Introducing the Aspen Protocol

We are excited to announce the development of the Aspen Protocol, a community-driven DeFi solution for creating synthetic assets on Avalanche. Similar to existing projects on Ethereum and Terra — namely Synthetix and the Mirror Protocol — Aspen will provide users with the ability to issue and trade assets that mirror the price of off-chain assets (e.g. equities, commodities, and non-ERC20 cryptocurrencies) at any time of the day. Beyond simply creating a clone of Synthetix or Mirror, we aim to improve upon these protocols in terms of both their safety and their cost for minting synthetic assets. Our ultimate goal is to increase the utility of the Avalanche blockchain and grow the Avalanche ecosystem through capturing real-world asset values on-chain.

Project Links

• Litepaper: https://docs.aspenprotocol.org
• Discord: https://discord.gg/BwQR7VV3kM
• Twitter: @AspenProtocol
• Website: https://aspenprotocol.org
• Github: https://github.com/aspen-protocol/ (private except for the website; all code will be made public before launch)

Background

Synthetics protocols on the Ethereum and Terra blockchains have been successful in their ability to bring real-world asset values on-chain. At the time of writing, the Mirror and Synthetix protocols have locked up $1.84bn and $1.29bn respectively, while new projects like UMA continue to grow the space. These protocols increase the utility of their respective blockchains by making it possible for smart contracts to operate on assets outside of just cryptocurrencies. Avalanche is exceptionally well-suited to hosting a synthetics protocol due to the lower latencies and lower costs associated with transactions on its C-Chain as compared to Ethereum, and we believe that a synthetics protocol will be an essential piece of the Internet of Finance. In this article we provide a light introduction to the Aspen Protocol. For a more detailed description please see our litepaper (https://docs.aspenprotocol.org).

Minting an aspnAsset

At its core, a synthetics protocol is responsible for creating synthetic assets that are backed by some real-world value. In the context of blockchains, synthetic assets are usually backed with cryptocurrencies in the form of collateral. Synthetics protocols typically set a minimum collateral ratio (e.g. 150%) that must be met in order to mint a synthetic asset. The collateral is locked in the protocol until a user burns synthetic asset(s) equivalent in value to what they minted.

We illustrate this process with the following example:

1. The price of $AMZN is $100 at time t0.
2. Alice puts up 175 DAI as collateral to mint 1 synthetic $AMZN (at a collateral ratio of 175%) using a protocol that has a minimum collateral ratio of 150%.
3. The 175 DAI is now locked in the synthetics protocol and Alice is free to trade or hold the synthetic $AMZN that she minted.
4. At any time t1, Alice may burn 1 synthetic $AMZN to unlock her 175 DAI. (Equivalently, she may also burn any other synthetic asset(s) worth the same value in USD as 1 synthetic $AMZN at t1).

This process largely defines how synthetic assets (or aspnAssets, e.g. aspnTSLA) are minted under the Aspen Protocol. In addition to the minting process outlined above, the Aspen Protocol also sets collateral ratios on a per-asset basis depending on the risk and volatility of the underlying asset. These collateral ratios can also change as a function of the size of our liquidation reserve, which we describe in a subsequent section. Both of these features allow us to fine-tune collateral ratios to be as low as possible for the assets minted under the protocol while still maintaining safety against protocol under-collateralization.

Minters will also be rewarded with ASPN governance tokens to incentivize individuals to mint synthetic assets. Minting assets is essential for providing liquidity, which in turn helps guarantee that assets can be purchased and sold on the open market. This is critical in order for minters to be able to establish their long and short positions by instantly selling the assets they mint as well as for ensuring that assets can be purchased by the liquidation reserve for burning when needed. At the outset of our protocol only well-established stablecoins will be accepted as collateral for minting.

aspnInvAssets and Synthetic Asset Swaps

To support minters who wish to take long positions, the Aspen Protocol will natively support the creation of synthetic assets that track the inverse price of a real-world asset, which we will call aspnInvAssets. Furthermore, the protocol will allow individuals who hold synthetic assets (either aspnAssets or aspnInvAssets) to convert them into their inverse for a small fee (e.g. 0.3%). By guaranteeing this market price conversion between inverse assets, the Aspen Protocol will peg both assets to each other thereby providing arbitrage opportunities should their prices diverge too much on external exchanges.

The following example illustrates how such a swap would work:

At time t0:

• GME price is $100; inverse GME price is (1/$100) = $0.01
• Collateralization ratio is 150%
• Alice mints 1 aspnGME using 200 stablecoins as collateral

At time t1:

• GME price is $125; inverse GME price is (1/$125) = $0.008
• Alice believes the price will continue to rise so she decides to swap positions
• Alice calls the Aspen smart contract to swap her aspnGME for invGME
• The contract burns Alice’s 1 aspnGME worth $125
• The contract mints Alice 15,625 invGME (assuming no swap fee) worth $125
• Alice is still over-collateralized because the dollar value of her invGME is the same as the dollar value of her aspnGME, which had 160% collateralization at the time of the swap.

This logic can also be extended to enable users to swap between any two synthetic assets for a minimal fee with zero slippage. In the previous example, you can simply swap invGME for any other aspnAsset or aspnInvAsset to illustrate how users can use the same collateral to back any synthetic asset worth the same amount in USD. All of these swaps will generate fees worth a governable percentage of the swap (initially set to 0.3%), which will be distributed to users holding the Aspen Protocol’s governance tokens.

Liquidation Reserve

The liquidation reserve is a pool of tokens that are delegated to the Aspen Protocol for the sole purpose of liquidating collateral when a synthetic asset’s value rises above the liquidation threshold. Having access to this pool of funds guarantees that we can liquidate a certain percentage of our collateral at a moment’s notice, which is crucial for improving safety. Furthermore, we can proactively set collateral ratios as a function of our liquidation reserve, which should enable us to set lower collateral ratios when the size of our liquidation reserve increases (and vice versa).

Depositors who fund the liquidation reserve are rewarded with a fraction of all liquidation bonuses on a pro-rata basis. Additionally, depositors earn distribution rewards in the form of the Aspen Protocol’s governance token ASPN to reflect the fact that their deposits are essential to keeping collateral ratios low. Because governance tokens also entitle their holders to a share of the fees generated by synthetic asset swaps, depositors can be viewed as investors seeking safe returns in the form of liquidation bonuses and swap fees. At the outset of our protocol the liquidation reserve may not be in place, in which case we will ensure our protocol’s safety by maintaining larger collateral ratios until the reserve is functional.

Summary

We are excited to announce the development of the Aspen Protocol and believe that a community-driven synthetics protocol will make a great addition to the Avalanche ecosystem. Beyond simply cloning an existing solution, we believe that we can make novel contributions to the synthetics space on blockchains and create a protocol that is first-in-class. We hope to share more details on issues such as our protocol, tokenomics, and governance as we approach our release which is targeted for Q4 of 2021. In the meantime, please see our litepaper and join our Discord to stay abreast of all announcements and updates.

About Aspen and Avalanche

Avalanche is a decentralized, EVM-compatible network which operates using a leaderless consensus protocol, enabling the use of dapps with low gas fees and near instant transaction finality. Aspen leverages the Avalanche network in order to provide its users a frictionless experience when it comes to issuing and swapping synthetic assets on a decentralized platform. Moreover, Aspen takes measures to ensure that the protocol stays collateralized, ensuring the health of its system of synthetic assets through the ups and downs of the market.