collateral casting and Mirror through combustion casting. The newly emerged Duet Protocol can be considered as a collection of both, with the advantages of both.

Let’s first look at how Mirror and Synthetix implement synthetic assets.

Mirror is a project developed by the Terraform Labs team, which is part of the same Terra ecosystem and can increase the use of the algorithmic stable coin UST in Terra. In Terra, users can generate equivalent USTs by destroying the platform coin LUNA, or they can destroy USTs to generate equivalent LUNAs. As the LUNA market price fluctuates, the number of LUNAs needed to destroy and redeem the same amount of a certain asset may not be the same. As Terra grows in size, more and more LUNA will be destroyed and the demand for LUNA will rise, causing the LUNA price to increase. After Mirror goes live, mAssets representing traditional assets can be borrowed through overcollateralized USTs, which are currently collateralized at no less than 150%.

Although Synthetix has been claiming since two years ago to introduce trading of real stocks in the form of synthetic assets, allowing everyone to trade stocks directly on the chain, Mirror stole the show. synthetic asset Synths can be generated in Synthetix by overcollateralizing SNX, and now also by overcollateralizing ETH and WBTC to borrow among them the synthetic stablecoin sUSD. In Synthetix, all users minting Synths by pledging SNX is equivalent to incurring debt to the system, with the debt of a single user affected by other users, and all debts in the system collectively forming a pool of debt, which is borne by users in proportion to their debt. synths can be traded directly within the system, with no slippage and unlimited liquidity, making Synthetix a great place to start. This gives Synthetix better composability, but also greater uncertainty.

Duet, on the other hand, is a similar combination of the two, with the ability to either overcollateralize cryptocurrencies to mint synthetic assets or by directly burning DUET tokens. During the first year of Synthetix’s operation, a lot of effort used to be spent on maintaining the price of Synths. In order to align the price of Synths with real assets, officials provided a lot of liquidity on Uniswap through incentives. sETH/ETH was the most liquid trading pair on Uniswap for a certain period of time, but the capital usage was poor and the equivalent sETH/ETH received far less of a share of the trading fees than other trading pairs.

By introducing algorithmic combustion to directly form synthetic assets, Duet can generate synthetic assets without having to deliberately maintain the price of the generated synthetic assets. When the price of the synthetic asset is lower than the price of the corresponding asset, the user can buy the synthetic asset, destroy it in the system, redeem the equivalent value of DUET tokens, and then sell it on the secondary market to gain profit. Similarly, when the price of synthetic assets on the secondary market is too high, users can also buy DUET and destroy it directly to mint synthetic assets and sell it on the secondary market to complete arbitrage.

How Duet Achieves 100% Capital Utilization with a New Model of Mortgage + Calculated Stable DeFi Synthetic Assets

100% capital utilization efficiency for synthetic real assets such as stocks

Synthetix assets are often criticized for their low capital utilization. For example, the main way to generate synthetic assets in Synthetix is to collateralize SNX for casting, but until SNX becomes a mainstream asset, there may not be a stable enough price as well as secondary market liquidity. If the collateralization rate is too low, it may lead to untimely liquidation, so Synthetix previously required a collateralization rate of 700%, and now it also requires 500%. The size of synthetic assets in Synthetix is also very limited due to the high collateralization rate. As shown in the chart below, Synthetix still had an overall collateral ratio of 615% as of May 21.

How Duet Achieves 100% Capital Utilization with a New Model of Mortgage + Calculated Stable DeFi Synthetic Assets

While it is possible to generate stable coins directly in Terra by destroying LUNA, there appears to be 100% capital utilization. However, in the process of borrowing mAssets through UST collateral, an overcollateralization of 150% is still required. Coupled with the volatility of the stock, the user’s collateralization may need to be above 200% or it will likely be liquidated. Therefore, to complete the operation of generating synthetic stock mAssets from LUNA within the protocol, the utilization of funds remains poor.

However, in Duet’s design, synthetic assets can be formed directly by burning the platform coin DUET, and DUET can also be redeemed at the prophecy machine price by destroying the synthetic assets. this is currently the only protocol that can generate stock-based synthetic assets directly through the platform coin, with 100% fund utilization efficiency. the synthetic assets in Duet Protocol are called dAsset. According to the official description, dAsset can track all public markets with fair prices, including mirror stablecoins (DuetUSD, DuetEUR, DuetJPY), BTC, stocks, ETFs, bonds, futures, foreign exchange, interest rates, indices and commodities.

Another important difference between Duet Protocol and Synthetix and Mirror is that their CDP (Collateralized Debt Position) model is different. The process of creating a dAsset by the user is actually a process of indebtedness to the CDP, and Duet uses a dynamic debt design. DUET can be used both as collateral for dAsset and as a “buff” for CDP liquidation. Users can deposit dual assets (DUET and another acceptable token) as collateral, the value of DUET can reduce the liquidation line of CDP and increase the capital efficiency, which can push the minimum closing line from 300% to 100% indefinitely, but this requires users to fill an unlimited number of DUET, so rational users will choose the most suitable amount of supplementary collateral for themselves, which should be an interesting game. point.

After a user pledges a higher-order asset to mint a dAsset, the dAsset is considered an asset of the system, and the user’s coin-denominated debt increases or decreases as the dAsset price rises and falls. These dAssets consist of indices, precious metals, stocks, crypto assets, etc. This basket of assets has varying degrees of positive and negative correlation, and the prices of different kinds of assets can be hedged against each other. The greater the variety of assets, the more the volatility of the overall debt pool can be spread out and the risk factor reduced. Like all CDPs, in order to reduce the impact of high volatility of crypto assets, Duet also has a minimum debt liquidation line, which corresponds to the pledge rate c-ratio, and once the asset price falls below the liquidation line, the system will start the mandatory asset liquidation and auction process.

When the market price fluctuations, users can also directly use DUET casting synthetic assets to repay their debts, or used to liquidate the debts of others, to avoid last year’s 3.12 MakerDAO in the DAI in the ETH decline because of the increase in demand for debt repayment, and a price spike, with MakerDAO stable anchor module similar functions. In the recent 5.19 crash, the liquidation volume of the on-chain mortgage lending platform exceeded $600 million, including $250 million in Venus liquidation alone, and 600,000 ETH in Liquity by Wavefield founder Sun Yuchen is already in the queue for liquidation. Because of the dynamic debt position model in Duet, it can increase the use scenario of DUET, reduce the required collateral rate, and DUET fluctuations do not affect the collateral rate of debt positions will not lead to a blowout; anyone can use any synthetic asset in the system to exchange back the equivalent value of DUET, which can facilitate users to increase collateral and enhance the robustness of the system.

Likewise, as the size of Duet expands, the DUET used to destroy the synthetic assets for casting will gradually rise, leading to a rise in demand for DUETs and the formation of deflation.

Cross-chain and multiple collateral, increasing supported asset classes

MakerDAO previously only supported collateralized borrowing of Single Collateralized Dai (SAI) with ETH, and only introduced Multi-Collateralized Dai in late 2019, and has now extended collateral to LP tokens and even real assets. uniswap has also evolved from only supporting the creation of transaction pairs between ERC20 tokens and ETH in v1 to the creation of transactions between any ERC20 token The entire DeFi ecosystem is working to be as secure as possible. The entire DeFi ecosystem is introducing more and more asset classes to increase asset diversity while being as secure as possible.

In Mirror, only stablecoins in Terra and mAssets are supported as collateral for overcollateralization, and Synthetix has added the ability to collateralize ETH and WBTC to borrow sUSD in addition to SNX minting Synths, but there are still a large number of ERC20 assets that are not The ERC20 assets have not been effectively utilized.

Duet, on the other hand, will accept a wide variety of blockchain world assets as collateral to increase its asset class and allow as many project communities as possible to participate in Duet. Mith Cash also relied on this approach to achieve success at a time when algorithmic stablecoins were popular. And by adding multiple collateral, Duet can expand its own synthetic asset size in addition to expanding its visibility in the community, which facilitates the application of synthetic assets in Duet.

DeFi collateral is actually a matter of cryptocurrency credit creation, and the collateral itself has a pyramidal vertical expansion of credit layers: crypto dollars – native crypto large assets: BTC/ETH – commercial bank loans/MBS: various types of Yield Tokens – corporate liabilities: Altcoins/other LPToken, etc. The types of collateral can be expanded horizontally: i.e., expand the categories of DeFi collateral, from on-chain native assets to off-chain physical assets, bonds, certificates of deposit, stocks, loans, etc. Duet Protocol improves on both aspects, expanding horizontally + vertically at the same time.

According to the Duet Protocol whitepaper, dAsset collateral can be interest-bearing assets (e.g. aToken, yToken, LPs), native crypto assets (e.g. BTC, ETH, SNX), cross-chain PoS assets (e.g. bLuna). duet adds more high-quality assets (BTC, ETH, USDT) as collateral. including assets unique to the DeFi world (cToken, aToken, LP tokens) to achieve a broader base asset scale. Duet also accepts competitor tokens as collateral for minting dAsset, optimizing DeFi’s composability. interest-bearing assets like yToken or cross-chain generated PoS tokens can also provide Duet’s users with more substantial returns, with the user’s collateral being sent to the corresponding revenue collateral contract to earn interest.

Due to the high Gas fees on Ether, Duet also plans to deploy to at least three EVM-enabled chains this year, with ETH being the first one to be deployed, after which specific chains will be considered depending on the level of ecological support. Successful deployments on other EVM chains will also support assets on that chain, again expanding the asset classes Duet can support.

How Duet Achieves 100% Capital Utilization with a New Model of Mortgage + Calculated Stable DeFi Synthetic Assets


Duet Protocol has attracted investments from dozens of investment institutions, exchanges and individuals worldwide, including OmniLAB, Draper Dragon, LD Capital, Everest Ventures Group, One Block Capital, Moonwhale Ventures AU21 Capital, 3 Commas, Paretone Capital, Cabin VC and others, MXC Labs, Block Vision Capital (Bitwell), Foresight Ventures (Bitget) and other exchanges, and individual investors including Duet together with LD Capital will provide Muse Museum with an annual grant of $500,000 to study the potential impact of DeFi on the pricing, clearing, and custody mechanisms of traditional financial markets. At the same time, Muse Museum and Duet Protocol’s chief scientist, Prof. Yu-Yi Wang, a post-doctoral fellow at ETH Zurich, Switzerland, will conduct research and analysis of the DeFi protocol from the perspectives of algorithmic game theory and cryptography, and continue to export academic results in English and Chinese.

How Duet Achieves 100% Capital Utilization with a New Model of Mortgage + Calculated Stable DeFi Synthetic Assets

The Duet community is also deeply engaged and continues to contribute, and the overseas community is growing rapidly. As of June 11, Duet Protocol’s Twitter and Telegram followers have both exceeded 100,000, and it has received coverage from mainstream financial media such as Bloomberg, Nasdaq, and CoinTelegraph. The community has successfully held Duet MEME contest, Duet Airdrop, Duet x Drep Airdrop, Duet x CoinMarketCap Airdrop, and other events such as Duet Protocol 100 AMA, Duet X DoraHacks NFT BUIDL, Duet Daily Quizz, Muse Museum collaboration, Duet video series and other activities are underway. Next, Duet will release an advance version of “Machine Zero”, which will serve as a Beta version of Duet’s official product, undertaking the role of testing, innovation, and experimentation.

How Duet Achieves 100% Capital Utilization with a New Model of Mortgage + Calculated Stable DeFi Synthetic Assets

Compared to existing synthetic asset protocols, Duet Protocol’s hybrid mechanism of collateral + algorithmic stabilization enables a long-term deflationary model and reduces liquidation pressure caused by illiquid collateral during volatile market conditions. Currently Duet Protocol is also the first synthetic asset protocol capable of synthesizing real assets such as equities at 100% capital utilization. By introducing more asset classes and accessing more chains, Duet Protocol can expand its ecology. During the development of Synthetix and others, they have also suffered death spirals and finally succeeded, and Duet Protocol’s hybrid mechanism may achieve greater success after the test of time.

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