Category: Web3

The White House’s press release issued last month points to a global, assertive, 360-degree take on the rapidly growing digital asset space and digital asset service providers. It covers:

●      Consumer protection

●      Affordability

●      Financial stability

●      Responsible innovation

●      Illicit finance

Further, it introduces a multi-regulator approach and places the spotlight squarely upon ensuring the stability of digital assets. For example, digital asset service providers, located anywhere, may now enter the crosshairs of US enforcers if they infringe upon a consumer located within American borders. 

While this feels like an escalation, it truly represents a leap in the right direction for the digital asset space’s advancement, stablecoins and central bank digital currencies included. The White House’s release follows the European Union’s introduction of the proposed Markets in Crypto Assets regulation (“MiCA”) in June 2022, which promotes the regulated use of stablecoins and enforces registration for digital asset service providers. 

Earlier in the same month, Japan passed a landmark bill designed to regulate stablecoins after the collapse of TerraUSD in May. An algorithmic stablecoin, Terra had relied on natural market forces, high lending rates, and partial reserves in Bitcoin to defend against a rout–without maintaining a one-for-one peg to a fiat currency such as the US dollar. 

It can be argued that this collapse kick-started and finally woke regulators up to the great potential of digital assets, stablecoin or otherwise, and to their lurking risks as well. This is what the White House means with a reference to “responsible” innovation. 

However, we cannot forget how The Bahamas passed its own landmark piece of legislation in December 2020, well ahead of the market turbulence and crypto winter. The Digital Assets and Registered Exchanges (DARE) Bill covers all facets of the digital asset sector: cryptocurrencies, stablecoins, digital asset service providers, coin exchanges, and, even, initial coin offerings. 

This article reviews the White House’s press release as part of a greater, global movement supporting the future of digital assets, and how the DARE Act already hit the mark. 

The Digital Asset Space and the White House

Inside the press release are nine key quotes or excerpts all actors in the digital asset space must pay attention to:

1. Regulators, such as the Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), should “aggressively pursue investigations and enforcement actions” against unlawful practices in the digital asset space.

2. The Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC) must “redouble efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices.” 

3. The Financial Literacy Education Commission shall lead public efforts to help consumers understand the risks involved with the digital asset space. 

4. Relevant agencies will encourage the “adoption of instant payment systems, like FedNow.”

5. Agency recommendations shall be reviewed, on whether to establish a framework to regulate non-bank payment providers. 

6. The Treasury and similar financial regulators should provide US firms developing “new financial technologies with regulatory guidance, best-practices sharing, and technical assistance.” 

7. The Department of Commerce shall establish a “standing forum” to convene all relevant public and private actors in the digital asset space to foster and coordinate ideas and growth. It shall also help US digital asset firms sell, or “find a foothold” for, their products or services in global markets. 

8. The President shall evaluate whether to call for an amendment to the Bank Secrecy Act (BSA) to explicitly include cryptocurrencies, digital asset service providers, and non-fungible tokens (NFTs). Further, he shall consider whether to amend federal statutes and permit the Department of Justice to “prosecute digital asset crimes in any jurisdiction where a victim of those crimes is found.” 

9. The Treasury is due to complete an “illicit finance risk assessment” on DeFi by February 2023, and a further assessment on NFTs by July 2023. 

When the EU Council released their MiCA, there had been an implicit hope for the rest of the world to follow their guidance on the treatment of stablecoins. While the US clearly acknowledged the need for a stablecoin framework geared foremost towards protecting consumers first, it addressed the equally clear lack of guidance pertaining to unbacked cryptocurrencies, NFTs, and DeFi. 

In other words–it sought to launch a global campaign addressing the entire digital asset space. 

Understanding America’s Framework

Points 1-3 above focus on the potential for illicit activity in the unregulated digital asset space, acknowledging costly gaffes of the past such as the fall of TerraUSD. Here, the White House states, in no uncertain terms, that it will investigate and prosecute those who seek to prey off of consumer ignorance while digital assets continue to grow and enter mainstream portfolios. 

Points 4-5 recognize and echo the founding ethos of cryptocurrencies using blockchain technology: financial accessibility. For the banked, the cost of owning, transferring, and otherwise utilizing money remains far too high as CNBC reports that the US banking system is “one of the most encumbered and heavily surveilled in virtually any Western country.” For the unbanked, traditional banks continue to present barriers to entry as the White House itself reports that “roughly 7 million Americans have no bank account.” 

Points 6-7 serve to create public-private partnerships vital to the developing digital asset space. Points 8-9 seek to provide ammunition to the necessary regulators and enforcers while providing a global reach. If a victim of illicit activity is found in Pennsylvania, for example, then there are now grounds for the Department of Justice to pursue the criminal–wherever they may reside. 

Central Bank Digital Currencies (CBDCs) 

The framework also reintroduces CBDCs into the spotlight. In this case, the prospect of a “digital dollar.” 

The White House press release reads: “It could enable a payment system that is more efficient, provides a foundation for further technological innovation, facilitates faster cross-border transactions, and is environmentally sustainable. It could promote financial inclusion and equity by enabling access for a broad set of consumers.”

This clearly echoes the reason why stablecoins exist–to provide instant, cross-border transactions, securely, and with little to no cost. 

It is worth noting that The Bahamas which is a well- regulated and progressive jurisdiction, had already launched its own CBDC–the Sand Dollar in October 2020. This was a demonstration of an early understanding of the points raised and framework foreshadowed by the White House. The Sand Dollar serves to: 

●      Provide secure transactions at much faster settlement speeds. 

●      Achieve greater financial inclusion and cost-effectiveness across all of The Bahamas. 

●      Strengthen national efforts against money laundering, counterfeiting, and other illicit activities. 

The DARE Act Did It Already

The DARE Act, which was passed by The Bahamas’ Parliament in December 2020, demonstrated how a progressive international financial center embraced innovation without compromising on effective regulation to provide the necessary guidance for the digital asset industry ahead of G7 nations.

This pioneering move and collaborative approach was an impetus for world-leading digital asset exchange, FTX, moving its headquarters from Hong Kong to The Bahamas in September 2021. In April 2022, FTX and Anthony Scaramucci’s SALT premiered their first “Crypto Bahamas” conference, bringing in many of the globe’s top players in the digital asset space, including former President Bill Clinton and former British Prime Minister Tony Blair. 

Specifically, the DARE Act provides comprehensive guidance on: 

1. Data protection.
2. Digital asset trading.
3. The registration and operation of digital asset service providers, including financial, compliance, and anti-money laundering (AML) requirements.
4. The registration and operation of digital asset exchanges, and their requirements.
5. Initial token offerings and the correct procedures for coming to market. 
6. Relevant rules, oversight powers, and sanctions designed to ensure a well-functioning digital asset marketplace. 

This is a non-exhaustive list, but covers the fundamental building blocks necessary for encouraging digital asset innovation in The Bahamas. The framework successfully competes on the world stage, as already demonstrated with the success of Crypto Bahamas. At a time when uncertainty surrounds the regulatory direction for the digital asset space, The Bahamas remains unafraid to show its expertise–backed by many decades–with financial services, compliance, and international law.

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Emmanuel O. Komolafe, is a member of The Bahamas’ Digital Advisory Panel and one of the nation’s leading governance, risk and compliance experts. Mr. Komolafe is the Chief Risk Officer of Deltec Bank & Trust Limited, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.

Businesses that effectively embrace the digital transition will prosper as the world changes. The world as we know it is about to change because of two developing technologies: blockchain and artificial intelligence (AI).

However, it’s not always clear whether these two technologies complement or compete. Are they compatible or antagonistic with one another?

How can you ensure that your company embraces blockchain and AI seamlessly?

Blockchain

A blockchain is a continuously growing digital ledger that records every transaction that has ever taken place. The continuous ledger that is made up of a “chain” of “blocks” of data are connected across a network of computers and is referred to as a “blockchain.”

The network of computers that manages the blockchain disperses data across the network, unlike a conventional database, which is controlled by a single entity. As a result, a highly secure, transparent, and immutable distributed network system is produced.

This is so that any changes or additions to the ledger don’t require simultaneous changes to all of the computers on the blockchain network, which each maintains an identical copy of the ledger. As a result, the blockchain system creates a very safe and impenetrable record of transactions.

AI

Artificial intelligence is the term used to describe computers that, through intricate algorithms built into the software, may display understanding resembling humans. AI enables organizations to develop and flourish by automating repetitive operations, improving decision-making, and streamlining procedures.

AI is computer code created to imitate and reproduce human intellect. It is a machine with human-like learning, comprehension, and response capabilities.

Machine learning (ML), a subset of AI, can fuel AI. A computer program that can “learn” and enhance its performance over time is referred to as ML. 

For instance, if an AI system can be taught to recognize pictures, it may utilize the information to figure out what a particular image is. Everything from facial recognition to comprehending customer purchase behavior may be done using machine learning.

How AI and Blockchain Work Together

Blockchain and AI can combine to address sharing economy or supply chain management issues. AI-generated data and insights may be utilized to enhance the precision and accuracy of blockchain technology and establish new levels of system trust.

While computer systems and apps utilize AI algorithms to automate processes and activities, blockchain technology serves three core purposes when dealing with these systems and applications:

• Blockchain technology is used to distribute/share the results of AI algorithms among several decentralized players, such as companies linked by a shared interbank network or a blockchain-based supply chain.

• Internet of Things (IoT) devices leverage blockchain technology in addition to artificial intelligence. IoT devices frequently employ AI-driven algorithms. Some of these gadgets are also employed as oracles, which provide blockchain networks with data from the real world.

• Some blockchain-based cryptocurrency and decentralized finance (Defi) systems utilize AI algorithms for various tasks, including cross-platform asset management and trading option suggestions.

By incorporating data from sensors and cameras, which can gather more exact data, such as the date and location of an item’s creation, AI may help blockchain become more accurate and precise. The accuracy of the blockchain record can increase thanks to the data from these sensors. In addition, demonstrating an item’s provenance and assisting in eradicating fraud can enhance user confidence in the system.

Use Cases for AI and Blockchain

Substantial potential for industry-specific integration of AI and blockchain has emerged due to the expanding use of these two technologies. While some of the opportunities are now fully tapped into, others are more likely to do so in the future. The following sectors demonstrate the greatest need for or the possibility of applying blockchain-based AI solutions.

Decentralized Finance (DeFi)

Some DeFi apps already make use of artificial intelligence by:

• Maximizing proposals for exchange trades

• Automatically putting up the best portfolios of cryptocurrency assets from several platforms

• Predicting asset rate changes to assist in the decision-making of crypto investors

Most DeFi platforms now rely primarily on individuals to make the majority of trading and investing decisions, while they offer some limited automation capability for these processes. Essentially, they provide the user with a trading interface, letting them weigh their alternatives and decide what to do.

A few Defi systems have already made technological advances in AI. For instance, the yield farming app YAI.Finance on the Oraichain platform employs AI algorithms to assist users in evaluating the risks and rewards of various investment situations and provides suggestions for the best course of action.

Banking

The following are some use cases for blockchain and AI in the banking sector:

Banks use AI algorithms to detect and identify questionable transactions as part of their anti-money laundering efforts. Blockchain technologies may be used to exchange and access the necessary information because many anti-money laundering duties involve collaboration between various banks, financial institutions, and governmental organizations.

For the onboarding of new clients, banks often implement stringent KYC (“Know Your Customer”) checks. In this procedure, AI features like picture recognition are routinely applied. Additionally, it is frequently required for banks and governmental organizations to share data, especially in suspicious circumstances. Blockchain technology may enable multiple banks and government agencies to cross-verify the relevant identification data in this situation.

One of the most popular uses of AI in banking is evaluating new clients’ credit risk. Sharing the findings of these evaluations between banks and credit score reporting bureaus can be facilitated by blockchain-based systems. In addition, to improve credit risk assessments of consumers, they can also be utilized to obtain extra information from multiple banks and reporting agencies.

Insurance

Another significant consumer of both blockchain and AI technology is the insurance sector. 

Fraud detection in claims processing. To streamline their claims processing operations—the main activity of any insurance business—many insurance companies are turning to blockchain-based solutions. Blockchain networks link various reinsurers, brokers, healthcare organizations, auto repair shops, and other stakeholders.

To identify fraudulent claims, these claims processing networks usually utilize AI algorithms. For instance, critical data is provided to blockchain-based claims systems through external oracles to verify claims. The sensors and cameras deployed on roads and AI capabilities to assess traffic and road incidents are typical examples of these oracles.

Optimal insurance plan and rate development. Insurance carriers utilize AI algorithms to predict customers’ future claims events and behaviors, much as banks use AI to evaluate customers’ credit risk. The best insurance prices and policies are created based on these projections.

The accuracy of these AI forecast algorithms may significantly increase by using blockchain technology to inject external data into them from other insurers, governments, credit reporting agencies, and healthcare providers.

Government

Government use cases for blockchain-based AI are numerous, given how often governments employ AI to fight crime, estimate economic models, develop urban settings, and offer various services to the populace. 

Inter-departmental networks powered by blockchain for identity management and delivering a range of public services. These platforms heavily rely on AI technology, such as face recognition software, to identify identity theft and provide the general public with simplified services.

Intergovernmental blockchain-based networks employ artificial intelligence (AI) to look for and find financial crimes, unauthorized human movement, and tax evasion.

AI-based blockchain land registry records are used to identify fraud in land claims. However, due to challenges in obtaining and measuring land and other country-specific factors, land register records in many nations include inaccurate and occasionally false information.

Such a register might be managed by a blockchain and AI-based system, reducing fraud. The Swedish government is now testing a solution like this for its land register database.

Retail

Supply networks for big players in the retail sector are getting more intricate. Hence, the blockchain emerges as an appealing option to hold data for transparency and optimization as these supply networks get more complicated.

Supply chains for supermarkets frequently employ AI to predict the ideal amounts of inventory and orders for the next delivery period. All the network participants involved, including farmers, distributors, resellers, and transportation firms, may plan and optimize their activity levels and operations as these projections are communicated across a blockchain-based supply chain system.

Knowing the supermarket’s anticipated order level for the upcoming buying season will be advantageous to each of these network partners for the supermarket.

Supermarkets already utilize AI imaging technology to spot rotten produce on their shelves. Retailers might reduce expenses associated with purchasing subpar food by integrating AI technology to detect inferior product quality at the source of purchase and transmitting this information over the blockchain.

The openness and accountability of original produce makers and distributors concerning delivering quality food will improve by storing this information on a blockchain-based supply chain system.

Closing Thoughts

Blockchain-based AI solutions open up a wide range of new prospects. The Defi, finance, insurance, retail, and government sectors are where AI will succeed most.

Blockchain and AI are frequently combined through sharing AI algorithm outputs on blockchain systems, using AI-enabled oracles to supply blockchain with data, and using asset optimization and prediction algorithms based on AI on various Defi platforms.

As the combined usage of blockchain and AI expands, the Defi sector should likewise experience rapid growth in intelligent automation. Platforms that offer AI-enabled automated trading and investment advice will win users away from Defi platforms that do not, as these services become the industry standard.

Disclaimer: The information provided in this article is solely the author’s opinion and not investment advice – it is provided for educational purposes only. By using this, you agree that the information does not constitute any investment or financial instructions. Do conduct your own research and reach out to financial advisors before making any investment decisions.

The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.

As you continue delving deeper into the world of blockchain technologies, you will hear about “blockchain oracles.” These oracles have no relation to the cloud application company Oracle, but they provide a way by which the decentralized Web3 ecosystem can access existing data, legacy systems, new data, and advanced computations. 

When blockchain oracles and decentralized networks are combined, they can create hybrid smart contracts, allowing for on-chain and off-chain infrastructure to support decentralized applications or DApps, that can react to real-world events and interact with traditional systems. Oracles connect a blockchain to an input or an output.

Take, for example, a sports bet between Ann and Bill. Ann bets Bill $50 that the Cardinals will beat the Steelers. Ann and Bill put $50 (total $100) in a smart contract escrow. At the game’s finale, how does the smart contract know to whom it should release the funds?  This answer requires an oracle that will obtain accurate data about the game’s outcome from an off-chain source and provide it to the blockchain securely and reliably.  

Blockchain Oracles Defined

Blockchain oracles are entities connecting blockchains to external systems, allowing smart contracts to execute based upon the inputs and outputs the oracles transfer to and from the real world.

The Oracle Problem

In general, blockchains are closed systems. The “oracle problem” blockchains have is a fundamental limitation on smart contracts. Smart contracts cannot interact inherently with data systems outside their native blockchain. Any resources that are not on the native blockchain (on-chain) are designated as “off-chain.” 

Blockchains obtain their most valuable properties by being purposely isolated from external systems.  Their properties include robust consensus of user transaction validity, the prevention of double spending, and the mitigation of network downtime. If a chain is to securely interoperate with any off-chain data or systems, an additional piece of infrastructure known as an oracle is required to bridge the two environments. 

The oracle problem must be solved because most smart contracts, especially those related to DeFi, require the knowledge of real-world data and events that happen off-chain. Oracles, therefore, expand the types of digital arrangements that blockchains can support by offering a gateway to the many off-chain real-world resources while upholding the blockchain’s valuable attribute of security. 

Many industries can benefit from combining oracles and smart contracts. This includes asset prices in finance, weather information for the insurance industry, randomness for gaming needs, IoT sensors for shipping, ID verification for governments and others, and much more.

Because the data supplied to a blockchain from an oracle will determine the outcome of any related smart contracts, it is vital that the oracle mechanism is correct and the data that the oracle is pulling from is accurate.

Decentralized Oracles

Suppose a blockchain’s oracle mechanism uses a centralized entity to deliver the data to the smart contract. In that case, this introduces a single point of failure, which defeats the entire purpose of utilizing a decentralized blockchain. Additionally, if the oracle goes offline, then the smart contract will not have access to the required data for its execution, or it may execute incorrectly due to stale data. 

Worse still, if the single oracle were to be corrupted, the data that was being delivered to the smart contract could be incorrect and may result in improper execution and bad outcomes, the epitome of garbage in, garbage out. Also, because a blockchain’s transactions are executed automatically and are immutable, a smart contract supplied with faulty data could not be reversed, and the escrow funds could be lost permanently. This single point of failure is why centralized oracles cannot be utilized for smart contract applications.  

Overcoming the oracle problem and a single point of failure requires using decentralized oracles, which prevent data manipulation, data inaccuracy, and downtime. Decentralized Oracle Networks (DONs) extend the decentralized nature beyond the blockchain from end to end. 

What’s more, some DONs, like Chainlink’s Price Feeds, have a three-layer decentralized system:

1.    From the data source

2.   The node operator

3.   Oracle network levels

This system further ensures the elimination of any single point of failure. It has been successfully used to secure tens of billions of dollars across smart contract ecosystems, using the multi-layered decentralized approach, resulting in smart contracts that can safely rely on the data inputs provided to execute.   

Blockchain Oracle Types

Because there is an extensive range of off-chain data sources, blockchain oracles come in several varieties. Hybrid smart contracts not only need various types of off-chain data and computations, but they also require different delivery mechanisms and security levels. Each oracle will conduct a combination of the following four tasks required of the off-chain data:

·       Fetching

·       Validating

·       Computing 

·       Delivering

Input Oracles

The most common and widely recognized oracles utilized today are known as “input oracles,” which fetch data offline from the real world, then deliver it to the on-chain network for use by smart contracts.  Input oracles are used to provide off-chain financial market data to on-chain DeFi smart contracts to execute correctly.  

Output Oracles

Working in the opposite direction to input oracles are output oracles. These oracles allow smart contracts to send commands to various off-chain systems, which will cause the execution of certain actions. 

Such actions include informing a banking network to make or release a payment, informing a storage provider that items can be released, or that supplied items or data can be stored. At a slightly more complex level, an IoT system could be informed to unlock a rented vehicle that was paid for using an on-chain car rental service. 

Cross-Chain Oracles

The third type of oracle is a cross-chain oracle, which can read and write information carrying it between different blockchains. Cross-chain oracles are the key to enabling interoperability, allowing for the movement of data and assets between separate blockchains. 

Moving such data from one blockchain can trigger an action on the other, or assets can be bridged across the chains so that they can be used outside of the native blockchain where they were issued.  These oracles may be the bridge to wider crypto acceptance.

Compute-Enabled Oracles

The newest type of oracles, becoming more widely utilized for smart contract applications, are computer-enabled oracles. These oracles secure off-chain computations to provide decentralized services that are unworkable on-chain due to technical, legal, or financial constraints. 

Services such as off-chain computation on Aglorand and Keepers on Chainlink can automate running smart contracts when predefined events occur, such as Zero-Knowledge Proofs (ZKPs) where one party can prove to another that they have the knowledge about a piece of information without having to reveal that information, or by running a verifiable randomness function which provides a provably fair tamper-proof source of randomness beyond the control of a smart contract.  

Hybrid smart contracts can be constructed with advanced capabilities by using multiple oracles.

Oracle Reputations

Because there are so many choices, finding an oracle service with a strong reputation is critical when deciding which one to use. Blockchain oracle reputation systems allow users and developers to monitor and filter through oracles, based on the parameters they believe are essential. An oracle’s reputation is aided by the fact that oracles sign and deliver data to a blockchain’s immutable public ledger, allowing for the historical performance to be reviewed and provided to blockchain users through interactive dashboards like reputation.link and market.link.

Such reputation frameworks provide each oracle network and node (oracle) operators accuracy and reliability. Developers can then make an informed decision as to which oracle they want for their smart contracts. 

Oracle Use Cases

Smart contract developers can build more advanced Dapps using oracles, giving them a more comprehensive range of use cases for on-chain applications. There are potentially an infinite number of use cases with each new oracle added, but the following are the most common:

Decentralized Finance (DeFi)

A large swath of the decentralized finance (DeFi) ecosystem requires the use of oracles to access financial data (markets and assets). Decentralized money markets, for example, use price oracles to determine a user’s borrowing capacity and check if the user’s positions are undercollateralized and require liquidation. Likewise, synthetic asset platforms will use price oracles to peg the value of their tokens to real-world assets, while automated market makerswill use price oracles to concentrate liquidity at the current market price improving capital efficiency.  

Gaming and Dynamic NFTs

Non-financial use cases can be enabled through oracles such as on-chain gaming, which can use verifiable randomness to create unpredictable and more engaging gameplay for users, like the appearance of prizes or a randomized bracket during a tournament. 

Oracles can also be applied to smart contracts such as dynamic NFTs (Non-Fungible Tokens) that can change their appearance, value, or distribution, depending on external events like the time of day, the weather, or by completing a task in gaming. What’s more, computer oracles can be used to generate verifiable randomness that is then used by a project to assign random traits to an NFT or for selecting the lucky winner when a high-demand NFT is dropped.  

Insurance

Insurance smart contracts use inputs from oracles to verify the occurrence of an insurable event during the claims processing period by accessing physical sensors, APIs, satellite images, and legal data. Insurance smart contracts also use output oracles to make payouts for claims using other blockchains or for linking to a traditional payment service.  

Enterprises

The use of cross-chain oracles provides enterprises with a secure bridge between chains, a blockchain middleware that allows them to connect backend systems to any blockchain network. This structure allows enterprise systems to read and write on any blockchain and perform complex logic operations deciding how best to deploy assets and data for recipients on the same oracle network. 

The result: enterprises work quickly, joining blockchains in high demand and swiftly creating support for any smart contract services desired by users. 

Sustainability

Oracles play a critical role with sustainability by supplying smart contracts with environmental data from IoT and similar sensors, satellite images, and machine learning computations. This data enables smart contracts to dispense rewards to those that conduct reforestation initiatives or participate in conscious consumption. By extension, oracles also support the carbon credit process that is intended to offset a company’s climate change impact. 

Closing Thoughts

Oracles extend the capabilities of blockchain networks and the smart contracts running on them, providing access to several off-chain data stores and resources. These can be harnessed to create advanced, hybrid smart contracts whose use cases can now go far beyond simple tokenization and transfer of value. 

Much like how the original Internet brought forth monumental change, democratizing data and how it is exchanged, hybrid contracts powered by oracles are redefining how the world economy should function. 

Disclaimer: The information provided in this article is solely the author’s opinion and not investment advice – it is provided for educational purposes only. By using this, you agree that the information does not constitute any investment or financial instructions. Do conduct your own research and reach out to financial advisors before making any investment decisions.

The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.

Like NFTs, one of the new hot topics in the DeFi space is synthetic crypto assets or tokens. We will introduce these new players in a quick and efficient way, explaining why there is so much buzz behind them, and tell you the important things you need to know about this promising digital asset sector.  

DeFi Is Here

Decentralized finance (DeFi) is turning the financial and monetary worlds on their heads. While many DeFi products and services appear familiar, such as exchanges, borrowing, lending, and swaps, blockchain tech’s transparent and open nature means that we can move into a completely novel terrain.  

When we look at the lending space, we are able to see how DeFi is bringing a financial paradigm switch in the form of synthetic assets. These novel creations, which are sometimes referred to as “synths,” are blockchain-based cryptocurrency derivatives. Synths act and feel like traditional derivatives but are not at all ordinary.  

What Are DeFi’s Synthetic Crypto Assets?

Even with their futuristic-sounding name, synthetic assets are not a difficult concept to understand.  At their core, synthetic assets are just derivatives set up on a blockchain.  

Imagine that a particular derivative’s value is tied to another asset’s value via a contract. In this case, we can trade the movement of the derivative’s value using financial products such as futures or perpetuals.  

How do synths differ from traditional derivatives like futures?

Synths are possible because of smart contract technologies. Rather than using contracts to create the chain that binds an underlying asset with the derivative product, synthetic assets will tokenize the relationship. Tokenization means that the synthetic asset can impart exposure to any asset no matter what it is and no matter where it is, all from within the crypto ecosystem via a smart contract.  

In short, a synthetic asset is just a tokenized derivative that mimics the value of another asset. Smart contract tech allows developers to create these synthetic assets and then trade them on blockchains. Synthetic stocks represent shares that generally trade on the Nasdaq or NYSE, but synths can trade on a blockchain-based exchange.

Imagine you want to trade in Saudi Aramco stock which is only on the Saudi stock market and has restrictions for foreign ownership. Only the most significant foreign investors may buy Saudi stocks directly, so non-billionaires can only find exchange-traded funds (ETFs) focused on Mideast investments. 

Using a synth, you could trade $sSAR (synthetic SAR) instead, which behaves like its underlying asset, tracking its price with data oracles like Chainlink. Oracles are entities connecting blockchains to external systems, providing accurate data, thereby enabling smart contracts to operate efficiently. 

Synthetic’s Advantages

Derivatives were a groundbreaking change to finance, with their ability to unlock additional value through volatility. However, blockchain-based synthetics could take liquidity access to a new level.

Here are the primary advantages that synthetic assets can provide to the markets beyond traditional derivatives. 

Issuable by anyone. Crypto-based synthetic assets can be minted by anyone through open-source protocols like Synthetix or Mirror. Synthetix already has over $289 million in assets locked in its protocol.

Global liquidity. Synths could be traded on any crypto exchange, including the unregulated, decentralized exchanges.

Borderless transfers. Synthetic crypto assets are similar to ERC-20 tokens on the blockchain, and you can send or receive them with standard cryptocurrency wallets.  

Frictionless exchange. Owners are able to switch between synthetic equities, synth metals, and other digital assets like NFTs without having to hold the underlying asset.  

Liquidity pool farming. Synth securities can participate in yield farming, or the ability to generate a yield on a synth position by contributing a quantity of the native crypto to liquidity pools. A liquidity pool is a quantity of cryptocurrency locked in a smart contract.  

In general, synthetic assets allow for much more liquidity between global exchanges, swapping between protocols via bridges.

The Tokenization of Anything 

The closer we look at synthetic crypto assets, the more pronounced their power becomes. They can be utilized to represent anything, not just traditional equity assets. 

Any asset can be represented as a synthetic asset token and then be brought to the blockchain space.  This ability to tokenize anything means that synthetic assets can unlock an infinite number of pools for global liquidity. Beyond the simple trading of synthetic assets, synths can create possibilities for a wealth of new markets. 

A Novel Synth

A synthetic asset token can be created to track the corporate CO₂ emissions found in an industrial zone. When the emissions rise, the token holders (city officials, outside speculators, locals living close by) will profit as the offending companies issue CO₂ tokens. 

However, if the emissions decrease, then the companies will benefit by retaining their tokens. In the long run, this incentivizes companies to continually reduce their CO₂ emissions. This is just a simple example of how synthetic asset-based markets that are not currently in place can expand the opportunities for new types of value creation.

Understanding the Mirror and Synthetix Protocols

Synthetic crypto assets are already trading in ways most would find familiar, making these new assets more approachable to anyone with experience trading equities or cryptos.  

Synthetix.io. This is the most well-known decentralized synthetic asset exchange protocol. Users can mint, exchange, and provide liquidity to a vast array of new assets.  

Mirror.finance. Despite its start by a centralized company, Mirror is a decentralized synthetic asset protocol capable of creating and exchanging fungible tokens that follow and cross chain assets’ prices. 

Users of Mirror and Synthetix trade stocks like Amazon, Apple, Tesla, and Twitter as easily as they could on any centralized trading platform, such as WeBull or Robinhood. But users can do much more than what is possible with those platforms. 

Oracles provide real-time data. The target asset price is provided by an oracle enabling the synthetic asset to track the underlying asset’s value accurately. 

Users mint (create) new assets. They will deposit collateral in the form of SNX for Synthetix and UST for Mirror. This collateral is used to back the newly minted asset with a tangible value.  

Users trade synthetic assets. Traders can utilize the liquidity pools of Synthetix or Mirror to trade synthetic asset derivatives such as mETH (mirrored Ethereum), sUSD (synthetic USD), or popular equities like mGME (mirrored Gamestop). These are trading pools that are always open. There is no blocking of stock purchases or short sales, like what happened with Robinhood and Gamestop.  

Minters gain liquidity creation rewards. These are provided through the exchange-traded assets that a minter creates. Meaning, they are paid in the native asset for the protocol (i.e., MIR or SNX).

New Synthetic Asset Exchanges

The synthetic trading space is expanding quickly, though Mirror and Synthetix are the oldest and the market leaders. There are several up-and-coming exchanges throwing their hats into the ring. 

UMA is creating synthetic assets for Web 3.0. It calls itself an “optimistic oracle and dispute arbitration system” intended to securely bring arbitrary types of data on-chain.  

Linear Finance calls their synths “liquid assets,” having the same value as other assets simulating commodities, cryptos, and other digitally structured products.

Balanced DAO is the finance system found on the ICON network backed with ICX tokens.

Deus.Finance is the marketplace of decentralized financial services providing synth trading infrastructure on Ethereum. They have also created a “Version 2” that includes minting DEI, or a cross-chain stablecoin.

Closing Thoughts

When looking at the world of finance, cryptos comprise only a tiny portion. Synthetics are able to tap into the broader market and provide services that the traditional stock exchanges cannot. These assets are growing in popularity, and in the United States, they remain highly regulated. 

This growth is being led by “Synth Funds” that follow ETFs, such as an S&P 500-following ETF. The possibility of additional liquidity and borderless transferring makes these new products highly sought after. They have the potential to permanently change the financial trading landscape.

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.