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Synthetic Stablecoins on Kollider

What Are Synthetic Stablecoins?#

Stablecoins refer to cryptocurrencies whose price is pegged to that of a more stable asset-- usually USD or another fiat currency. Kollider's synthetic stablecoins are stablecoins that are created using derivates on the Kollider Exchange. In other words, Kollider offers users the ability to hedge their price exposure to Bitcoin by pegging all or part of their balance to a fiat currency.

How Do Kollider Synthetic Stablecoins Maintain Stability?#

Good question!

Synthetic fiat accounts are short positions in an inversely priced perpetual swap that is settled in Bitcoin. Kollider Synthetic Stablecoins use the open source project LndHubX to provide this functionality. In essence, LndHubX is nothing more than an accouting system as well as a connection to the Kollider Exchange to buy and sell these perpetual swaps.

On the Kollider Exchange one BTC/USD perpetual swap contract is always worth $1. If the current Bitcoin price is $10,000 then you would need to send (1 / 10000 * 100,000,000) = 10,000 Sats to sell (short) 1 contract. This would be the same if you were to buy a contract (long). However, since Kollider Synthetics only involve shorting we'll just talk about the short side here.

Now, if the price of Bitcoin goes down to $5,000 then your position would make a profit of ((1/5,000 - 1/10,000) * 100,000,000) = 10,000 Sats and when you close it you would get 20,000 Sats (10,000 initial margin + 10,000 profit). You can see that 20,000 Sats are exaclty worth $1 at a Bitcoin price of $5,000 so you maintained the same dollar value in Bitcoin.

Conversely, if the Bitcoin price goes up to $20,000 then your loss would be ((1/20,000 - 1/10,000) * 100,000,000) = 5,000 Sats. If you close the position at this point you would be returned 5,000 Sats (10,000 initial margin - 5,000 loss). However, at a Bitcoin price of $20,000, 5,000 Sats are exactly worth $1 so you again maintained the same dollar value in Bitcoin.

Kollider Synthetic Stablecoins are simply short contracts that are made on the user's behalf and managed until the user wants to withdraw their funds. The amount of Bitcoin that a user holds in their wallet (denominated in sats) will change over time as the Bitcoin price moves, but the amount of value they hold in their account, denominated in fiat currency, will remain constant.