Dynamic Debt Pooling
Unlike traditional static debt, the design of dynamic debt was first introduced by the DeFi project Synthetix. In layman’s terms, when a user pledges SNX to mint sUSD, the value of sUSD is considered a liability to the system, and when sUSD is bought as sToken, the debt increases or decreases as the price of sToken goes up or down. All users of the Synthetix network share the risk of rising or falling debt. If the price of sBTC increases by 20% over a certain period while the other sTokens price remains unchanged, the SNX’s mortgagee shares in the debt from the 20% increase in sBTC. Because the debt is diluted, those who hold sBTC gain, while others lose.
For example, “A and B each pledge $500,000 worth of sUSD, at which point the total debt of the entire network is $1 million, (i.e.) each is responsible for 50% of the debt. If A uses the $500,000 worth of sUSD to buy sETH and the price of ETH increases by 50%, then the value of the debt pool will increase to $1.25 million, and A and B’s respective liabilities will increase from $500,000 to $625,000. Where A, who holds sETH, also gains $125,000 after paying off his debt, while B, who has only held sUSD from the beginning, increases his debt by $125,000.”
This debt pooling model is a dynamic zero-sum game within a contract, where profits may come from an increase in the price of one’s assets and a decrease in the price of others’ assets; conversely, losses may come from a decrease in the price of one’s assets and an increase in the price of others’ assets. Therefore, users participating in pledging need to be traders who are more experienced in trading and risk control and skilled in using hedging on traditional platforms to hedge risk. The sharing of debt pools provides an incentive for users to keep trading and minting new sToken, as you can lose money if your asset price does not rise faster than the total value, thus providing an incentive for traders to keep pursuing asset appreciation while increasing liquidity and creating new synthetic assets.