Synthetic assets are a system that allows users to create 24/7 financial markets related to any value.
For example, right now, there does not exist a financial market future for the US Unemployment Report. If you wanted to trade against it or include it in a portfolio that represents a snapshot of the US economy, you would be unable to.
But, with the BAO protocol, all you need is to have an oracle track the price, and then you can create a synthetic asset with a price related to US Unemployment.
Synthetic assets can track anything, including the price of existing assets, allowing 24/7 worldwide access to markets.
The global cryptocurrency market is at about $2 trillion.
By comparison, the global stock market is at $73 trillion, and derivatives are at $544 trillion.
Existing stocks and derivatives combined are worth $617 trillion (1,067x all cryptocurrencies combined), and even then, those derivatives do not cover the types of markets you can make with synthetic assets.
Capturing even 1% of the global asset trade would mean a market cap of $6.17 trillion (17.5x the market cap of Bitcoin)
Existing synthetic asset solutions have significant gaps.
Systems like Synthetix require that the bulk of the collateral is managed in their network token. While this proves lucrative, it also has two critical flaws:
It makes those assets idle, meaning they can't be used for other purposes (such as pool liquidity in other providers)
It overly centralizes risk to a single asset infrastructure and creates double-risk exposure.
Given that the financial incentives of the Synthetix ecosystem are driven solely by this model, changes would be catastrophic to it.
To buy into a synthetic asset from Synthetix, you must believe in the SNX token. While that is a straightforward premise for cryptocurrency supporters, it is a tough sell for institutions that want exposure to synthetic assets. Now they have a double risk of being exposed to the asset they are buying and to SNX.
BAO solves these problems by using existing assets from other protocols as collateral so that:
Assets are optimized and not idle. Users don't need to decide between protocols.
Double risk is turned into a double benefit as users get staking fees and asset exposure.
BAO synthetics uses some of the fees collected to build an insurance fund to help make users whole if something goes wrong.
While the UMA protocol is an improvement over the Synthetix protocol in a technical sense, its complexity and liabilities leave much to be desired.
The UMA protocols rely on specific "token sponsors" in their ecosystem who manage whitelisting processes, the creation and sale of tokens, and the initial collateralization. They also require using their own unique oracles rather than something secured and tested like Chainlink.
Finally, they have a dispute resolution method tied to the oracle process. While this may make sense for betting market oracles like Augur, having all protocol assets able to be overturned by human interest arbitration defeats the point of using cryptocurrencies at all.
Overall Value Points for BAO:
BAO has a broad distribution, rewarding over 200 market assets and creating the most diverse yield farming distribution in history so everyone can participate with minimal risk of monopolies.
BAO is backed by a diverse treasury that collects yield using battle-tested Defi protocols. Never Centralized exchanges.
BAO will build on top of existing protocols, meaning users don't need to choose which project they are invested in.
BAO building on top of other protocols also means users can boost their earnings, and we can make diverse partnerships.
BAO uses chainlink oracles at its core for synthetic assets meaning we can ensure accurate pricing.
Unlike UMA, sponsorship isn't required. No risk of liability for a single person. The synthetic assets created will be managed by the community DAO.
In a worst-case scenario where BAO fails to gain traction, the BAO token includes rights to the Bao treasury for users to vote on a final liquidation distribution. This applies only after the synthetic protocol is launched and there are collected fees to liquidate.
The addressable market for a project like BAO is >1000x larger than the existing cryptocurrency market.
BAO token distribution model rewards early and dedicated participants. This aligns incentives long-term for all users.
Founder rewards are small and max locked in veBAO, ensuring there is no dumping disaster (like there was with SushiSwap)
BAO has dedicated community funds, liquidity provider funds, and dev funds to provide community grants, rewards, and upside can be shared with users who contribute beyond just code.
BAO incentivizes users to lock tokens in veBAO by rewarding users with locked tokens more than those without, meaning long-term participants will have more governance power, rewards boosts, and revenue share over time.