Topic：Shadows-Synthetic Assets Power Trillion-Dollar Markets
Guest: Iror Chen（Shadows CEO）
Host: first of all, let’s welcome our guest Iror Chen. Please introduce yourself briefly.
Iror Chen: I first knew Bitcoin in 2013 and was attracted by its technology and decentralized idea. I kept learning new knowledge about cryptos and officially entered this field in 2015. Since then, I’ve been involved in projects like blockchain games, airdrop tools, and blockchain wallets. I’ve also led a community that focuses on sharing and learning blockchain knowledge. Last year I founded Shadows. Our team members are mainly distributed in China and the United States; they have many years of experience in the crypto field. Thanks again for Lichang’s invitation. Today I’d like to discuss about a subfield in DeFi: synthetic assets.
The following is the main content of the AMA:
Host: please briefly introduce Shadows
Iror Chen: Shadows is a protocol for issuing and trading synthetic assets. It’s a protocol, not an exchange. In the future, Shadows will be deployed on multiple chains and support cross-chain assets and synthetic assets. Similar to MakerDao, Shadows allows users to lock collaterals to create a synthetic asset, or to redeem collaterals by burning the synthetic assets. To trade on Shadows, you do not need a direct counterparty. Basically, what you are doing is converting one type of synthetic asset into another, automatically executed by smart contracts.
Host: Shadows Beta has been publicly tested on BSC testnet for one month. What’s the current status? Can you tell us when the official version is expected to be released?
Iror Chen: the reason why we choose to test on the BSC is that the development environment and infrastructure of BSC are ready to use, so the deployment cost and testing cost are relatively low. Since we launched the public test, we have collected dozens of feedback from the community, regarding UI interface, interaction design and smart contract bugs. I would like to take this opportunity to express my gratitude to all of our community members, especially to those who actively participated in the testing and submitted suggestions. Thank you very much for your continuous support. The main purpose of this public test is to collect feedback of user experience and identify bugs in the smart contract, which helps us optimize our product. We are currently fixing bugs and improving the product based on community’s suggestions. At the same time, we are also developing a variety of cases for internal testing purposes. Those who with development experience should know that the workload of writing test cases is almost like developing a brand new system. The reason for spending so much time on public and internal tests is that we try our best to ensure the safety and stability of Shadows system. Pursuing development speed only is irresponsible to users. After this round of public test and internal test, we will commission a reputable third party to audit the smart contract. Then we will choose an appropriate timing to release the official version. It is expected to be in Q3 for now.
Host: we noticed that members in the Shadows telegraph community are very curious about Prism — the Shadow parachain project. What is the current status of Prism? Could you share something with us?
Iror Chen: while we are working on the synthetic assets protocol for Shadows, we are also developing a substrate-based parachain, known as Prism. You can imagine the overall development workload of our team is quite heavy. We define Prism as a scalable DeFi computer, with which we hope to reduce the development difficulty, development cost and deployment difficulty of the DeFi application. At present, the underlying framework of Prism and the EVM (Ethernet virtual machine)-compatible smart contract are already built. More functions are about to be developed next. I am aware that some of our community members want to know whether Prism will participate in the bidding for Kusama and Polkadot slots. We have plans to bid for slots, but not now. We hope Prism can really provide value and meet the market demand, so we are not in a hurry to participate in any auction. Prism’s current focus is to improve the function and realize the vision of scalable WiFi computer, introduce more DiFi applications and developers to the Polkadot ecosystem, allowing Prism to become one of Polkadot ecology’s DeFi infrastructures. So there is not much difference in obtaining a slot sooner or later. Once Prism is ready and the time is right, we will participate in auctions. Even if we don’t win any auction by then, we will use relay-chain to communicate with the Polkadot mainnet.
Host: we noticed an interesting phenomenon, that is, in the field of DeFi, many projects choose to do collateral lending, decentralized trading, stable-coin exchange and yield aggregator. It seems that there are relatively few projects focusing on synthetic assets. What do you think the reason(s) might be?
Iror Chen: before we launched Shadows, we did an in-depth research on DeFi. This question needs to be analyzed from two perspectives. First, from a technical point of view: among various DeFi applications, implementing synthetic assets is relatively challenging. For example, it took us a lot of time to develop the debt pool. The lines of code for the debt pool are even longer than what you need to develop a decentralized exchange. Second, from a market point of view: we need to consider who will trade synthetic assets. The answer is likely to be the future users of blockchain, while synthetic assets may not have a huge demand at the moment. In El Salvador, the country recently made Bitcoin legal tender, 70% of the its residents do not have a bank account. When those people know how to use a blockchain wallet, if they want to make investments in the stock or the commodity market, they can just purchase the associated synthetic assets without having open any account in banks or stock exchanges. No paper work, no review needed, and perhaps no tax. At present, there are still about 2 billion people in the world without a bank account; so when blockchain technology is popularized, we will see an explosive growth in the demand for synthetic assets. Therefore, the market of synthetic asset is still at a very early stage.
Host: what distinguishes Shadows from other synthetic asset projects? What are the strengths of Shadows?
Iror Chen: most of the DeFi applications rely heavily on liquidity. When users convert digital asset A into digital asset B, there must be sufficient liquidity to complete the transaction. The biggest advantage of Shadows is that when users issue and trade synthetic assets, liquidity is not a barrier. In other words, the system has unlimited liquidity. When users exchange synthetic asset A for synthetic asset B, they only need to interact with the smart contract, not with a counterparty. Shadows is not very different from other synthetic asset projects. It’s just like in the field of decentralized exchange, SushiSwap, Uniswap and PancakeSwap are basically the same, but these projects are doing well because they really meet the users’ demand and the market has enough niches to accommodate multiple decentralized exchanges. The same is true for synthetic asset projects. Synthetic asset is still in its early stage with lots of potential. I’m sure multiple synthetic asset Dapps will have a bright future.
Host: there have been some discussions in the blockchain industry regarding how to get assets on chain for a few years. Why do you think synthetic assets can solve this problem? Are there successful cases in the field?
Iror Chen: in DeFi, the most successful case of synthetic assets so far is DAI, created by MakerDao. DAI’s current circulating market value reaches ~5.2 billion dollars. MakerDao generates a new synthetic asset DAI by collateralizing cryptos. The price of DAI is anchored with the real US dollar (i.e. one DAI equals one US dollar), which means they achieved circulation of US dollar on chain. In the past, we thought that registering real assets through centralized institutions could be a solution. However, we have not seen successful cases yet. The appearance of synthetic assets reveals a new possibility to us. Moving assets onto blockchain can be indirectly achieved through crypto collaterals that are pegged to real world assets. This can bypass centralized institutions, making the whole process more efficient and transparent.
Host: recently, several countries warned Binance; compliance has thus become a major concern. Do you think there are legal risks in the issuance and trading of synthetic assets?
Iror Chen: let’s still use the DAI example. DAI is issued by the Maker protocol with a total supply of 5.2 billion dollars. When users collateralize their ETH to issue DAI, the whole process has nothing to do with issuing or trading real US dollars. Rather, it is just an automatic execution of the smart contracts. Since users are only interacting with smart contracts, there are virtually no legal issues. Another example is trading synthetic stocks. Suppose that a user buys synthetic stocks with synthetic stable coin. What happens is that synthetic stable coin is converted into synthetic stocks by smart contract execution on the blockchain; the process doesn’t have any impact on stocks in the real world. It’s just that the prices of synthetic stocks are pegged to the real stocks.
Host: we know that synthetic assets are still in an infant stage from our discussions above. Can you share your views on the future of synthetic assets? Under what circumstances would people want to trade and hold synthetic assets instead of real assets?
Iror Chen: we are now able to move real assets onto blockchans through synthetic assets and circulate those assets around the globe with no borders. So who will trade synthetic assets? I think people who are prevented from making investments due to all sorts of trading barriers will be most interested. This applies to people who have and do not have a bank account. We have touched on people without a bank account in the example of El Salvador above; they are facing multiple trading barriers. Here let’s talk about people with a bank account; they have their own trading barriers. For instance, Philippine residents can’t trade American or European stocks without opening an account in the United States or in Europe. This trading barrier could make those people lose some great investment opportunities. However, with a crypto wallet, they will be able to trade global financial assets. Holding synthetic assets rather than real assets has its pros and cons. The disadvantage is that the holders are not eligible to rights such as earning dividends in the case of stocks. However, there are also aspects that real assets cannot compete with synthetic assets: synthetic assets can be circulated around the globe in real time without borders, without paying taxes and without any censorship.
Host: NFT is quite hot this year, and its market performance is quite impressive. Does Shadows have any plan related to NFT? What do you think about the rise of NFT?
Iror Chen: NFT is a new type of crypto asset. It is also a protocol and a technical solution. I think there are bubbles in the current NFT market — simply because NFT is hyped, some people chase the trend without a clear understanding of the field yet. Of course, this is a quite common phenomenon in virtually all emerging things. I’m personally optimistic about the future of NFT and I think its market size will reach trillions of dollars. Shadows still focuses on synthetic assets. However, our team has been paying close attention to the development of the industry and learning from others. We are in close contact with some NFT tech teams; we often discuss the possibility of implementing synthetic NFTs, which could increase the liquidity of the NFT market.
Host: we all agree that keeping users’ assets secure is the most important thing. How does Shadows protect users’ assets?
Iror Chen: DeFi users are all aware of the risks associated with flash loans, contract loopholes and hacker attacks. The security of the Shadows system is our top priority. Shadows’ public test on BSC may take longer than other projects. We welcome feedback from the community in this open and transparent way. At the same time, we are writing test cases to thoroughly check the system and identify as many bugs as possible. The effort we spent on testing is almost like developing a new product. Before the official release of the product, we will commission a professional third party to audit the entire set of smart contracts to ensure the safety and stability of our product. We value quality more than speed. We firmly believe making solid progress more important than being fast in the long term.