Interview: Shadows COO Explains How Synthetic Assets Unlock Finance
Ted Shao is the COO and co-founder of Shadows Network. As one of the few decentralized platforms that aims to bring traditional assets—such as TSLA, gold, or USD—accessible to everyone, Shadows is gaining serious attention throughout the DeFi space.
Yet the project is still young, and remains unknown by many. Due to this situation, The Tokenist reached out to the Shadows team for an interview, to take a deep-dive into Shadows, synthetic assets, and the DeFi space in general. Ted Shao, the COO of Shadows, was more than happy to participate.
The following is the result of our conversation.
Tokenist: Hi Ted, thanks for taking time out of your busy schedule to speak with us. The DeFi spaces continues to evolve at a rapid pace, with significant potential to disrupt the world of traditional finance. Of course you’re aware of this—especially when it comes to synthetic assets. We’re very excited to dive into this nascent type of asset, how it works, and how the Shadows Network facilitates such a transformative process. But first, for those who are maybe unaware—how would you describe the Shadows Network?
Ted: To describe Shadows Network, short version, Shadows Network is a synthetic assets protocol built on Polkadot Substrate. Long version, Shadows Network is an underlying network for issuing, trading and also, lending decentralized synthetic assets. We aimed at bringing more financial investment options to the DeFi space, and becoming the backbone of web 3.0 that will enable the free trading of on-chain assets by anyone, anywhere.
As we all know, derivatives are contracts whose value is derived on a financial asset which include instruments like currencies, commodities, stocks, and market indexes. They allow market participants to either mitigate risk (hedge) or assume risk with the expectation of reward (speculation).
As for Shadows, we bring smart contracts to the big picture. Our derivative products allow market participants to trade on real assets without actually holding them. They are contracts whose value is derived on a financial asset which include fiat currencies (xUSD, xEUR), crypto currencies (xBTC, xETH), commodities (xGold, xOil), stocks (xTesla, xAAPL), and market indexes (xDJIA, xCOMP).
Tokenist: From my understanding, synthetic assets are—in essence—a representation of the price action of a real-world asset, such as a stock. The price action becomes tokenized and tradeable through a collateralized digital asset. Is that correct?
Ted: Correct. Synthetic assets are smart contracts which are minted on-chain in the form of debt. These contracts follow the price action of the real asset.
Tokenist: When you say “in the form of debt”, what exactly does that mean? Where does the debt come from, and how is it settled?
Ted: First, to explain the concept of “debt”, let’s take the example of real estate mortgage as an analogy. It’s very common in our daily life, right? People mortgage their house to the bank and borrow money. Before they return the money, that amount of money exists in the form of debt. Likewise, in the synthetic assets generation process, the user must collateralize DOWS to generate xUSD with a collateralization rate above 800%. xUSD can be xUSD itself, but also can be sold to other synthetic assets such as xTSLA, xGOLD. These assets are essentially debt.
When the user wants to exit the system or reduce the debt and unlock the DOWS collateral, the debt must first be paid off. For instance, If a user collateralized DOWS and minted 10 xUSD, when he/she wants to redeem DOWS, he/she must pay off the 10 xUSD first. If the debt pool size fluctuates during the collateral period and the individual debt changes, the user will need to pay off more or less debt than 10xUSD!
In a nutshell, on Shadows, market participants must meet DOWS collateral ratios before minting any derivative contract. When a derivative is minted, debt is added to the system which needs to be paid off before collateral can be released. Since the derivatives are following the price action of real assets, the debt amount is changing relatively to those price changes. In general, when the positions of the underlying assets are out-performing the rest of the market, the amount of overall debt is reduced and the participant is rewarded. Vice versa.
Tokenist: Let’s say I have some ETH and want xTSLA. Could you walk me through the process of going from ETH to xTSLA via Shadows?
Ted: Great question! At the outset, the transition process will be ETH-DOWS-xUSD-xTSLA. Later in the future, we may support ETH-xUSD-xTSLA.
Tokenist: What are the benefits of trading a synthetic stock, as opposed to a real-world stock?
Ted: Shadows network is committed to making contributions to the DeFi space. From our perspective, the future economy should be more fair and transparent. Shadows network is such a decentralized network. It’s not controlled by a small group of people, instead, can be governed by DOWS holders.
Tokenist: So, I guess what you’re saying is that the recent stock trading scenario with several brokers imposing trading restrictions on certain securities would not be possible via synthetic stocks on Shadows. Is that correct?
Ted: This is correct, as long as that particular stock trading is not completely stopped on the market and there is still a way for Shadows to request the real time price data of those stocks.
Tokenist: What mechanism is used to correlate a synthetic asset’s value to the value of its corresponding real-world asset?
Ted: We will utilize best-source oracle services by asset class. For example, one of our partners is Kylin Network, a Polkadot project & cross-chain platform powering the data economy. We will leverage their platform’s data analytics RESTful API tools, for near real-time asset prices.
Tokenist: Which digital assets can be collateralized via Shadows?
Ted: We will start with DOWS. It DOWS will be the initial and core collateral of the system. Then BTC, ETH, DOT will come next.
Tokenist: Are there any fees associated with transactions conducted via Shadows? Are there any incentives for users to hold Shadows’ native token, DOWS?
Ted: Yes. DOWS staking will be rewarded by transaction fee redistribution and governance participation.
Tokenist: Is there any privacy pertaining to both user identity and transactional data from transactions powered through the Shadows Network?
Ted: Shadows Network is decentralized, no user identity data will be stored anywhere.
Tokenist: What about transactional data? We all know that Bitcoin is decentralized, for example, but plenty of transactional data is permanently stored on Bitcoin’s blockchain. What sort of transactional data is stored in virtue of using the Shadows Network?
Ted: Transactional data will be stored on the underlying public chain, such as Polkadot network, Binance Smart Chain, Ethereum, etc. Depends on which blockchain the Dapps will be based on.
Tokenist: What mechanism does the Shadows Network use to ensure the collateralized asset will sufficiently cover a rise in value of its corresponding synthetic asset? What happens when the value of a synthetic asset exceeds the value of the collateralized asset?
Ted: Great question. On Shadows, The user must collateralize DOWS token to cast any synthetic asset, creating a DOWS-denominated debt that earns DOWS as incentive when the user maintains the collateralization ratio above 800%.
This over-collateralization mechanism ensures that the synthetic asset is sufficiently collateralized against significant price changes. Once the collateralization ratio falls below 800%, the user will not receive DOWS bonus, and will not receive a transaction fee bonus until the collateralization rate is restored. Meanwhile, the collateralized DOWS will not be redeemable and the user has to adjust its collateralization rate by destroying some of its synthetic assets or replenishing its DOWS.
Tokenist: Can different synthetic assets be traded via Shadows? If so, how does the debt model work to facilitate such trading? It would be great if you could provide an example.
Ted: To trade between different synthetic assets, users will have to go from synthetic asset A to xUSD first, then to synthetic asset B.
Tokenist: There are several other platforms that facilitate the trading of synthetic assets, such as Synthetix, Mirror Protocol, and Injective Protocol. Synthetix is largely the leader, with over $2.5 billion in total value locked (TVL) at the time of writing. What does Shadows Network offer that makes it different from existing synthetic asset platforms?
Ted: We aim to be competitive by differentiating our product offerings and building on networks that give users a better experience with low fees and reliable, fast, and secure transactions.
To make the answer more straightforward, allow me to share a chart here:
Tokenist: What does the Shadows Network’s current timeline look like?
Ted: The Shadows project is focused foremost on quality product and market competitiveness. We see a number of new technologies emerging and are evaluating ones that give us a strategic competitive advantage. One of them is Binance Smart Chain, which is live, scalable, and gaining mass traction. We are evaluating their technology, with other various work streams in the pipeline.
What are your thoughts on the Shadows Network? How long before synthetic assets see mainstream popularity? Let us know in the comments section below.