The Disadvantages of Synthetic Assets (renBTC, tBTC, sBTC, wBTC)
Many people tout the advantages of Synthetic Assets on Ethereum, but there is no advantage without disadvantage. The platforms servicing these synthetics will never advertise these disadvantages, but they are buried in Whitepapers.
Intro to Synthetics
The synthetic ‘wBTC’ is economically unlimited because it requires no Collateralization (bonding) and so its price peg relies on Centralized Keys and trusted third parties. If these keys are lost or stolen, expect that all holders of wBTC get rugpulled.
RenBTC, tBTC and sBTC all operate similarly to one another, depending on bonded collateral, and as such, are economically limited. These synthetics rely on ‘Signers’ to validate mints and burns of the respective token in order to regulate price compared to real Bitcoin. However, these signers must be trusted or else they can lie and steal money! How are they kept honest?
Keeping the Signers Honest
RenBTC, tBTC, and sBTC signers are kept honest because they must stake ‘collateral’ in the form of REN, SNX, or ETH. If their collateralization ratio falls too low, the signers are punished or removed from the system and incentives are in place to lessen the supply of the Synthetic Asset.
As long as the signers have a bonded stake with good collateralization ratio, cheating or being dishonest will cause the signer to lose more value than it could ever gain by cheating. However, this bonded stake enforces an economic limit which, if exceeded, will allow signers to profit by cheating or being dishonest.
Furthermore, this economic limit, or economic ceiling on the amount of allowable outstanding synthetic is not only low, but it is indirectly set by the amount of revenue that the signers are earning in fees. If the signers are not earning high fees by staking, they will pull out their staked collateral and will stop being signers which further lowers the economic ceiling, the allowable outstanding supply of the synthetic asset.
sBTC signers earn fees (SNX) when users buy/sell synthetix assets. renBTC signers earn fees (REN) when the renBridge is utilized. tBTC signers earn fees (KEEP) when the tBTC bridge is utilized. These fees for bridging are substantial, up to 0.005 BTC for one bridging.
For example, over a span of time, if there are fewer users who are bridging and paying those bridge fees, the signers will earn fewer fees. This incentivises the signers to discontinue signing and to take their capital elsewhere, to stop staking. This reduces the amount of collateralization for the synthetic asset as a whole and reduces the acceptable amount of bridged currency.
Mathematically, this means that the acceptable supply of bridged currency (S_locked) is a linear function of the fees being generated by the bridge (F_bridge). As long as the bridge continues to generate fees, your synthetic assets are safe. If, for some reason, the bridge is no longer generating fees each day, your synthetic assets in your wallet are at risk. On the average, signers for the system will leave, will stop staking, and there will be a lower safe economic ceiling for the synthetic asset than the amount of outstanding synthetic asset. This is also referred to the ‘Locked vs Bonded’ ratio in both the whitepapers of renBridge and tBTC’s Keep Network.
In simple terms, ‘Locked’ amount is the amount of total circulating supply of the Synthetic (tBTC, renBTC, sBTC) and it must be lower than ‘Bonded’ amount, which is the staked collateral that is (hopefully) earning fees every day.
Like a pyramid scheme, the fees from new entrants are being used to fund the security of the existing locked supply. If the fees stop, the locked supply is no longer safe. The supply in your wallet, potentially.
Worse yet, the more types of synthetics there are, the fewer fees each one earns, meaning that the total economic ceiling is reduced, not increased with more synthetic options!
A Different Approach
The only way escape the continuous pyramid-scheme of a fee-generating bridge protecting the assets in your wallet is to
- Trust centralized Third Parties like BitGo’s wBTC (high risk)
- Forego price pegs in Ethereum for Native Assets
In my opinion, I want the assets in my wallet to be secure regardless of the activity of a bridge or of a dapp. I want the assets in my wallet to be dependent on nothing but the Ethereum Network, like how Ether is only dependent on the Ethereum Network.
This is why, for long-term holds, I forego price pegged assets and seek out Native Assets on the Ethereum Network. Using synthetic assets can be profitable and useful especially in the short-term, but they should not be considered reliable for long-term storage like a non-synthetic Native asset.