Practical Examples & Currency Risk Mitigation

For example – Trade Opening

1. Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B requires $1000 worth of sySPY (S&P500 stock index) @ $100 per share

2. Assume 1 ETH = $1000

3. Collateral Ratio is 0%

4. Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B deposits 1 ETH ($1000) into Synfy smart contract. Address is quoted price range. Address takes price range.

5. Synfy will notify the order is being filled (this can take anywhere between 10 seconds to 20 minutes depending on market liquidity at the time)

6. Synfy converts the 1 ETH ($1000) into stablecoin e.g. Tether, USDC or FIAT (USD) to pre-empt cover order with counterparty link and lock in the USD price.

7. Synfy hedges the underlying offchain for $1000 – via its various counterparty links and internal liquidity

8. Synfy notifies address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B that order is complete

9. Synfy issues 10 tokens of sySPY to Mary ($1000 / $100)

10. Synfy posts to blockchain confirmed order event with counterparty ticket data

For example - Trade closing (no price change)

1. Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B requests to sell $1000 worth of Xspy (S&P500 stock index) @ $100 per share – by sending back 10 tokens of sySPY

2. Assume 1 ETH = $1000

3. Collateral Ratio is 0%

4. Synfy will notify the order is being filled

5. Synfy sells underlying offchain for $1000

6. Synfy notifies address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B that order is complete

7. Synfy burns the 10 tokens of sySPY

8. Synfy issues USD stablecoin of $1000 to Address (Tether, USDC, syUSD or FIAT) 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B to lock the USD P&L.

Outcome scenarios:

· Assume The price of S&P500 has now risen to $110 (+10%)

o Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B now can swap back the 10 tokens of sySPY at $110. And receive $1100 back + any original collateral minus any costs.

· Assume The price of S&P500 has now fallen to $50 (-50%)

o Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B now can swap back the 10 tokens of sySPY at $50. And receive $500 back + any original collateral minus any costs.

Currency Risk:

Assume market is extremely volatile and collateral ratio is set to 200%

Assume Synfy settles back in ETH. The examples below demonstrate the problems with this.

· Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B deposits 1 ETH ($1000) into Synfy smart contract + 1 ETH as collateral to purchase S&P500 as above. Total of 2 ETH ($2000)

· Assume The price of S&P500 has now risen to $110 (10%)

· Assume 1 ETH = $1500 (Ethereum has appreciated relative to USD)

· Synfy liquidates the 10 shares of S&P500 with counterparty at $110 = $1100

· Synfy converts back the $1100 at 1 ETH = $1500 = 0.7333 ETH

· Synfy converts back the $1000 collateral cover at 1 ETH = $1500 = 0.6666 ETH

· Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B now can swap back the 10 tokens of XSPY at $110. And receive 0.7333 ETH back + original collateral of 0.6666 ETH = a total of 1.4 ETH. Worth $2100. Note they deposited 2 ETH and got back 1.4 ETH due to the appreciation – and realise the currency gain.

In the example above, Synfy will always settle back $2100 in stablecoin - (Tether, USDC, syUSD or FIAT). Leaving the choice to the user to convert back to ETH. The above example was to demonstrate the problems and complexity with settling back in the user deposit currency in ETH.

This can be corrected to:

· Assume The price of S&P500 has now risen to $110 (10%)

· Assume 1 ETH = $1500 (Ethereum has appreciated relative to USD)

· Synfy liquidates the 10 shares of S&P500 with counterparty at $110 = $1100

· Synfy converts back the $1100 at stablecoin - (Tether, USDC, syUSD or FIAT).

· Synfy converts back the $1000 collateral cover at stablecoin - (Tether, USDC, syUSD or FIAT).

· Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B now can swap back the 10 tokens of XSPY at $110. And receive the FIAT value back + original collateral in stablecoin - (Tether, USDC, syUSD or FIAT). Worth $2100. The choice is up to the user if they wish to convert the $2100 to ETH which would total 1.4 ETH.

Ethereum depreciation

· Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B deposits 1 ETH ($1000) into Synfy smart contract + 1 ETH as collateral to purchase S&P500 as above. Total of 2 ETH ($2000)

· Assume The price of S&P500 has now risen to $110 (10%)

· Assume 1 ETH = $800 (Ethereum has depreciated relative to USD)

· Synfy liquidates the 10 shares of S&P500 with counterparty at $110 = $1100

· Synfy converts back the $1100 at 1 ETH = $800 = 1.375 ETH

· Synfy converts back the $1000 collateral cover at 1 ETH = $800 = 1.25 ETH

· Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B now can swap back the 10 tokens of XSPY at $110. And receive 1.375 ETH back + original collateral of 1.25 ETH = a total of 2.625 ETH. Worth $2100. Note they deposited 2 ETH and got back 2.625 ETH due to the depreciation.

In the example above, Synfy will always settle back $2100 in stablecoin - (Tether, USDC, syUSD or FIAT). Leaving the choice to the user to convert back to ETH. The above example was to demonstrate the problems and complexity with settling back in the user deposit currency in ETH.

This can be corrected to:

· Assume The price of S&P500 has now risen to $110 (10%)

· Assume 1 ETH = $800 (Ethereum has depreciated relative to USD)

· Synfy liquidates the 10 shares of S&P500 with counterparty at $110 = $1100

· Synfy converts back the $1100 at stablecoin - (Tether, USDC, syUSD or FIAT).

· Synfy converts back the $1000 collateral cover at stablecoin - (Tether, USDC, syUSD or FIAT).

· Address 0x1D1479C185d32EB90533a08b36B3CFa5F84A0E6B now can swap back the 10 tokens of XSPY at $110 And receive the FIAT value back + original collateral in stablecoin - (Tether, USDC, syUSD or FIAT). Worth $2100. The choice is up to the user if they wish to convert the $2100 to ETH which would total 2.625 ETH – and realise the currency loss.

Mitigation

Actual Currency risk can be mitigated by the user purchasing the equivalent synthetic syUSD of $2000 or simply an off-chain position in USD/ETH.

It is also the reason why Synfy purchases the asset using a stablecoin like (Tether, USDC, syUSD or FIAT). and returns the closing trade back as (Tether, USDC, syUSD or FIAT). – thus, leaving the user to choose when to convert back to ETH and realize any losses or gains.

Burning

In all cases where sy-<TOKEN> is swapped back, the amount of sy-<TOKEN> is burned.