Synthetic Tokens

How Synthetic Tokens work on UMA's platform.

What’s a Synthetic?

Synthetic tokens are collateral-backed tokens whose value changes depending on the tokens’ reference index. In the example above, our uGAS’s reference index is the 30 day median gas price. Synthetics are created by depositing collateral into a smart contract and minting tokens backed by that collateral.

Some examples of synthetic tokens include:

  • Synthetic real-world assets (eg: gold or Tesla stock price)

  • Synthetic cross-chain cryptoassets

  • Tracking tokens for various non-tradable indices

Some of the most creative ideas for synthetic tokens fall in the last category. Check out the discussion on Discord for more project ideas like:

  • Tokens that track the future usage of DeFi projects (e.g. assets locked in Uniswap)

  • Tokens that track the number of downloads of a Chrome extension (e.g. Metamask)

  • Tokens that track the success of trade ideas on r/WallStreetBets

By changing the price identifier of a priceless synthetic token, you can create synthetic tokens that behave like tokenized versions of other derivatives, like options.

Priceless Synthetic Tokens

The first type of priceless contract developers can use on UMA is for creating synthetic tokens.

Priceless synthetic tokens are synthetic tokens that are securely collateralized without an on-chain price feed. These tokens are designed with mechanisms to incentivize token sponsors (those who create synthetic tokens) to properly collateralize their positions. These mechanisms include a liquidation and dispute process that allows tokenholders to be rewarded for identifying improperly collateralized token sponsor positions. The dispute process relies on an optimistic oracle, the UMA DVM, to settle disputes regarding liquidations.

To ensure that the rewards for liquidations and disputes are economical (i.e. worth the gas/transaction cost to liquidate or dispute), deployers of this financial contract template can set a minimum sponsor size. This is the minimum number of tokens that a token sponsor must have created against the contract. Any action that would reduce a token sponsor's position to below this threshold is disallowed and will revert. This includes partial liquidations that leave the sponsor's position smaller than the minimum size, token redemptions that bring the position below the minimum size, and new position creations that request to mint fewer than the minimum number of tokens.

Launching a Priceless Synthetic Token

To launch a new type of synthetic token for which an existing market does not yet exist, the synthetic token’s smart contract needs to be be parameterized and deployed.

By using UMA's priceless synthetic token contract template, developers can easily deploy a new synthetic asset by defining a few key parameters and using an approved UMA contract factory. Some parameters to highlight are:

  • Token’s price identifier (the price feed this token should track)

  • Token expiration timestamp

  • Token collateralization requirement (e.g. a synthetic token must have collateral worth at least 120% of the price indentifier’s current value)

This tutorial will show you how to parameterize and deploy the smart contract for a new synthetic token from the command line.

UMA's Expiring MultiParty (EMP) contract template#

One can write priceless financial contract templates to create various kinds of financial products. The first contract template created on UMA enables creating expiring synthetic tokens, called the ExpiringMultiParty (EMP) contract. This is only the first example of a synthetic token implementation, and is by no means restrictive on the types of synthetic tokens that could be built on UMA's infrastructure.

These are ERC-20 tokens whose required backing collateral is determined by the value of a price identifier. There is no on-chain price feed for the values of the price identifier;token sponsors, liquidators and disputers monitor the value of this price identifier off-chain to determine how much collateral needs to be maintain. If token sponsors are improperly collateralized, liquidators can liquidate token sponsors’ positions. Disputers then verify these liquidations, and ultimately will send a price dispute to the UMA DVM if there is a disagreement on a token sponsor's under-collateralization status. Details on these mechanisms are available here.

Additional Resources

Here are some additional resources to better understand how the priceless synthetic token contract works: