Shadows Network: A Synthetic future on Polkadot
Shadows is a decentralized protocol for issuing, trading, lending, and borrowing synthetic assets, built using the Substrate blockchain framework — compatible with the Polkadot ecosystem.
Synthetic assets are tokenized derivatives of real assets. They track the price performance of stocks, fiat currencies, commodities, indices, or cryptocurrencies without owning the underlying. Synthetic assets have become one of the most popular defi use cases, providing global accessibility to diverse markets while retaining privacy protection, asset safety, and free circulation. As a result, synths are set to disrupt the trillions of dollars in the traditional derivatives space, with the market leader, Synthetix, already accounting for over $2 billion in total locked value.
Shadows aims to take that a step further, not only to provide an alternative to the traditional derivative market, but to expand on offerings from predominantly Ethereum-based platforms. Shadows Network is building out an innovative, scalable, and interoperable cross-chain solution that can challenge the likes of Synthetix and compete for value locked in this rapidly expanding niche.
How Does It All Work?
Synthetic assets on the Shadows Network are underwritten by the native DOWS token and issued by locking DOWS collateral into a smart contract. DOWS supports a wide range of synthetic assets such as stablecoins (xUSD), cryptocurrencies (xBTC), and financial products (xGOLD, xTSLA). Due to the cross-chain nature of Polkadot, the Shadows Parachain will also support cross-chain asset synthesis and trading, opening the door to new markets and users.
Shadows Network consists of three main modules: the synthetic asset issuance agreement, the synthetic asset transaction agreement, and the debt collateral lending agreement.
Synthetic Asset Issuance Agreement
Shadow synthetic assets are secured by the underlying value of the DOWS, which the user pledges into a smart contract to create a synthetic asset, incurring a DOWS denominated debt. To unlock the DOWS, the user is required to destroy the synthetic asset to settle the debt.
Any synthetic asset needs to meet a DOWS collateral ratio of 800%, below which the collateral cannot be redeemed. Platform versions will also support BTC, ETH, DOT, and other cross-chain collateral with a minimum collateral ratio of 180%.
Synthetic Asset Transaction Agreement
Shadows Network utilizes a unique debt pool design mechanism. Trading of synthetic assets is essentially a transfer between debts. Shadows smart contracts automatically execute the conversion of one synthetic asset to another without an order book, counterparties, or the problems of liquidity and trading slippage, allowing synthetic assets to trade simply, safely, and efficiently.
As a result, it is possible to trade an asset without actually holding the underlying, reducing friction and allowing quick exchange between different types of assets such as Tesla shares, gold, and bitcoin.
Debt Collateral Lending Agreement
Shadows Network utilizes a lending pool where users can place debt, such as xUSD, into a lending pool smart contract for lending out. The borrower pledges the synthetic asset debt, such as xTSLA, into the lending pool, pays interest, and receives a loan of xUSD due to the need for flexible funding liquidity.
There is an automatic balance between supply and demand in the lending pool rates and the interest earnings generated are allocated in proportion to the xUSD lent in the lending pool.
The current market leader in decentralized synthetic assets is Synthetix. Synthetix also enables tokenized derivatives for many underlying assets donated by “s,” for example, sUSD, sAU, or sTSLA. Collateral is predominantly posted in SNX and ETH, with limited functionality for sUSD and renBTC tokens added more recently. Therefore, it still restricts users to assets from the Ethereum ecosystem, rather than providing full cross-chain compatibility.
SNX stakers benefit from two types of reward incentives: exchange fees from the Synthetix DEX and SNX staking rewards generated through an inflationary monetary policy. In comparison, DOWS also provides holders with staking rewards, plus transaction rewards from fees, collateralized lending rewards, synthetic assets issuance rewards, and system governance rights. Shadows also implements a destruction mechanism for DOWS from transaction and pool fees, automatically executed by the smart contract in a deflationary process.
Outside of a brief foray into EOS, Synthetix is determined to solely focus on the Ethereum ecosystem, as confirmed by founder Kain Warwick. The Synthetix team believe this is preferable to a dilution of focus. Others would suggest that scalability and interoperability are now key given the extreme level of gas fees on the Ethereum network that is hampering defi usability for all but the most wealthy participants.
If Ethereum 2.0 can fully deploy to scale the system fast enough, they may be right, though evidence from the past has often disappointed in this regard. So if history repeats, a scalable and interoperable alternative like Shadows’ Polkadot Parachain, set for launch in Q2, could disrupt the current leading platform and open up the space to a new world of cross-chain asset synthesis and trading.
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