NEPRI TFA’s objective is to allow users to gain price exposure to real-world assets while:
• Maximizing capital efficiency (i.e. minimising the collateralization ratio).
• Maintaining system solvency (i.e. ensuring the value of minted synthetic assets does not surpass the value of underlying collateral).
Collateral Type
Collateral selection is the key to achieving these two objectives. Users seek exposure to volatile assets like US technology stocks. If the underlying collateral is more (or even as half as) volatile than the synthetic, the system must be vastly overcollateralized in order to avoid bankruptcy. Put simply: if a crypto-synthetics platform is collateralized by a highly volatile collateral like a floating-price crypto-asset, then the system itself is at the whim of collateral fluctuations. This can jeopardize the system’s efficacy, since users seek capital-efficient exposure to the synthetic asset itself, not the underlying collateral.
In the ideal case, the collateral asset should:
· Exhibit a low standard deviation in price over long-time frames.
· Trade in a relatively liquid market that can absorb sudden market orders without significant slippage.
Given these considerations, NEPRI opts for stablecoin as the collateral type, initially NEPRI Yield USD (nYUSD), generated by NEPRI Finance.
Collateralization Ratio
NEPRI TFA opts for a minimum collateralization ratio of 120%. In other words, for every $1 of collateral, users can mint a maximum of $0.8375 worth of tokenized synthetics. Stablecoin collateral unlocks this degree of capital efficiency, contrasting systems that rely on crypto-assets as collateral.
Leveraged Trading: Synthetic Assets As Collateral
In NEPRI TFA, users can also use the tokenized synthetic assets themselves as collateral for further minting. This allows for leveraged trades. If a tokenized synthetic is used as collateral, the minimum collateralization ratio rises to 150%.
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