πŸŒͺ️Synth Unwinding

Synths may be unwound if its underlying collateral is not maintained

Synth Collateral Maintenance

Synths are tokenized asset management strategies used by the Umoja Protocol as primitives to build Smart Money. Users provide collateral to use these strategies, either directly through Umoja's interface or soon indirectly via its API/SDK for creating new assets. Each Synth strategy may require users to keep up a certain amount of collateral to function properly, with some, like Synth Options, needing a minimum threshold due to the use of leverage.

Depending on the Synth's strategy, collateral maintenance may be required to ensure that the Synth is as effective as it is supposed to be. Certain Synths, such as that of Synth Options, require a minimum collateral threshold given that its strategy uses leverage.

Note, all Synth strategies have built-in liquidation protection (for those relevant).

A synth's position may be unwound (i.e., halved) if its underlying collateral continues to be equal to or less than the Synth's minimum collateral threshold. It is important that, if the user wants to maintain their notional exposure, that they top up their collateral.

For example, let's say we have a Synth Put Option (i.e. a "Hedge") with the following details:

  • Synth: Synthetic Put Option

  • Exposure: Protecting $1M worth of BTC from going down in value.

  • Current BTC Spot Price: $50,000

  • Coverage Activation Price (Strike): $49,000

  • Coverage Length (Term): 1 Week

  • Synth Min. Collateral: 5%

  • Required Collateral Deposit: 10%

For instance, if Alice uses $5,000 in USDC as collateral to protect $50,000 worth of Bitcoin from dropping below $49,000, she needs to maintain at least $2,500 in collateral to keep her full coverage. If market volatility leads to high trading fees that deplete her collateral by 50%, her coverage would decrease to $25,000 instead of being completely lost, aligning her remaining collateral with the required 5% for the adjusted coverage amount.

If a user's collateral is below the minimum threshold of the Synth they are using, then their notional value (i.e., exposure) halves. To avoid Synth unwinding, user's need to top-up their collateral to ensure it's above the Synth's minimum threshold.

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