A real life example of trustless assets

[brianwalden]

So the combination of Nexo cutting me off and Flare's delay inspired me to go looking around the cryptoverse for other opportunities. I stumbled across the Terra Network. Its native token is LUNA. Two major dapps in its ecosystem are Anchor and Mirror. Both of them issue assets which are trustlessly backed by other cryptocurrencies. The incentive mechanisms are a little different from Flare, but the process is basically the same.

Anchor issues UST, a dollar stablecoin, by getting people to stake LUNA and then borrow UST against it. Anyone who puts staked LUNA into the pool can borrow up to 60% of its value - it sounds a lot like minting F-assets, right? Normally, you don't want to borrow that much because 60% is where you get liquidated; they call 45% "safe". Anyway, when you do this you actually create new UST, just as if you were to mint F-assets on Flare or AUR on Trustline. One interesting thing is that they actually pay you to borrow UST, but it's paid in ANC, the dapp's own token.

Mirror issues synthetic stocks - they're pegged to the stock price but there's no actual share there. New tokens are issued by putting up collateral and borrowing them. So you could, for example, put up $200 UST to borrow/mint $100-worth of AAPL stock. The interesting thing is, you're not charged anything to borrow this. You can keep it as long as you want, there's no interest. You just have to keep the collateral locked up until you pay it back. This is actually how minting F-assets works. It's an interest free loan. As long as you maintain the necessary collateral, the F-assets are yours. Whenever you decide to pay them back, you can then get your collateral back.

One interesting thought I just had is that if you borrow a synthetic stock like this but don't hold onto it (i.e. you sell it for something else), that's essentially a short. An interest free short. That means that anyone on Flare could short F-assets by minting them and then selling them.

[Guest]

As you rightly pointed out, there is a key difference between those synthetic assets on Mirror and F-Assets. F-Assets are 100% backed by actual assets. And this is why Mirror's synthetic tokens are not trustless assets, and neither are they intended to be.

Mirror's synthetic assets vs. F-Assets

• A synthetic asset simply tracks the price performance of the pegged asset. It cannot participate or influence the economic activity of the pegged asset. It only influences the liquidity and activity of the assets it is actually collateralized against.  Shorting mAAPL doesn't act as a short on AAPL. It will instead impact LUNA or whatever other assets it is collateralized on. 
• An F-Asset is an IOU, but guaranteed by software instead of a human counter-party. It's referred to as trustless because you don't need to trust the software. You can verify it because it is open source. However, it is not different from any other IOU, in its function. It does give you the ability to participate and influence the economic activity of the underlying asset. Shorting FXRP, for example, can act as a short on XRP.

DAI/AUR/UST vs. USDC/PAX

The difference between Mirror's synthetic assets vs. F-assets is sort of similar to the two broad categories of stablecoins we have. 

AUR, for example, is not a USD IOU. It tracks the performance of a USD with FLR and XRP. When more AUR is minted or redeemed, it has an affect on FLR and XRP as the underlying assets. FLR and XRP change hands. However, USD fiat is not a participant in the economic activity of AUR. 

PAX/USDC however are actual USD IOUs. USDC is backed almost entirely by fiat in various forms. PAX is 100% backed by treasuries and fiat. When there are redemptions and minting of these IOUs, there is an actual impact on USD. 

Ultimately this is why stablecoin regulation is an urgent concern for the Fed and Congress. 

• They want to make sure that stablecoins that claim to be IOUs to have the backing to support a bank run redemption. 
• They want to ensure that USD doesn't end up tracking the price of synthetic assets instead of the other way. 

[BillyOckham]

14 minutes ago, Ripley said:

Shorting FXRP, for example, can act as a short on XRP.

Please forgive my ignorance but can you explain how?  I wouldn’t have thought that possible.

[Zsc4life]

7 hours ago, brianwalden said:

So the combination of Nexo cutting me off and Flare's delay inspired me to go looking around the cryptoverse for other opportunities. I stumbled across the Terra Network. Its native token is LUNA. Two major dapps in its ecosystem are Anchor and Mirror. Both of them issue assets which are trustlessly backed by other cryptocurrencies. The incentive mechanisms are a little different from Flare, but the process is basically the same.

Anchor issues UST, a dollar stablecoin, by getting people to stake LUNA and then borrow UST against it. Anyone who puts staked LUNA into the pool can borrow up to 60% of its value - it sounds a lot like minting F-assets, right? Normally, you don't want to borrow that much because 60% is where you get liquidated; they call 45% "safe". Anyway, when you do this you actually create new UST, just as if you were to mint F-assets on Flare or AUR on Trustline. One interesting thing is that they actually pay you to borrow UST, but it's paid in ANC, the dapp's own token.

Mirror issues synthetic stocks - they're pegged to the stock price but there's no actual share there. New tokens are issued by putting up collateral and borrowing them. So you could, for example, put up $200 UST to borrow/mint $100-worth of AAPL stock. The interesting thing is, you're not charged anything to borrow this. You can keep it as long as you want, there's no interest. You just have to keep the collateral locked up until you pay it back. This is actually how minting F-assets works. It's an interest free loan. As long as you maintain the necessary collateral, the F-assets are yours. Whenever you decide to pay them back, you can then get your collateral back.

One interesting thought I just had is that if you borrow a synthetic stock like this but don't hold onto it (i.e. you sell it for something else), that's essentially a short. An interest free short. That means that anyone on Flare could short F-assets by minting them and then selling them.

The only thing I did so far is put UST on Anchor and earn 20% interest on it. So actually I could also stake LUNA, borrow UST against it and put those UST on Anchor to earn 20%? And on top of that I get ANC?

Edit: Atm I‘m playing only with Pancakeswap and earning ~90% APR. But I don‘t want to put everything on one platform. 

Edited July 24, 2021 by Zsc4life

[Guest]

22 minutes ago, BillyOckham said:

Please forgive my ignorance but can you explain how?  I wouldn’t have thought that possible.

I could be wrong, but my hypothesis has been this: 

When someone shorts FXRP, they are expecting delivery of FXRP at a lower value, which can only happen if XRP is at a lower value. It's possible that the size of XRPL market vs. the size of F-Assets market will determine how much of an impact this has. 

Whereas when someone straight up mints/redeems FXRP for XRP, XRP only changes hands between Agents and the Originators. Minor deflationary effect on FLR. Possible effect on XRP if the originator/agent is an exchange account, thereby changing available liquidity.

[BillyOckham]

8 minutes ago, Ripley said:

I could be wrong, but my hypothesis has been this: 

When someone shorts FXRP, they are expecting delivery of FXRP at a lower value, which can only happen if XRP is at a lower value. It's possible that the size of XRPL market vs. the size of F-Assets market will determine how much of an impact this has. 

Whereas when someone straight up mints/redeems FXRP for XRP, XRP only changes hands between Agents and the Originators. Minor deflationary effect on FLR. Possible effect on XRP if the originator/agent is an exchange account, thereby changing available liquidity.

Ok ta.  I have to be honest and say I don’t understand this situation or what would happen even in light of the explanation….   it’s truly beyond me.  I suppose time will tell.  Thanks for elaborating.

 

[brianwalden]

1 hour ago, BillyOckham said:

Please forgive my ignorance but can you explain how?  I wouldn’t have thought that possible.

Anytime you borrow something, you have to pay it back. You're basically betting that it will be worth less to you in the future than it is now. For example, when you take a loan for your car, you're betting that the value of the car to you over the time until you pay it back is worth more than the dollars you're borrowing to get the car.

Minting FXRP isn't necessarily a short. You can mint it because you think it will bring you other profits (F-asset rewards or trading fees if you're an agent). In that case, you're borrowing it to farm whatever yield you can get. But you don't profit on FXRP going up in value because at some point you have to pay it back.

But minting F-assets would be an interest free way to short them. You borrow against your FLR, then sell them for whatever you're long on, then later when they're worth less you buy them and unmint them.

[brianwalden]

Holy crap, when you think about it this way, debtors are short and creditors are long. That's a crazy way to view our financial system.

Edited July 24, 2021 by brianwalden