Synthetix V3: Collateralized Debt Positions (CDPs)

December 20, 2023

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Introduction

Collateralized Debt Positions (CDPs) are a basic element of many DeFi protocols, together with Synthetix. They permit customers to deposit collateral and borrow in opposition to it, making a system of over-collateralized loans. This text delves into the intricacies of CDPs, their real-world examples, how they perform in different DeFi protocols like MakerDAO, and their implementation in Synthetix V3.

What’s a Collateralized Debt Place?

A Collateralized Debt Place (CDP) is a monetary association the place a consumer deposits an asset (the collateral) into a sensible contract and receives a mortgage within the type of a stablecoin or one other asset. The mortgage is over-collateralized, which means the worth of the collateral is bigger than the worth of the mortgage. This over-collateralization ensures that the mortgage is all the time totally backed, even when the worth of the collateral decreases. If the worth of the equipped collateral falls under the liquidation ratio, the collateral is liquidated to settle the generated debt.

Actual-World Examples

An actual-world instance of a CDP is a mortgage. While you take out a mortgage to purchase a home, the home serves as collateral for the mortgage. For those who default in your mortgage funds, the financial institution can seize the home to recoup its losses. On this case, the home is the collateral, and the mortgage is the debt place.

CDPs in Different DeFi Protocols: MakerDAO

MakerDAO is among the most well-known DeFi protocols that make the most of CDPs. In MakerDAO, customers can deposit Ether (ETH) as collateral to mint DAI, a stablecoin pegged to the US greenback. The deposited ETH is locked in a Vault, MakerDAO’s model of a CDP. If the worth of the deposited ETH falls under a sure threshold, the Vault may be liquidated, and the ETH is bought to make sure that all excellent DAI is totally backed.

Collateralized Debt Positions in Synthetix

In Synthetix, CDPs are applied and used by a system of vaults, swimming pools, and markets. Customers deposit collateral into vaults and delegate their collateral to swimming pools, which in flip generate stablecoin credit score in opposition to this collateral to offer liquidity to varied markets. This technique permits Synthetix to facilitate the creation of a variety of onchain monetary merchandise.

Within the V3 iteration, customers deposit governance-approved collateral into vaults to generate sUSD, the Synthetix ecosystem stablecoin. Drawing parallels, a V3 vault resembles MakerDAO’s and Liquity’s CDP. Synthetix, nevertheless, allows CDP homeowners to delegate collateral to swimming pools, serving to to gas by-product markets for merchants.

LPs delegate their collateral to swimming pools, which act as pooled CDPs, offering liquidity to markets and enabling builders to generate liquidity for onchain monetary merchandise. These markets then generate charges, benefitting LPs. Pool homeowners govern the liquidity distribution to markets. For example, the Spartan Council Pool would use governance SCCPs to determine liquidity distribution throughout markets.

V3’s markets, with liquidity from swimming pools, facilitate the creation of onchain derivatives. As soon as delegated liquidity, markets can entry sUSD, fostering a liquid surroundings for buying and selling. By taking part in well-designed markets with appropriate charge buildings, liquidity suppliers can earn buying and selling charges.

Instance Markets: Perpetual Futures (like Synthetix Perps), Choices (like Lyra), Spot (like Spot Synths), Insurance coverage, Lottery (like Pool Collectively), and so forth.

Liquidations

When the collateralization ratio of a specific liquidity place drops under the liquidation collateralization ratio for its corresponding collateral sort, the place could also be liquidated. When this happens, the collateral and debt related to the place are distributed amongst the entire different liquidity positions taking part within the pool with the identical collateral sort pro-rata (after a set quantity of the collateral is supplied to the liquidator, sometimes a bot, as an incentive).

Anybody can verify if a liquidity place may be liquidated with the isPositionLiquidatable perform. If this perform returns true, then the place could also be liquidated with the liquidate perform. The tackle calling the perform will obtain liquidationRewardD18 per the getCollateralConfiguration perform (or the entire place’s collateral whether it is lower than this quantity).

Borrowing sUSD in Synthetix: Curiosity-Free Loans

One of many distinctive options of Synthetix is the means for customers to borrow sUSD in opposition to their collateral with out having to pay any curiosity or issuance charges. It is a vital benefit over different DeFi protocols, which regularly cost curiosity on loans.

In Synthetix, customers can deposit any ERC-20 token authorized by the Synthetix governance right into a vault. As soon as the collateral is deposited, customers can mint sUSD as much as the collateralization ratio set by the governance. The minted sUSD can be utilized inside the Synthetix ecosystem or traded on different platforms.

The absence of curiosity or issuance charges makes borrowing sUSD in Synthetix significantly enticing. Nonetheless, it is vital to notice that whereas there are not any direct charges, there are dangers related to borrowing. If the worth of the collateral falls under the liquidation ratio, the place may be liquidated, and the collateral may be bought to cowl the debt.