This post is more of an attempt put my ideas, thoughts and developing understanding of the synthetic space.
Here’s my example:
Lets say there is Crypto currency called CTB. There are 1 Million in circulation with a market cap of 100 Million ie the price per CTB is $100. If the demand for CTB grows so does the price and visa-verse as the deman goes down. hypothetically if more CTB are minted then the price goes down in direct ratio (old supply / new supply)
If so what happens if an investor who wants exposure to the price of CTB but doesn’t want to own it. They could spend a $150 (150% collateral) Million to mint 1 million iCTB. The price wouldn’t go up because I haven’t changed the supply since I’m not wrapping the underlying asset. How does supply/demand/price work is an overly simplified situation like this?
I realise it a very artificial situation but are the basics correct here?
The way I understand it is LP is for staking rewards, but you dont get the benefit of the price going up. That’s the advantage of buying the asset or minting/buying the iAsset.
So hopefully I can help you think about it. A couple thoughts. First, minting an iAsset (or any synthetic asset for example), really should not affect the price of the underlying asset (theoretically it could depending on how people choose to hedge positions, etc.). When you mint an iAsset, the price of that iAsset is coming from an Oracle, so I think you are all good there.
When that person mints the iCTB, they are actually borrowing the iCTB and are short iCTB versus their deposited collateral. If they wanted positive price exposure to iCTB, it would be easier to just go out and buy iCTB or CTB on the market. Minting massive amounts of iCTB may affect the supply/demand of the iCTB asset itself. This really matters less for price (because price is theoretically pegged, though it can deviate), but matters liquidity. It depends what they do with that minted iCTB. If they deposit into an LP, they are diluting any fee/emissions yield from that LP. If they instead went out and bought a bunch of iCTB on a DEX, they would see massive slippage and cause the price of iCTB to divert from the pegged price. This ideally would be fixed by arb’ers. Though i still need to wrap my head around it. I have a post out there about iAsset liquidity.
I put together a stylized example that really helped me understand the directional risks of minting an iAsset and liquidations of iAssets (when the CDP collateral ratio falls below the minimum). Hope this helps!
A benefit of an iAsset is that its total supply is disconnected from the total supply of the real asset it tracks. More iAsset can exist than exists the real asset itself. This allows you to settle trades that wouldn’t be possible using the real asset.
The price of the iAsset tracks the real asset’s price and so doesn’t directly have an influence. What can happen in some scenarios is a form of a gamma squeeze where price of the real asset changes due to market pressure from hedging positions.