Z-BTC & Z-ETH: Moving Average Derivatives on Synthetix

Username

0xCryptoSeldon

Grant Description

We're proposing integration of a new derivative asset type with Synthetix - The Moving Average Derivative. These derivatives will offer volatility minimised exposure to underlying native assets - initially BTC and ETH.

Overview

Moving Average Derivatives are a novel class of volatility-minimized derivatives that we’ve been studying for quite some time. We propose the addition of this new synthetic derivative type to the existing offerings of Synthetix, namely Perp Futures and Spot Synths.

MADs have previously been discussed in the context of building crypto-native “stable” coins in the RAI community, as well as in the context of volatility hedged exposure to crypto - to counter narratives of crypto's "volatility danger". These may have particular significance for the crypto industry (as opposed to TradFi), as extreme volatility is commonplace, and is presently a major barrier to largescale investment.



At Foundation Labs, we have previously developed a prototype for MADs using a Collaterlised Debt Position model - and deployed it to RSK testnet.

However, we feel that Sythetix’s approach to C-Ratios and enhanced liquidity may be much more effective at allowing such an asset to be widely adopted. Therefore, we are proposing deploying this derivative asset as an additional asset type on Synthetix.

This will involve publishing a custom price feed smart contract, tracking the 200w-SMA for BTC and ETH - the first two assets we have chosen to provide this derivative for. In the future, this template can easily be extended to build synthetic MA-derivatives for any underlying asset that may have the requisite demand or interest.



Once deployed, Governance would need to approve the new asset type and their respective price feeds, to integrate these assets with Synthetix.

Value to Synthetix

Synthetix is the ideal platform to launch highly specialised derivative assets like Moving Average Derivatives. MADs are a novel approach to offer volatility minimized exposure to underlying crypto assets’ long-term appreciation. They may see high demand as an investible or balance sheet asset from both retail and institutional investors that are interested in cryptoassets, but for whom the volatility of the native asset is above their risk appetite.

At the completion of this grant, Sythetix will be able to offer two new synthetic derivative assets, sZ-ETH and sZ-BTC.

Significant demand for such moving average derivatives will, naturally, result in increased demand for SNX tokens to collateralise the vaults to generate these assets. Moreover, an additional, volatility-minimized derivative type available to crypto investors is a public good that may help increase overall adoption and investment.

Project Implementation Plan

A. We will develop a custom price feed smart contract, that will have the following functionalities:



1. Function Update() 
- Fetches the spot price of the Asset daily from the chainlink price feed. 


• Uses a sliding window approach to calculate the current 200w - MA for that asset’s price, on-chain, in USD terms.
 Note: Update() will need to be called manually daily, however it will be a public function callable by anybody at any time; The function will also automatically execute if the Fetch_Price function is called. Contract will check if a price-update has already occurred in the last 24 hours, and revert if in that case. This can also be checked via a read only LastUpdate() public var.



2. Function Fetch_Price()
- Allows the 200w-MA of the specified underlying asset to be accessed at any time by calling this function on the contract - Synthetix can integrate with this custom endpoint as the price feed. This is separated from the update function to optimise gas, however it will also check LastUpdate to ensure that the price feed is not out of date.


3. Updatable Contracts.

• Provides mechanisms to modify the underlying oracles using a 3/5 multisig, with 2 members of our team and 3 from Synthetix team - in case of any issues with the oracle.



B. We call them volatility minimized assets or Z-assets. After development, price feeds for Z-ETH and Z-BTC will be available. After a governance vote, these can be integrated to provide two new asset types to synthetix’s portfolio (sZ-BTC, sZ-ETH), with novel volatility minimising properties.

C. The code will include proper documentation and extensive unit tests to ensure it functions as expected. An additional external audit may be conducted after this grant at the request of the DAO (at additional cost).


D. Moreover, we will also provide brief documentation on the nature and behaviour of Z-assets, along with historical backtests, and a modelling repo for monte-carlo analysis.

Additional Information

A deck explaining the behaviour and value proposition of Z-Assets, in particular Z-BTC, can be found here: https://drive.google.com/file/d/1NGhJSrtsiI_25lvg4zjsEmYdYQi6Lkoh/view?usp=sharing This includes an analysis comparing MA-Derivatives to spot derivatives (options and futures), and points out the novel properties of the former.

More Background: 0xCryptoseldon is very experienced at developing smart contracts and DeFi applications, having received over $150k for completed grants- from Sovryn, Ocean, Harmony, Solana, and Zilliqa so far; besides notching up over 6 hackathon wins.

Our Github for reference (the initial prototype of Moving Average Derivatives using Collaterlised Debt Positions, similar to Maker DAO): https://github.com/FoundationCryptoLabs/XSS/tree/governance

Funding Request

Funding request - 3,500 SNX (~$8500)



Breakdown:
 Smart contract development costs : $7500 
Deployment and on-chain testing : $500 Documentation, Background Content, and Modelling Repos: $500



Milestones: 
 1750 SNX upfront, to cover inital dev & deployment
 costs. 1750 SNX after completing deployment of functional Z-ETH and Z-BTC contracts on ETH-mainnet.

Our anticipated timeline for project completion is 30-45 days from approval.