Pascal explained how Synthereum protocol enables 0-slippage swaps with deep liquidity and scalability.
Disclosure: This article was sponsored by Jarvis
Hello! What’s your background, and what are you working on?
My name is Pascal Tallarida, and I am the founder of the Jarvis Network. I started trading Forex 15 years ago when I was 19 and ever since then my life has revolved around it. I fell in love with Ethereum when I understood that smart contracts could replace and improve the brokers and exchanges I have been using or working with before.
Jarvis Network is a set of protocols on Ethereum and Polygon to make DeFi more accessible. Synthereum, our first protocol, allows for the issuance and exchange without slippage of synthetic fiat currencies (aka the jFIAT). The way the protocol works solves the issues met by other stablecoins: jFIATs keep their peg, are highly liquid, composable and scalable while remaining extremely capital-efficient!
These features remove all the friction to develop an ecosystem of protocols and applications that ease the users on-boarding and journey!
How does Synthereum solve the issues met by other stablecoins?
The Synthereum protocol design enables a highly capital-efficient 0-slippage on-chain Forex exchange (on-chain FX) for its stablecoins: users can swap $100 worth of jFIATs for 100 USDC and vice versa, at a price provided by the Chainlink’s oracle. This on-chain FX feature alone solves the peg, liquidity, capital-efficiency and scalabiity issue met by other stablecoins, and enables multiple use cases…
- Strong peg
The on-chain Fx enabled by the protocol is basically a primary market where jFIAT can be bought or sold at the real market price given by the Chainlink’s oracle and without slippage. This naturally provides a strong peg to jFIATs, even on secondary markets, since traders could easily perform arbitrages.
Eventually, jFIATs are over-collateralized with USDC; USDC does not bear technical risk and has a limited market risk; and the low volatility of Forex pairs lower considerably the risks of a jFIAT being under-collateralized or under-capitalized.
As such, jFIAT are stable and have a low-risk profile, and were carfeully designed to do not fall into any regulatory framework. Thanks to that, Mt Pelerin, a self-regulated Swiss company, has launched recently the very first fiat on and off-ramp for our synthetic Euro, Swiss Franc and British Pound on both Ethereum and Polygon. To celebrate the launch, the protocol treasury is subsidizing the on and off-ramp fees, to provide a 0-fee 1:1 fiat gateway for a limited time. The solution is available on their non-custodial wallet.
- Deep liquidity and scalability
The on-chain Forex exchange makes Synthereum’s jFIAT highly liquid and scalable: any jFIAT, from day 1, can be exchanged for any tokens, without being listed on any AMM.
To achieve this, our on-chain liquidity router contract (OCLR) combines, in a single transaction, a on-chain FX exchange, to swap any jFIAT for USDC at the Chainlink price, and an AMM swap to swap USDC for any token.
For example, to swap $20,000 worth of jGBP for AAVE, the OCLR will first swap the jGBP for 20k USDC on Synthereum, and then will swap the USDC for AAVE using Uniswap on Ethereum or Quickswap on Polygon.
Since there is no slippage between jFIAT and USDC, jFIAT inherit from the same liquidity and therefore price impact as USDC’s. Leveraging from the latter network effect, it allows to connect any jFIAT to the entire crypto liquidity, from day 1! This allows the launch of mainstream stablecoins like EUR or CHF, or uncommon like PLN or SGD, on any chain where USDC is deployed and liquid enough!
Another consequence of this feature is that it can help other stablecoins to achieve the same results, thanks to similar asset pools like Curve or Uniswap v3. For example, in a EUR pool, other euro-stablecoin would be able to be swapped for jEUR to inherit from its fiat or crypto liquidity gateway. A jCAD-CADC or jSGD-XSGD pools would add a Canadian and Singapore dollar fiat on and off-ramp to our jCAD and jSGD, through CADC and XSGD, while helping the latter to access a deep liquidity.
These pools enable an interesting business case for our jFIAT since they allow to generate yield through trading fees and liquidity mining, enabling multiple yield-bearing stablecoins. The trading fees are coming from arbitrages and what we could call “utility ramp swap” (swapping one asset for another one to access its feature such as a fiat gateway); this ensures a sustainable yield, along with the yield a money market could generate.
Another sustainable yield can come from having AMMs pools. Even though we have a 0-slippage primary market, there is value in having a concentrated liquidity AMM pool to serve several us cases. There will be constant arb between AMM and Synthereum to maintain the peg on these AMMs, which will generate trading fees.
How does the 0-slippage exchange work?
As explained above, the on-chain FX capabilities is responsible for all Synthreum features. The exchange is not performed by an AMM, but rather by a liquidity pool with minting and burning capacities.
The liquidity pool only holds USDC, supplied by liquidity providers. Whenever someone wants to buy jFIAT, the pool uses its liquidity to mint jFIAT without interest or fee, and sell them to the buyer at the price provided by Chainlink’s oracle, without slippage.
For example, if someone wants to buy for $100 worth of jFIAT, the pool will mint them by depositing 125 USDC of collateral, and will sell them for 100 USDC to the buyer. Since it happens within the same transaction, a clearing happens: instead of the pool having to spend 125 USDC to mint the jFIATs, and then sell them for 100 USDC, the pool only spends 25 USDC; somehow, the pool sells the jFIAT before it is minted, and uses the result of the sale, to which it adds 25 USDC, to mint the jFIAT with 125 USDC of collateral, and then sends them to the buyer.
When someone wants to sell jFIAT, the pool receives the jFIAT and burns them to retrieve the collateral. Part of the collateral is used to buy back the jFIAT from the user.
It is extremely capital-efficient: 25 USDC provides enough liquidity to buy $100 worth of jFIAT and no liquidity is required in order to sell. The pool capital-efficiency parameter could be changed to adapt to the market dynamics and the pool global collateral ratio (CR); it could, for example, lowers its required CR to 110% for minting jFIAT. Therefore only 10 USDC of liquidity would be enough to mint $100 worth of jFIAT.
Another protocol, Synthetix, also features 0-slippage trade, how do you differentiate?
There are many differences, but I think there are two major one: first, using USDC as a base token has way less friction and risk than using sUSD, and then, for the liquidity providers, Synthereum can generate a higher yield and is less risky.
First, because of its highly capital efficient design: in Synthereum, each $1 deposited by a LP is used to back from $4 to $10 worth of synthetic assets. So when a trade worth $1,000 occurs, with a fee of 0.1%, the LP is actually generating 0.4% to 1% on the top of their engaged capital; in Synthetix, or in Mirror, the liquidity requirements for LPs are very high and therefore the yield is lower. In addition to that, an upcoming release will allow to deposit the idling USDC collateral into Aave and to redistribute all the interests to LPs; this would allow them to earn interest on a capital 5 to 11 times bigger than what they have engaged.
Then, because of easier risk management: in Synthereum, the collateral being USDC, and the trades being only related to Forex, it is simpler to manage the risk and exposure. It is especially true when comparing cross-asset class trades: both Synthetix and Synthereum allows for EUR <> BTC trading, but in Synthetix SNX stakers (who happen to be the LPs of the system) have a short exposure on Bitcoin, that has to be managed; on Synthereum, the same trade may have more slippage, but thanks to the OCLR contracts, the wBTC are bought from an AMM, so the LP are only the counterparty of the EUR <> USD trade, and therefore have a EUR short exposure, which is far easier to manage. Not to mention that in Synthereum, each jFIAT has its own liquidity pool, and therefore LP can decide for which assets they are comfortable with providing liquidity.
And what is the role of your token then?
Before answering this, l would like to say that we have mainly spent time building the protocol, and we will now start to spend time working on our token-economy, with the goal of growing the JRT utility, yield and value.
For now the Jarvis Reward Token (JRT) is used for voting, but the end goal is that all the stakeholders of Synthereum should stake JRT:
- Traders should stake JRT to reduce trading fees.
- Liquidity providers should stake JRT to align their interests with the protocol.
- Governors should stake JRT to participate in the governance of the protocol.
Staked JRT (stJRT) would generate staking rewards (either through inflation or buyback, depending on what the governance vote for, and/or through rewards slashing mechanism ala Ellipsis) and would be used either for collateral to borrow jFIAT, or to be vested, ala CRV, to further reduce the trading fees, boost the yield or increase voting power. Eventually it can play a role in a NFT roleplay game.
What is your roadmap?
First we need to launch our multi-LP system to help us scale! For now, there is only one liquidity provider, and this has limited us a lot. We would need to attract 10 to 50M USDC in our liquidity pools.
Then we need to expand to more chains to reach out to more communities and users.
Then we of course need to add more assets, especially in some niche markets such as XAF, PLN or PHP. Alongside these niches, deploying assets which already exist in a tokenized version, and therefore with a fiat on and off-ramp, is also very important and strategic in order to increase the number of jFIAT that can generate yield.
Finally, to have more integrations: in aggregators like Paraswap (especially because Paraswap is integrated into Metamask, Ledger, Argent etc.), trading and gaming protocols, crypto cards, and more fiat on and off-ramp solutions and of course more wallets.
The latter shows that our real ambition is to provide Synthereum as a DeFi-As-A-Service backend for allowing wallets, exchanges, and fiat gateways to perform any trades with any stablecoins and earn yield in one-click with them.
What’s your position on the regulatory landscape today?
We need regulation to protect investors from human greed and failures. Banks regulators are regulating bankers, not banks; bankers are humans who can make mistakes, willingly or not. Regulation is always here to create a framework to create trust and avoid conflict of interests and transparency between all the parties.
Autonomous finance, like decentralized one, aims at providing this framework: trust, transparency, fairness. It does not need regulation because unless the contract has been developed by a malicious actor to purposely steal funds, contracts are not evil, they are just pieces of code.
What is needed is an independent group of security researchers, financed by Gitcoin for example, and by anonymous donation, who could labelise contracts (from low risk to high risk), and more education to educate the users on the risks DeFi and smart contract pose. Eventually this group would “translate” into human-readable language, these smart-contract for allowing anyone to understand the rules of the protocol they interact with.
If we can self-organise ourselves, educate users, clearly display all the risks on each dApp, and labelise contracts, we can send a strong message to regulators and avoid a direct conflict with them.
On our side, as I stated it above, we have carefully designed Synthereum so it does not fall under an existing regulatory framework. It won’t fall into an upcoming one either if we make sure that the protocol is sufficiently decentralized.