Over-collateralization is the primary security model. Users lock crypto assets (e.g., ETH) exceeding the value of the minted synthetic asset to absorb price volatility. This creates a collateral ratio, often 150% or higher. It mitigates counterparty risk and ensures the synthetic's value is always backed, even during market crashes.

Decentralized oracle networks like Chainlink provide critical off-chain price data. They feed real-time valuations of the underlying asset (e.g., Tesla stock, gold) onto the blockchain. This data is aggregated from multiple sources to resist manipulation. Accurate oracles are essential for minting, redeeming, and liquidating positions.

The ERC-20 token representing a specific asset, such as sTSLA or sXAU. It tracks the price of its real-world counterpart via oracles. Synths are fungible, tradeable on DEXs, and composable within DeFi for lending or yield farming. They grant exposure without requiring custody of the physical asset.

A shared debt pool system aligns incentives across the protocol. Stakers deposit collateral to back the entire ecosystem of synths and earn fees from trading and minting. Their staked value fluctuates based on the aggregate performance of all synths, creating a collective risk model distinct from isolated vaults.

The mint/burn mechanism controls synth supply. Users mint synths by depositing collateral into a smart contract, creating a debt position. To reclaim collateral, they must burn an equivalent value of synths, repaying the debt. This process enforces the synthetic asset's peg to its target price through economic incentives.

Automated liquidations protect the system's solvency. If a user's collateral ratio falls below a threshold (e.g., 150%), their position can be liquidated by keepers for a reward. This mechanism swiftly recapitalizes the debt pool, ensuring all synths remain fully backed and minimizing systemic risk from undercollateralized accounts.

Oracle failure is a primary risk. Synthetic assets rely on external price feeds. If an oracle is delayed, censored, or manipulated, it can cause incorrect pricing, allowing for profitable exploits like draining collateral pools. Protocols mitigate this with decentralized oracle networks and circuit breakers, but the dependency remains a critical single point of failure.

Code exploits can lead to catastrophic loss. The complex logic for minting, trading, and liquidating synthetics is a high-value target. A bug in the collateral management or fee calculation could be exploited to mint unlimited assets or steal funds. Rigorous audits and formal verification are essential but not guarantees against novel attack vectors.

Volatility-driven liquidations can destabilize the system. During high market volatility, a drop in collateral value or spike in synthetic asset price can trigger mass liquidations. This creates sell pressure on the collateral asset, potentially causing a feedback loop that depletes the protocol's solvency and harms all remaining positions.

Collateral depegging directly threatens protocol solvency. Many synthetics are backed by stablecoins or LP tokens. If the collateral asset loses its peg or suffers an exploit (e.g., a stablecoin depeg), the entire backing for the synthetic becomes undercollateralized. This requires robust collateral diversification and high-quality, battle-tested assets.

Protocol parameter changes pose a centralization risk. Governance tokens often control critical levers like fee rates, collateral ratios, and oracle whitelists. A malicious actor gaining majority control could extract value or sabotage the system. This highlights the importance of decentralized, well-distributed governance with timelocks on sensitive actions.

Legal and compliance risk is an external threat. Synthetic stocks and commodities may attract regulatory scrutiny as potential unregistered securities. Enforcement actions against issuers or restrictions on access could render assets illiquid or worthless. This legal overhang creates uncertainty for long-term holders and protocol developers operating in a gray area.