The Rise and Fall of Synthetic Assets

Clone Protocol
6 min readNov 22, 2023

Synthetic assets stand at the crossroads of innovation and risk in the financial world, blending traditional finance with the new era of decentralized finance (DeFi). This article explores their journey, from inception to destruction. We begin by addressing a fundamental question: What exactly is a synthetic asset?

What is a Synthetic Asset?

The term ‘synthetic asset’ was a buzzword in the DeFi landscape in 2018, but let’s break down exactly what it means. At its core, a synthetic asset is a type of financial derivative — a token whose value is closely tied to another asset, be it another token, a stock, commodity, fiat currency, or any other price-bearing entity. This linkage can be achieved through various mechanisms in DeFi, ensuring that the synthetic asset’s price mirrors that of its underlying asset.

The Genesis of Synthetic Assets

From the beginning of DeFi, there has always been strong interest in bringing Real World Assets (RWAs) onto the blockchain. This is because of a shared desire to merge the stability and diversity of traditional assets with the innovation of the crypto space. When synthetic assets were first introduce, they emerged as a solution to this, so people immediately bought in. Even wall-street started paying attention then to what was possible on-chain. This set the stage for the rise of synthetic assets in DeFi.

Fake Tesla, Apple Stocks Have Started Trading on Blockchains
Bloomberg (July 6, 2021)

Synthetix: A Marketing Masterpiece

Synthetix original branding: On-chain exposure to any asset

Synthetix, an Ethereum-based pioneer in the DeFi sector, masterfully capitalized on the growing demand for RWAs in crypto. At its zenith, the platform offered an expansive range of synthetic assets, including various cryptocurrencies, precious metals, numerous fiat currencies, and even U.S. equities like AMZN and AAPL briefly in 2021. Synthetix invented the “Debt Pool Model,” where shared debt among stakers maintained the pegs of synthetic asset prices. Stakers, in return for contributing to the debt pool, earned rewards in SNX (the Synthetix utility token) and trading fees. This model necessitated a hefty 600% collateralization in SNX for asset minting (or liquidity mining), translating to at least six times more capital requirement than a typical DeFi exchange (DEX). In hind sight, the danger of a protocol full of assets completely collateralized by their own utility token seems obvious. Nonetheless, the Synthetix promise to integrate RWAs into crypto combined with their pioneering liquidity mining program was so compelling that it initially overshadowed these concerns. This promise, coupled with strategic marketing, led to an initial surge in popularity. However, as we will explore, the limitations of this model eventually lead to the downfall of its synthetic assets.

Mirror Protocol: No Price Peg, No Problem!

Mirror Protocol: Assets reflected on the blockchain.

Mirror Protocol, developed on the Luna blockchain by the Luna core team, saw the success of Synthetix marketing and decided to take it one step further. In order to quickly capitalize on the hype around the synthetic assets narrative, Mirror adopted a model similar to a traditional Uniswap V2 DEX. This approach rendered Mirror more capital efficient compared to Synthetix, requiring just 150% collateral in UST for asset minting. However, this seemingly improved model brought its own set of challenges. Lacking a debt pool, Mirror depended largely on user faith to sustain its price pegs. This went about as well as you would expect, with synthetic asset prices on Mirror commonly exceeding true asset prices by 10–25%. Despite this glaring issue, Mirror remained one of the most popular DeFi projects in crypto until Luna’s crash in 2022. This success stemmed in part from their bold stance against potential US regulations. The platform listed a wide array of synthetic assets for US equities over an extended period of time, a very risky move designed to push the synthetic asset narrative even further. For a while, Synthetix and Mirror were at the forefront of DeFi, convincing their users that synthetic assets were the future of RWAs in crypto through the successful marketing of an enticing narrative. However, in hindsight it is clear that neither model could sustainably deliver on their ambitious promises.

The Death of Synthetic Assets

The synthetic asset market, once hailed as the future of decentralized finance, soon faced a dramatic downturn. Let’s delve into the unraveling of the synthetic asset promise, exploring the reasons behind its failure.

The Failure of Synthetify

Synthetify website.

Synthetify, a project that initially showed promise with solid placements in two of Solana’s early hackathons, attempted to replicate Synthetix’s model on the Solana blockchain. It was a copy-pasta, a fork of Synthetix on Solana. After all, if Synthetix’s debt pool model worked on Ethereum, why couldn’t it also work on Solana? Despite the models being identical, Synthetify lacked one crucial component that Synthetix had: first-to-market advantage. Synthetify struggled to gain momentum while being hampered by the same capital inefficiencies inherent to the debt pool. As a result, Synthetify never had more than a couple synthetic assets in its debt pool, and never attracted enough liquidity to make those tokens tradable for regular users. While many viewed Synthetify’s struggles as a case of poor execution of a sound concept, astute observers recognized it as a more telling sign. It served as clear evidence that the debt pool model was fundamentally unscalable, foreshadowing similar challenges that would eventually hinder the growth of its progenitor, Synthetix.

As of October 24, 2023, Synthetify was exploited due to governance failure.

Synthetix Pivots

Synthetix is now thriving with the successful pivot. (Nov 21, 2023 on

Today, Synthetix stands as a prominent platform providing liquidity for various permissionless derivatives, namely perpetual contracts and options, across Ethereum Virtual Machine (EVM) compatible chains. But what led to the shift from their original debt pool model for synthetic assets? We already discussed how dangerous it was to fully collateralize their synthetic assets with SNX, and this became all too real for Synthetix when the price of SNX token plummeted by 94% between February 2021 and June 2022. This crash eroded the collateral base for their synthetic assets, forcing Synthetix to delist almost all of them, leaving only synthetic Ethereum and Euro today. Synthetix fortunately had the foresight to pivot before the bear market, with their new focus being on other derivatives like perpetual futures and options.

The End of Mirror Protocol

Mirror Protocol mAssets (screenshot). The mAssets are significantly de-pegged.

Mirror Protocol’s downfall was not a direct result of its own flaws, but rather a casualty of the wider Luna ecosystem collapse, triggered by the crash of UST. While operational, Mirror saw success despite its inability to accurately maintain its synthetic asset pegs. The platform’s disregard for legal compliance and its inability to maintain price pegs were not merely risky but outright reckless. Since its end, though indirectly caused, there has not been any project irresponsible enough to replicate their bold financial experiment.

Rising From the Ashes: The Evolution into Cloned Assets

Since early 2021, Clone Protocol has been keenly aware of the limitations inherent in existing synthetic asset exchanges. Anticipating their decline, we’ve been hard at work crafting a model that balances capital efficiency, scalability, and stable asset pegs.

As we approach our mainnet launch (currently in live on Solana Devnet), we’re excited to introduce “cloned assets,” a robust evolution of previous synthetic assets. Our Comet Liquidity System, inspired by Uniswap V3’s concentrated liquidity, promises unparalleled capital efficiency for cloned asset liquidity pools. We are also introducing the Hybrid Collateral Model to ensure that arbitrageurs are always incentivized to assist us in maintaining our price pegs. While the synthetic assets experiment has failed, cloned assets represent a fresh direction in DeFi, especially on networks like Solana. Our ambition is to swiftly integrate a multitude of tokens from various chains into the Clone ecosystem, enhancing trading efficiency and token diversity on Solana.

Join us in this new chapter of DeFi innovation! Discover more in our documentation.

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Clone Protocol

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