Under the Hood: Synthetics, Derived Assets & Trade Accounts

THORChain’s Synthetic Assets (or Synths) were launched in Mar-2022 (https://medium.com/thorchain/activation-of-synthetics-5064e0f43301).

Derived Assets forms the basis of Lending, which was launched in Aug-2023 (https://medium.com/thorchain/lending-on-thorchain-646bbf2e6e1b).

Trade Accounts were launched in Jun-2024 (https://gitlab.com/thorchain/thornode/-/issues/1789).

Let’s learn more about them here.

Synthetic Assets (Synths)

Synths are assets on THORChain’s blockchain, backed by their respective liquidity pool (LP). Every unit of a Synth (e.g. one BTC/BTC) is backed by 50% L1 asset (BTC.BTC) and 50% RUNE in the LP. One BTC/BTC is minted from one native BTC.BTC (minus slippage) by swapping through the BTC LP, and vice-versa for the redemption. The quantity of Synths is capped at 60% of the LP depth, and thus is also capped/secured by the RUNE bonded by node operators.

Synths form the basis for Savers.

Synths were also previously used for cheap and fast arbing, since they exist on THORChain blockchain, which generally has cheaper gas fees and faster blocktimes vs the external L1 chains. With the launch of Trade Accounts (see below), Synths will gradually be phased out for the purpose of arbing.

Derived Assets

Derived Assets are also on THORChain’s blockchain, but they are collectively backed by the protocol and all RUNE holders via a burn/mint mechanism. Every unit of a Derived Asset (e.g. one THOR.BTC) is minted from one native BTC.BTC (minus slippage) by swapping through the BTC LP to RUNE, then burning that equivalent value in RUNE. Redemption of a Derived Asset reverses the process.

Currently, the main use of Derived Assets is as the backend accounting basis for THORChain’s lending. Derived Assets are not directly held nor tradable by users, but this functionality could be enabled in the future. There is no direct cap for the quantity of Derived Assets, unlike Synths; but practically, it is capped e.g. via the Lending cap.

Trade Accounts

Trade Accounts (or Trade Assets) are also on THORChain’s blockchain. Users deposit L1 assets (e.g. 1 BTC.BTC) into Asgard vaults, but they are not credited into liquidity pools. Instead, the equivalent Trade Assets (1 BTC~BTC) are minted, held in a new “Trade Module”, and credited to the user’s Trade Account. Unlike Synths or Derived Assets, there is no slippage during the conversion of L1 assets to Trade Accounts, or vice versa (there are still on-chain inbound/outbound gas fees though). Users can then trade with their Trade Account with the benefit of THORChain’s low fees and fast blocktimes.

Trade Accounts will have twice the efficiency of Synths, for the purpose of arbing. This is because Synths are 50:50 backed by the pools, while Trade Assets are 100% “pegged” to the L1.

To maintain the overall economic security of THORChain, the total L1 assets (in both the pools, and as backing for Trade Accounts) in Asgard Vaults must be kept below the Global Bond Cap, which is based on the total amount of bonded RUNE. If this cap is breached, some of the Trade Assets will be liquidated and converted into bonded RUNE.

*Trade Assets are kept in a new “Trade Module” and not directly in users’ addresses, so that they can be liquidated automatically by the protocol if security cap is breached. However, users can trade using their share/allocation of their Trade Assets held in that module.

Feel free to hop into the TC University Discord to chat about this, or any other THORChain questions that you may have.

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