Historical Behaviour of the Synthetix Debt Pool
This is based on a document I prepared while discussing the indexcoop proposal to create a mirror found for the synthetic debt pool. As such it’s probably self-indulgent to share it on my substack, however, I think it could be useful to some people (even if only myself as a future reference).
Apologies if it’s too dense to be understood, this is a complex beast. Feel free to ignore.
Note: This document was written before the proposal to INDEXcoop and so it differs in a number of aspects.
My earlier post introduced the Synthetix Debt pool and how it acts like a market cap index fund
Historical Behaviour of Debt Pool
The aim of this review is to try and get a feel for how the debt pool changes over time. As described in the introduction, changes due to price movements are largely irrelevant to the key parameter (number of each token). In addition, as more SNX is staked (or the collateralization ratio changes), the debt pool Mcap changes without necessarily changing the composition.
That said, the total Market cap of the debt pool is probably one of the parameters that most observers will be familiar with. The individual MCaps of the 5 core synths is shown below. There is a spike in sUSD around the 10th Feb - presumably due to a change in the collateralisation target. Note also that net ETH went -ve around the 24th September 2020, it’s unlikely that any mirror fund would attempt to try and replicate a net short on a single token.
These can be stacked to give an approximation to the total market cap:
Finally, the 5 core tokens can be presented as a percentage of the total market cap.
As market cap is a better model for the mirror fund, looking at the number of each token can be more informative as to how the composition changes (and how much realancing would be required within the mirror fund. This is calculated by dividing the net market cap each day by the opening price.
Looking at the token number plot, it’s difficult to draw any key observations. Generally sUSD has increased, ETH is trending up, and Link has spiked recently (presumably due to the sLINK, LINK curve pool).
Given the different valuation and thus numbers for each taken, this plot isn’t an ideal visualisation.
If the number of each token is normalised 100% based on the number circulating on the 13th March 2021, then it’s a little easier to see how the token numbers (and thus rebalances) behave.
Of the 5 synths tracked, sDeFi appears to have the greatest movement over time, but this is tempered by the fact it’s a small proportion (currently 1.6%) of the total market cap. Therefore, it is more volatile in terms of the % tokens number change.
As the first implementation of the mirror fund is likely to be a 7 day, manually triggered rebalance. Looking at the 7 day changes in tokens may help understand the size of the rebalances.
Looking at the percentage change in the number of each synth over a 7 day period is quite frankly astonishing with greater than 100% change in token numbers being observed on a regular basis.
The largest change was ETH in late September. This is due to the very low number of sETH in circulation at the time.
Perhaps the best measure of the magnitude of changes required to rebalance the mirror fund is to look at the change in the number of tokens in the fund, multiplied by the price. This then shows the value of swaps within the debt pool combined with issue and redemption. It’s not a perfect match for the need to rebalance the mirror fund as wholesale issue of new debt will result in all the synth token numbers increasing.
So the best way to consider this chart is to look for the cases where an individual token moves in a different direction to the rest (or to the net value change of the debt pool).
For example, week ending 16 Jan 2021, there was a large increaser in sUSD than the net increase of the debt tool, as expected that was associated with reduction in BTC, ETH and sDeFI. In total that week there was a reduction of BTC, ETH and DeFi tokens corresponding to $24,000,000 while the debt pool grew by $17,000,000. I.e. there was a significant swaps occurring with a flight to stable coins.
Likewise, during week 23jan21 there was an obvious swap of sUSD for sLINK with minimal change in the total debt pool.
Note that as it’s likely that only a proportion of the overall debt pool will be mirrored by the proposed fund, this means that weekly rebalance trades to minic the swaps within the pool will be a similar proportion to the total pool size.
The available data has been looked at in a number of ways. Even so it is extremely difficult to draw definitive conclusions as to the minimum rebalance frequency needed to provide good enough hedging.
I believe that as a fully automated rebalancing of the fund is beyond the current capabilities of the set protocol, use of an off chain solution as a trail has merit. Use of a 7 day fixed repeating schedule for rebalances seems to be practicable and is expected to be sufficiently timely to capture major changes in the composition of the debt pool. It is expected that there will be some tracking error between the performance of the mirror fund and the debt pool. Even so, it is expected that the mirror fund would be a better hedge than could be achieved by the majority of SNX stakers working alone.
Given the observation of externally induced changes in the debt pool (e.g.mid February increase in total debt), scheduling system upgrades with an eye on the rebalance schedule would be prudent.