How the synthetic asset protocol Coinversation meets users' diverse trading needs based on mortgage pools and multiple liquidity pools

In 2020, the DeFi boom brought about by liquidity mining accelerated the financialization evolution of cryptocurrencies, giving rise to synthetic assets and introducing a brand new form of on-chain financial derivatives. Excited entrepreneurs in the crypto world have claimed that synthetic assets will bring a wild future to DeFi, creating new things that the traditional financial world cannot achieve.

Indeed, synthetic assets not only amplify the composability of on-chain assets but also build a bridge to the trillion-dollar traditional financial market for the DeFi ecosystem, greatly enriching the investment choices for DeFi users, which is why they are increasingly favored by more DeFi users.

Currently, in the crypto world, the application scenarios of synthetic assets mainly fall into three categories. The first category is the replication or mirroring of fiat currencies or stablecoins, meaning that the assets exist but are either on-chain or replicated on another chain, such as USDT and Maker's DAI. The second category is real-world synthetic assets, such as synthetic gold, synthetic crude oil, and synthetic S&P 500 index, primarily addressing issues of cross-platform usability, such as stock accessibility and cross-chain asset demand. The third category is the direct creation of previously non-existent assets, providing market-demanded but unmet return/risk exposure, and directly tokenizing such exposure, for example, synthetic indices and cash flow assetization.

In the Ethereum ecosystem, Synthetix has successfully validated the business model of synthetic assets, bringing the trading of commodities, fiat currency exchange rates, and more on-chain.

With the expansion of more synthetic asset application scenarios, new synthetic asset protocols like Coinversation have emerged. Addressing the current shortcomings of synthetic assets, such as high trading costs, low liquidity, and significant liquidation risks for users, the Coinversation Protocol's model combines collateral pools with multiple liquidity pools, potentially offering new ideas for the evolution of synthetic asset forms.

Coinversation is the first synthetic asset project in the Polkadot ecosystem, officially launched in August 2020. The core team members come from top tech companies such as Alibaba, Ant Financial, and Google, including technical personnel with over a decade of development experience and early Ethereum developers.

Through Coinversation, users can use the project's issued CTO and Polkadot DOT as collateral to synthesize any cryptocurrency or off-chain assets like stocks, bonds, and gold through smart contracts and oracles. It is understood that Coinversation mainly features two characteristics: collateral pools and multiple liquidity pools.

First, Coinversation mints synthetic assets through collateral pools, allowing for transactions without the need for a counterparty and without considering trading depth, which is fundamentally different from automated market makers.

The so-called collateral pool refers to the process where users deposit Coinversation's token CTO or Polkadot DOT, generating a certain amount of cUSD, which is the stablecoin within the Coinversation Protocol. Its price is fixed at 1 USD, and all synthetic assets in the system are priced in cUSD.

When users who have collateralized CTO or DOT wish to exit the system or reduce their debt and unlock their collateralized CTO or DOT, they must first repay their debt. For example, if a user mints $100 of cUSD by collateralizing CTO, they must burn $100 of cUSD to unlock the locked CTO.

It is important to note that the debt ratio of all users in the system is determined when cUSD is minted from collateralized CTO or DOT and is unrelated to the prices of other synthetic assets after conversion. The debt ratio will only change when users mint or burn cUSD. The total debt of all users constitutes the collateral pool, and fluctuations in asset prices will cause changes in debt. By maintaining a constant debt ratio, the profits of each user can be calculated.

Second, Coinversation expands the traditional single liquidity pool into multiple liquidity pools, providing more opportunities and infinite combinations for business, and attracting a more diverse and broader user base.

For retail and general trading users, multiple liquidity pools are harder to manipulate centrally compared to single liquidity pools. The assets in multiple liquidity pools can also be converted into each other, so when a centralized large holder adjusts the price of a single liquidity pool, other liquidity pool creators can counteract the centralized manipulation through arbitrage. This way, retail users can more easily avoid being exploited by manipulators, reducing the risk of being taken advantage of.

For project teams or institutions, users can create their own liquidity pools for IDOs (using dynamically adjusted weighted liquidity pools, similar to Dutch auction methods). The team controls all assets, which can more effectively assist in asset allocation and management.

For many market KOLs or professional secondary market traders, they can create ETFs through multiple liquidity pools, such as open-ended funds for NFTs on Polkadot or average funds for Polkadot's official Grant fund, allowing ordinary users to invest. Retail users can buy a token of an ETF fund in an index-like manner to indirectly invest in a series of specific token combinations.

The future development of Coinversation mainly targets three aspects:

First, upgrading the types of synthetic assets currently determined by project teams or community governance to allow different investors to independently sign any type of contract within the system.

Second, when standardized tokens similar to Ethereum's ERC-20 emerge in the future, all synthetic assets of Coinversation can circulate externally in the form of standardized tokens, even entering other exchanges.

Third, achieving a decentralized virtual asset issuance platform and contract trading platform, which can not only replace the perpetual/futures contract functions of major centralized exchanges in the long term but also enable the issuance of any type of asset on this protocol, securing a place in the traditional financial market.

From this, it can be seen that Coinversation's goal is not only to benchmark existing synthetic asset platforms but also to aspire to become a comprehensive derivatives trading platform that meets users' diversified trading needs.

As the crypto market matures and the foreseeable challenge of the Polkadot public chain to Ethereum's position arises, the design advantages of Coinversation's underlying economic model will gradually become apparent and occupy an important position in the synthetic asset industry and even the DeFi industry.