Synthetix onboards Gauntlet for derivatives risk management

Gauntlet is delighted to announce its partnership with Synthetix. Synthetix is the leading derivatives liquidity protocol providing the backbone for derivatives trading in DeFi, allowing users to gain on-chain exposure to price movements of assets including popular cryptocurrencies and fiat currencies. The Synthetix team recognizes the importance of risk management as the protocol continues to grow and has signed on Gauntlet as its risk partner. Gauntlet’s agent-based simulation platform will capture the unique mechanics of the Synthetix protocol to systematically optimize capital efficiency and manage risk.

Simulating Synthetix’s debt pools to manage market risks

Synthetix gives users price exposure to a broad range of assets through the issuance of synthetic assets (Synths). The protocol accomplishes this through a unique and innovative mechanism where users act as shared counterparties to mint Synths. In traditional lending protocols, users usually only care about the price trajectories of their collateral assets and borrow assets when managing their positions. However, in Synthetix, a user’s risk position and profit are not only dependent on the specific assets they own but rather on all the assets in the shared debt pool. As shown below, the price trajectories of all the assets in the shared debt pool impact the profit of all users regardless of which Synths each user individually has minted.

Gauntlet’s financial models capture these unique dynamics. For example, our Correlated Geometric Brownian Motion models and slippage models inform how price changes impact the debt pools. Our agent-based simulation platform models user interactions and drives our recommendations on key parameters including Collateralisation Ratio and Liquidation Ratio.

Modeling liquidation delay mechanics

On Synthetix, when a user’s account becomes flagged as under-collateralized, they are given a Liquidation Delay period. During this period, the user can either add more collateral or burn Synths to increase their Collateralisation Ratio. The risk for the user is that if they fail to manage their Collateralisation Ratio and if it crosses the liquidation threshold they only have this Liquidation Delay period to fix their position before they risk losing some of their collateral. This Liquidation Delay parameter results in unique user behavior and liquidation dynamics that the Gauntlet platform will model in order to optimally manage market risk.