Incept is a synthetic asset protocol on the Solana blockchain, and we are here to present a brand-new approach that will revolutionize the power of synthetic assets.
The Polaris Announcement is Here!
With this announcement, we will explain our novel comet liquidity system. Strapped with such a mechanism, The capital efficiency of Incept’s automatic market makers (AMMs) will be unprecedented. Along with this, our assets prices will likely hold much tighter pegs, an abundance of liquidity will allow us to quickly expand to new markets, and LPs will have a brand-new opportunity for considerable yield. So, how do we do it all? First let’s talk about synthetic assets.
This article tries to cover as much as possible in a digestible manner. If anything is unclear or requires additional explanation, please reach out to us @inceptprotocol. All feedback is welcome too!
The Modern Synthetic Asset Protocol
It is well known that synthetic or tokenized assets have an incredibly exciting future in DeFi. Advantages of such assets over traditional real-world assets include security, inclusiveness, fairness, accessibility, and much more. However, there are a few disadvantage where synthetic assets seemingly fail to obtain the upper hand. These disadvantages are the capital efficiency of the liquidity, complex UX, and inaccurate price pegging. To provide liquidity into synthetic asset AMM pools, an individual is stuck between two underwhelming choices. A user traditionally has the option to mint or borrow a synthetic asset with an over-collateralized position. Such a choice leads to inefficient use of capital for the LP and means that the protocol needs a large amount of capital from LPs in order to have sufficient liquidity in their pools. The other option is to buy their synthetic asset from the pool they plan to contribute to and then use that token for liquidity. This choice is more promising in terms of capital efficiency for the LP, as there is no need for over-collateralization, but worse for the protocol, because each LP who makes this choice is simply inflating the price, damaging the synthetic assets peg to its real-world price. Projects like Synthetix and Mirror have still found great success with such an approach. However, Polaris proves that liquidity in synthetic asset AMMs can be MORE efficient than regular AMM pools, rather than less. Let’s talk about concentrated liquidity for a second.
Uniswap v3 recently demonstrated the incredible capital efficiency of concentrated liquidity. Concentrated liquidity does exactly what it sounds like, concentrates the liquidity to a certain price range. Once the asset price leaves the range, the liquidity becomes inactive. For more information on Uniswap v3’s concentrated liquidity pools, we recommend this article from Uniswap. Anyways, what does this have to do with synthetic assets or Incept?
Incept’s Novel Comet Liquidity System
Let’s take care of answering those questions. Although Uniswap v3 is incredibly efficient and innovative, their efficiency is limited by one overarching fact. That fact being that the assets in their pools are real (as opposed to synthetic). Since the assets are real, users must physically own the asset they provide as liquidity. On Incept, that is not necessarily the case. The Comet Liquidity System of V1 Polaris allows an LP to lock up collateral in order to provide their liquidity. However, what’s special is that they can provide more liquidity than the value of collateral they put in. We imagine eyebrows are raised at this point, but allow us to explain. There is an interesting phenomenon that has been making LPs bash their heads into walls since the dawn of DeFi. Of course, we are talking about impermanent loss. Let’s imagine a user locks 100 USDC into a comet and contributes 400 USD of liquidity (200 in USDi, our native stable coin, and 200 in iAsset, Incept’s synthetic asset for this pool). If the asset price never moved, and the user chose to close the position, we could simply burn the tokens we initially put in (200 USDi and 200 USD of iAsset) and return the 100 USDC to the user. However, once prices start to fluctuate, the impermanent loss becomes a concern. However, there is a convenient and unmistakable fact that comes along with impermanent loss. That is that only one asset can be lost at a time. If only one asset can be lost at a time due to impermanent loss, and that amount can be calculated, then we know exactly how much an LP has lost out of what their comet initially contributed. Since we can calculate impermanent loss, we can calculate exactly at what asset price the comet will truly be in debt, meaning that 100 USD (100 USD because the user contributed 100 USDC to the comet) of either the 200 USDi or 200 USD of iAsset has been lost. iAsset is lost when the price increases, while USDi is lost when the price decreases. From here we can designate an exact price range in which the liquidity position is not in debt. Then, for safety of course, we enforce a 50% buffer on either end of the price range. This updated range becomes the comets under-collateralized range! When the position is within the described 50% buffer, we say that the comet is “flying too close to the sun” (as comets tend to do) and that it will be liquidated (or burned up like a real comet) if not closed or altered by the LP. With a generous price buffer and incentivized liquidators, Incept boasts the first concentrated liquidity system through which one source of capital can ensure that each side of the users liquidity is backed at the same time. More resources to learn about Comet Liquidity System will be published in the future!
Hopefully by now it is clear what Polaris has in store, but let’s dive into WHY we see this system as such a critical component. As previously mentioned, there are not many attractive options when it comes to contributing liquidity to synthetic asset protocols. Comets flip this problem completely on its head. Incept’s synthetic asset pools now become more opportunistic for LPs than any modern AMM. Our concentrated liquidity doubles the efficiency of Uniswap v3 by using what we know about impermanent loss to ensure your collateral backs both sides of your position at the same time. This efficiency will allow for more liquidity and eventually more markets on Incept. Additionally, user’s ability to contribute more liquidity for less capital without impacting our market prices will allow our synthetic assets to be pegged much tighter to their real-world asset pairs than any other synthetic asset competitor. Alongside these benefits for both LPs and traders, our team is working to build out a trading experience that closely mirrors that of a centralized exchange. Our goal is to create the most familiar, intuitive, efficient, opportunistic, and overall powerful trading experience in all of DeFi.
Make sure to follow us on Twitter or join our Discord to stay tuned for future updates. Our community of rocketeers welcomes all aboard our journey to onboard the next billion DeFi users 😊.
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Disclaimer: none of this is financial advice