Synthetic Asset Router

The router acts as a single entry point, aggregating liquidity from multiple underlying protocols (e.g., Synthetix, UMA, MakerDAO) or liquidity pools. This provides users with:

• Best execution prices by sourcing from the most favorable pool.
• Reduced slippage through optimized order routing.
• A single interface to access a diverse basket of synthetic assets, from commodities to forex pairs.

A core function is enabling the trust-minimized creation and transfer of synths across different blockchains. This involves:

• Locking collateral on a source chain (e.g., Ethereum).
• Minting a synthetic representation on a destination chain (e.g., Arbitrum, Polygon) via a cross-chain messaging protocol (like LayerZero or CCIP).
• Maintaining collateralization ratios and enabling redemption back to the original chain, abstracting complex bridge mechanics for the end user.

The router integrates with and abstracts multiple price feed oracles (e.g., Chainlink, Pyth Network, internal DEX oracles). This ensures:

• Robust and manipulation-resistant pricing for minting and liquidation events by using a decentralized oracle network.
• Real-time asset valuation across all supported synthetic assets.
• A single, reliable source of truth for the system's collateralization checks, critical for maintaining peg stability.

It automates the process of securing and rebalancing collateral backing the synthetic assets. Key mechanisms include:

• Continuous collateral ratio monitoring against predefined thresholds.
• Automatic liquidation of undercollateralized positions to protect the system's solvency.
• Support for diverse collateral types, which may include stablecoins, ETH, LSTs, or even LP tokens from other DeFi protocols.

The router is designed as a DeFi primitive that other protocols can integrate. This enables:

• Money Legos: DEXs can use it as a liquidity source for synthetic asset pairs.
• Yield Strategies: Vaults can mint synths as part of a broader yield-generating strategy.
• Structured Products: Protocols can build leveraged or hedged positions using the router's minting and redemption functions as a base layer.

It employs several techniques to minimize transaction costs for users, which is critical for frequent minting/redemption actions:

• Batch transactions for multi-asset operations.
• Route optimization to choose the most gas-efficient liquidity source.
• Fee abstraction, potentially allowing fees to be paid in the synthetic asset itself rather than the native gas token.

The router's primary function is managing the minting (creation) and redemption (destruction) of synthetic assets, or synths. Users deposit collateral into a vault, and the router mints a corresponding synth, maintaining the collateralization ratio. Redemption burns the synth to release the locked collateral, minus any fees.

• Minting: Lock collateral (e.g., ETH), receive synthetic USD (sUSD).
• Redemption: Return sUSD, retrieve a proportional amount of ETH collateral.

A key integration is sourcing liquidity across multiple blockchains and decentralized exchanges (DEXs). The router acts as an aggregator, splitting a user's trade for a synthetic asset across various liquidity pools to achieve the best execution price with minimal slippage.

• Example: Swapping synthetic gold (sXAU) for synthetic Bitcoin (sBTC) might route portions of the trade through Uniswap, Curve, and a cross-chain bridge like LayerZero.

Synthetic assets are worthless without accurate, real-time price data. The router must integrate with decentralized oracle networks like Chainlink or Pyth. These oracles provide the secure off-chain price feeds (e.g., for Tesla stock or gold) that the smart contract uses to:

• Determine the value of collateral for minting.
• Calculate exchange rates for trades.
• Trigger liquidation if collateral value falls below the required ratio.

Synthetic asset routers are designed for composability, enabling other DeFi protocols to use synths as building blocks. This creates integrated financial products.

• Lending: Use sETH as collateral to borrow stablecoins on Aave.
• Yield Farming: Deposit sUSD into a Curve pool to earn trading fees and CRV rewards.
• Structured Products: Automate strategies that trade between synthetic assets based on market conditions.

A major use case is bridging traditional finance (TradFi) with DeFi by creating synths for Real-World Assets (RWAs). The router facilitates access to assets like stocks, commodities, and fiat currencies without requiring direct ownership.

• Process: A licensed entity holds the actual asset (e.g., a Treasury bill). The router mints a tokenized representation (e.g., sUS6M) that tracks its value, allowing on-chain trading and integration.

The router enforces system stability through configurable risk parameters managed by governance. Key managed settings include:

• Collateral Ratios: Minimum required over-collateralization (e.g., 150%).
• Liquidation Penalties: Fees applied during under-collateralized liquidations.
• Trading Fees: Protocol fees on mint, redeem, and exchange functions.
• Supported Assets: Whitelists for acceptable collateral and synth types.

The system's solvency relies on over-collateralization and timely liquidations.

• Collateral volatility: If the value of the locked collateral (e.g., ETH) drops rapidly, positions may become undercollateralized before a liquidation can occur.
• Liquidation engine flaws: Inefficient or delayed liquidation mechanisms can result in bad debt for the protocol.
• Collateral whitelisting: The security of the entire system depends on the inherent security and censorship-resistance of the accepted collateral assets.

The router is implemented as a set of interconnected smart contracts, introducing several layers of risk:

• Code vulnerabilities: Bugs in the complex minting, swapping, or fee logic could lead to fund loss.
• Upgradeability mechanisms: If the contract uses proxy patterns for upgrades, compromised admin keys or flawed upgrade logic could be exploited to hijack the system.
• Integration risks: Vulnerabilities in integrated protocols (e.g., DEXs used for swaps, lending markets) can propagate to the router.

The router's economic model and governance can be targeted.

• Governance token attacks: If control parameters are governed by a token, an attacker could acquire enough tokens to vote in malicious proposals (e.g., lowering collateral ratios).
• Fee extraction: Poorly designed fee mechanisms could be exploited by miners/validators through MEV (Maximal Extractable Value) strategies, extracting value from users.
• Sybil attacks: An attacker could create many wallets to manipulate governance votes or liquidity provisions.

Secure router implementations employ multiple defensive strategies:

• Decentralized & robust oracles: Using multiple, time-tested oracle networks (e.g., Chainlink) with fallback mechanisms.
• Conservative parameters: High collateralization ratios (e.g., 150%+), circuit breakers, and gradual parameter updates via Time-locks.
• Extensive auditing: Multiple audits by reputable firms and public bug bounty programs.
• Non-custodial design: Ensuring users always retain custody of their collateral in smart contracts, not with a central entity.
• Formal verification: Using mathematical methods to prove the correctness of critical contract logic.