Examples of The Crafting Finance SDP and trading model
1.Sharing Debt Pool
Once a user minted some synthetic assets, the assets can be put into the sharing debt pool (SDP), and the user will be assigned a fixed debt ratio which is the ratio of the value of the user’s synthetic assets to the value of all synthetic assets in the entire system. “Fixed” means this ratio will not change due to changes in asset prices, and will be used to calculate the user’s profit and loss. This ratio will only change when a new user mints new assets or an existing user destroys existing assets.
Bellows are three examples to illustrate how we calculate every user’s debt ratio.
Example 1: Assuming that there are only two users in the system, A and B, A and B each generate rUSD worth $100 after collateralizing a certain amount of CRF, that is, the system generates a total of $200 rUSD. At this time, the debt ratio of user A is 100/200=50%, and the debt ratio of user B is also 100/200=50%.
Example 2: Immediately following Example 1, suppose another new user C joins and newly generated rBTC worth $200. At this time, the total assets of the system are rUSD $200 and rBTC $200, which is a total of $400. Therefore, the debt ratio of users A and B is adjusted to 100/400=25%, and the debt ratio of new user C is 200/400=50%.
Example 1 illustrates the generation of debt ratio in the initial state of the system, and Example 2 illustrates how new users will affect the re-division of debt ratio. What follows is an example of a more general situation.
Example 3: Assume that the entire system has generated a synthetic asset of $100K, and now a new user X has joined and generated a synthetic asset of $100. Then the debt ratio of user X is 100/(100+100000)=0.0999%. Suppose that there was an old user A whose debt ratio was 0.2%. After X is added, the debt ratio of user A becomes 0.2%×100000/(100+100000)=0.1998%. By analogy, we can calculate the change in the debt ratio of all users.
2.How to calculate profit or loss
Bellows are two examples to illustrate how we calculate profit or loss using SDP trading mode.
Example 4: Assuming two users A and B, A generates $100 rBTC, and B generates $100 rUSD, the respective debt ratio is 50%, and the total system debt is $200. Suppose the price of BTC rises by 50%, so the value of rBTC held by A becomes $150, and the value of rUSD held by B is still $100. At this time, the total system liability becomes $150+$100=$250. Note that because the debt ratio has not changed, A’s debt is $250*50%=$125, and B’s debt is also $125. Therefore, it can be calculated that the profit or loss of A is $150-$125=$25, and the profit or loss of B is $100-$125=-$25. The sum of all users’ profit and loss in the entire system is 0, which is similar to a traditional contract trading system. It should be noted that although B did nothing after generating rUSD, he/she still lost money due to the increase in the price of BTC. This is because rUSD is generated, which by default is equivalent to becoming a long position in the U.S. dollar (in this case, it is also equivalent to a short position in BTC)! We define this loss as “crafting loss”.
Example 5: Suppose that following the assumption in example 4, now A holds $150 rBTC, and B holds $100 rUSD. Now suppose that there is a new user C, who generates rUSD of $100, and calculates the new debt ratio. Note that the total debt of A and B is now $250 instead of $200 in the initial state! Therefore, after C’s operation, the total debt of the system becomes $350. The ratio of A is $125/$350=35.71%, the ratio of B is $125/$350=35.71%, and the ratio of C is $100/$350=28.57%.
3.An upgrade for the SDP trading mode
In Crafting Finance, we have upgraded the sharing debt pool model (SDP) proposed by Synthetix. Different from Synthetix, in which users have no choice and can only join the debt pool when forging synthetic assets. We innovatively proposed that users can choose whether to join the debt pool, and found that even if users do not join the debt pool, they can still trade in the system (Kingsman), and bring more possibilities to the entire system. Below we use two simple examples to illustrate.
Example 6: Suppose there are user A and user B. User A chooses not to join the debt pool when forging synthetic assets, and user B chooses to join the debt pool when forging synthetic assets. Suppose that before A and B forged synthetic assets, there were originally $100 rBTC in the system. Then, A forged $100 of rUSD but did not join the debt pool, and B forged $100 of rBTC and joined the debt pool. Then, the assets and liabilities of the entire system become $200 rBTC in the debt pool, and $100 rUSD outside the debt pool. B accounts for 50% of the system’s liabilities, and A has no debt ratio because he/she has not joined the debt pool.
Now if B buys $100 rUSD from A, and the $100 rUSD is not in the system, can it be traded in the system? The answer is yes. For example, B converts this $100 rUSD to rBTC through our trading system Kingsman, and the assets in the debt pool become a total of $300 rBTC, -$100 rUSD, the total assets and liabilities of the system are still $200, and B’s debt ratio is still 50% which is $100. That is, by allowing the balance of an asset in the debt pool to be negative, we have realized that synthetic assets that are not in the debt pool can also be traded in Kingsman.
Example 7: If there is no user B, can user A who does not join the debt pool directly go to Kingsman to trade? The answer is also yes. Imagine that the debt pool originally had $100, and it was all rBTC, while A forged $100 of rUSD but did not join the debt pool. If A converts rUSD to rBTC through Kingsman, the assets in the debt pool will become $200 rBTC and -$100 rUSD, and the total assets or liabilities of the debt pool will still be $100. How to calculate profit and loss? In fact, it can still be calculated according to the debt ratio. For example, if the price of BTC to USD doubles, the assets in the debt pool will become $400 rBTC and -$100 rUSD, that is, total assets or liabilities have become $300, of which $200 is A’s assets. However, because A has not joined the debt pool, A’s debt is still 0! So A’s profit is the current $200 minus the initial $100, and the profit is $100. Note that after removing A’s assets, the assets in the debt pool are still $200, but the liabilities are $300, so other people in the debt pool will lose $100! That is to say, in this example, when A finds that everyone in the debt pool is long in BTC, and BTC price will indeed rise, A can use the external rUSD to exchange rBTC through Kingsman to earn money from those with long positions in the debt pool. Conversely, if BTC price falls, people in the debt pool will make a profit, and A will lose money, that is, people in the debt pool can earn external money. In Synthetix, if the entire system is long in BTC, no one will make a profit and no one will lose no matter how the BTC price changes. Therefore, our design can introduce additional liquidity from the outside, which greatly improves the original design of Synthetix.
About Crafting Finance
Crafting Finance, developed on the the Polkadot blockchain, it will use DOT, KSM, BTC, ETH and the CRF issued by the project as collateral, and synthesizes any cryptocurrency or offchain assets such as stock, bonds and gold through smart contracts and oracles, users can exchange various synthetic assets in Kingsman. Kingsman is one of the Crafting Finance product, a synthetic assets trading platform, with the conception of “SDP” (Sharing Debt Pool), Kingsman is characterized by almost unlimited liquidity and zero slip point of trading. The innovation of synthetic assets transaction in Kingsman will make a more flexible and strategic way for users to participate.
Crafting Finance Offical Channel
- 🌐 website: http://crafting.finance/
- 🚅 Twitter: https://twitter.com/craftingfinance
- 🚤 Telegram group: https://t.me/craftingfinanceofficialgroup
- 🛳️ Telegram Channel: https://t.me/craftingfinanceofficial
- ⛴️ Discord: https://discord.gg/89upsrRUNY
- 🚢 Medium: https://medium.com/@craftingfinance
