As banks and stock exchanges suffer from a loss of trust, Decentralized Finance (DeFi) continues to push the boundaries of innovation. One of these DeFi vanguards is Metronome Synth, a multi-collateral and multi-synthetic protocol that expands users' ability to trade and manage digital assets.
Before we delve deeper, it is important to understand the role of synthetic assets in the DeFi space.
Synthetic landscape explained
You have undoubtedly heard of liquid staking. The concept is simple. When you participate in proof-of-stake blockchain networks, your staked cryptos often experience lock-up periods, meaning you cannot use them.
So your assets become illiquid since they are locked up anyway. This is a liquidity stake that unlocks this liquidity by issuing a token that corresponds to the value of the funds staked. For example, Lido Finance issues stETH for the same amount of ETH staked. Users can then stake this stETH token in a variety of dApps as if they were using ETH itself, for example as collateral for a loan.
It is easy to conclude that liquid stake tokens and synthetic tokens belong to the same category. Finally, a synthetic token is created through a smart contract to track the price of its source security. However, this is not true.
Synthetic tokens are minted specifically to mimic the price of an underlying asset, be it a commodity, stock or cryptocurrency, without holding it. In other words, synthesizers provide access to the price movements of the underlying asset.
For example, a synthetic Bitcoin could be minted using collateralized ETH, with the BTC synth price then pegged to the price of a real Bitcoin. This flexibility increases user convenience for both trading and hedging. For example, if a synthesizer is pegged to the price of gold, traders could sell gold (the physical commodity) without owning gold if they believe the price will go down. The same thing could be done with a synthesizer that mimics the price of the S&P 500 index.
What metronomes bring to the synthesizer table
At this early stage of synthesizer development, the early bird catches the worm. The Synthetix platform (SNX) was one of the first to allow users to create synthesizers using a wide range of underlying assets. As a result, Synthetic grew to a respectable total value (TVL) of $443.8 million.
Metronome Synth was launched relatively recently, in January 2023, and has already raised $4 million TVL while still in beta. After the successful audits and testing of the smart contracts, the project is in full swing on April 18th.
Developed by the Bloq DeFi team, Metronome Synth follows on from the previous Metronome project, which raised $12.1 million during the ICO fundraiser in July 2018.
With the motto of “unlocking limitless liquidity,” Metronome Synth allows DeFi users to deposit multiple types of cryptos as collateral for synth manufacturing. This ranges from stablecoins (DAI, USDC) to leading cryptocurrencies (Bitcoin, Ethereum).
Additionally, Liquid Stake tokens can also serve this purpose. As of March 2023, the aforementioned stETH is known as VastETH, where “va” refers to the Vesper Finance protocol. Thanks to this integration, DeFi users will be able to deposit Vesper Lido Staked ETH (vastETH) to Metronome to mint a variety of synths.
As you might expect, these metronome synthesizers have the “ms” prefix, e.g. E.g. msBTC, msETH and msUSD. To mint one of them, users can deposit their preferred collateral, but each has its own terms and conditions.
Exposure of metronome synthesizers examined
Let's say you are a Bitcoin maximalist who only owns BTC. However, you still want to take advantage of various DeFi protocols. In this case, you would first deposit your BTC in one of the BTC to WBTC protocols such as Bitgo or Kyber Network.
These protocols would then mint wrapped BTC (WBTC) according to the value of your deposited BTC. Once your wallet is filled with WBTC, then connect it to the Metronome Synth app where you will immediately get a clear overview of possible Mint synth collateral.
Currently, the deposit limit for WBTC is 311 Bitcoins, with a collateralization ratio of 80% and a liquidation penalty of 18%. This means that to mint 10 msBTC from Metronome Synth, you would need to deposit at least 12 WBTC to maintain the minimum collateralization ratio of 80%.
If the value of your WBTC collateral falls below 80%, Metronome Synth would liquidate the collateral and pay an additional 18% as a penalty. But wait, there is something very important to consider – slippage!
If you mint 10 msBTC with 12 WBTC as collateral, the price of both the collateral and the synth are assumed to be subject to a fixed one-to-one exchange rate. After all, both are linked to the real price of Bitcoin. In practice, market liquidity causes the price of synthetic tokens to deviate from the expected price.
For other dApps this could result in earning 9.5 WBTC per msBTC, but not for Metronome Synth. When it comes to swapping synthesizers, you can do so without slippage.
Smart Farming by Metronome
If anything is the core principle of DeFi, it is yield farming. Users can turn into virtual banks by earning interest in return for their liquidity services, whether for staking to secure a PoS chain or for borrowing.
Standalone yield farming is a simple concept. DeFi’s smart contracts and self-custodial wallets enable people to become their own virtual banks. But what if you want to expand your agricultural position to achieve higher yields? This is where smart farming comes into play to improve your position with synths.
When users provide liquidity to a lending/DEX protocol like Curve or Uniswap, they earn interest on their liquidity service. Just like a traditional bank would do. To drive these returns increases, liquidity providers (LPs) could increase their liquidity footprint by raising funds.
This is looped yield farming. By using synthetic tokens, traders can maximize their returns, creating advanced smart farming. Metronome Synths partners with Vesper Finance as their preferred yield aggregator.
Combining metronome and vesper, a typical scenario with synthesizers would look like this:
- Deposit $1,000 worth of USDC stablecoins into Vesper Finance's USDC pool.
- In return, you will receive vaUSDC tokens as high-yield tokens.
- Deposit vaUSDC as collateral with Metronome Synth to generate a synthetic asset of your choice.
Alternatively, one could deposit their vaUSDC position directly into Smart Farming to do the following:
- Adjust the return loop of your deposit according to your risk preference.
- Metronome Synth then mints msUSD, which is automatically exchanged for USDC on a decentralized exchange (DEX).
- Finally, Metronome deposits these freshly exchanged USDC back into the Vesper Finance pool, returning vaUSDC and increasing your initial APY. Since vaUSDC is deposited as collateral for Metronome's position, this means your overall position is safely over-collateralized.
When the yield farming period ends, the farmer withdraws his earnings and repays the borrowed USDC plus interest. The farmers can then use the profits made to pay off the synthesizer debts. With Metronome Synth, users pay a 1% synth balance fee.
Outside of smart farming, Metronome's ability to integrate more customized strategies with the support of vaAssets allows users to leverage yield-producing collateral and support directed trading and zero-slippage swapping with both EVM and non-EVM assets .
Driving the spirit of multi-dApp integration, Metronome users have access to Vesper and Curve pools to increase their yield. Once users deposit their funds into Vesper, yield farming will be automated based on their collateral position in Metronome.
This is the essence of Metronome's Smart Farming, as farmers simply need to set the amount of yield loop on their synthesizer. Metronome's smart farming protocol takes care of everything else and returns to Vesper's original position, as seen below.
So, Metronome eliminates the need to switch between multiple dApps to maximize agricultural yield. This not only improves the user experience but also saves huge amounts on gas fees. Once the APY yield loop is adjusted, a user's only job is to monitor the health of their Metronome collateral position.
Depending on the circuit's smart farming position, users can view both their estimated APY potential and monitor the health of their circuit.
With looped smart farming positions, you can optimize your yield and watch your profits grow. Keep an eye on your estimated APY potential and monitor the health of your circuit in real time as you increase your earnings.
Who developed the metronome synthesizer?
The core team behind Metronome Synth consists of experienced developers who have contributed to major DeFi projects such as SpaceChain, Bloq and VesperFi:
- Jeff Garzik
- Jordan Kruger
- Matthew Roszak
- Manoj Patidar
- Zane Huffman
Metronome Synth's smart contracts have been fully audited by Halborn and Quantstamp. Thanks to Metronome's clever combination of zero-slippage between synthesizers and integration with the wider reach of Vesper Finance, DeFi has become significantly easier to use.
Although synthetic assets may still be foreign even to some crypto natives, access to the synthesizer landscape is being reduced. Ultimately, Metronome Synth is shaping the future of the DeFi space. One that is more practical and sustainable than jumping on the next monkey JPEG train.
Note: This explainer was sponsored by Metronome Synth
Series Disclaimer:
This series article is intended only as a general guide and information for beginners exploring cryptocurrencies and DeFi. The content of this article should not be construed as legal, business, investment or tax advice. For all legal, business, investment and tax implications and advice, you should consult your advisors. The Defiant is not responsible for lost funds. Please use your best judgment and exercise due diligence before interacting with Smart Contracts.
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