Composing Synthetic Assets With Lending Protocols

Detailed Instructions

Begin by depositing an accepted collateral asset, such as WETH or WBTC, into a lending protocol like Aave or Compound. This deposit mints a collateralized debt position (CDP) token, representing your share of the pool. The amount deposited determines your borrowing capacity based on the asset's loan-to-value (LTV) ratio. For example, depositing 10 ETH with a 75% LTV allows you to borrow up to 7.5 ETH worth of other assets.

• Sub-step 1: Approve the lending protocol contract to spend your collateral token using the approve function.
• Sub-step 2: Call the protocol's deposit or supply function, specifying the asset address and amount.
• Sub-step 3: Verify you received the protocol's corresponding aToken or cToken in your wallet, which accrues interest.

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// Example: Depositing WETH to Aave V3
IERC20(wethAddress).approve(poolAddress, collateralAmount);
IPool(poolAddress).supply(wethAddress, collateralAmount, yourAddress, 0);

Tip: Always check the protocol's current LTV ratios and liquidation thresholds for your chosen collateral, as they can be updated via governance.

Detailed Instructions

Using your active CDP, borrow a stablecoin like DAI or USDC. This creates a debt position denominated in the borrowed asset, which accrues interest at a variable or stable rate. The borrowed amount must remain below your health factor, a risk metric calculated as (Collateral Value * Liquidation Threshold) / Total Borrowed Value. A health factor below 1.0 risks liquidation.

• Sub-step 1: Query your available borrowing power for the desired stablecoin using the protocol's getUserAccountData function.
• Sub-step 2: Execute the borrow function, specifying the stablecoin address, amount, interest rate mode (1 for stable, 2 for variable), and a referral code (often 0).
• Sub-step 3: Confirm the stablecoins are received in your wallet and that your health factor is safely above 1.2 to provide a buffer.

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// Example: Borrowing DAI from Aave V3
IPool(poolAddress).borrow(daiAddress, borrowAmount, 2, 0, yourAddress);

Tip: Monitor borrowing rates. Variable rates can fluctuate with market conditions, impacting your cost of capital for the synthetic position.

Detailed Instructions

Direct the borrowed stablecoins to a synthetic asset protocol like Synthetix or a derivative vault. This step involves swapping the stablecoin for a synthetic token (synth) that tracks an external price feed, such as sETH or sBTC. The minting is typically done via a mint function that burns the stablecoin and mints the synth, often at a 1:1 ratio to the value of the underlying asset.

• Sub-step 1: Approve the synthetic protocol's minter contract to spend your stablecoin balance.
• Sub-step 2: Call the mint or issueSynths function, specifying the amount. The protocol will use an on-chain oracle (e.g., Chainlink) to determine the minting ratio.
• Sub-step 3: Verify the synthetic token balance in your wallet and check the protocol's collateralization ratio to ensure the system remains over-collateralized.

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// Example: Minting sUSD with DAI on a Synthetix-inspired contract
IERC20(daiAddress).approve(synthMinterAddress, mintAmount);
ISynthMinter(synthMinterAddress).mint(mintAmount);

Tip: Understand the synthetic protocol's fee structure, which may include a minting fee or exchange fee when converting between synths.

Detailed Instructions

Ongoing management is critical. You must monitor two key risk layers: the lending protocol health factor and the synthetic protocol collateralization ratio. Price volatility of your initial collateral (e.g., ETH) or the synthetic asset can endanger the position. If your lending health factor nears 1.0, you must either repay debt or add more collateral.

• Sub-step 1: Set up alerts for your health factor using a service like DeFi Saver or a custom script polling the protocol's contract.
• Sub-step 2: To avoid liquidation, be prepared to call repay on the lending protocol or deposit more collateral.
• Sub-step 3: Periodically claim any reward tokens (e.g., Aave's stkAAVE or COMP) emitted by the lending protocol for participation.

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// Example: Repaying a portion of debt on Aave V3
IERC20(daiAddress).approve(poolAddress, repayAmount);
IPool(poolAddress).repay(daiAddress, repayAmount, 2, yourAddress);

Tip: Consider using a debt management dashboard that aggregates your position across both the lending and synthetic protocols for a unified view.

Detailed Instructions

To exit, reverse the workflow. First, burn the synthetic token to redeem the stablecoin. Then, repay the stablecoin debt to the lending protocol to free your collateral. Finally, withdraw the original collateral. The order is crucial to maintain solvency and minimize slippage or interest accrual.

• Sub-step 1: On the synthetic protocol, call burn or burnSynths to convert your synth back to the base stablecoin, paying any redemption fees.
• Sub-step 2: With the stablecoin, repay the full outstanding debt (principal + accrued interest) to the lending protocol using the repay function.
• Sub-step 3: Once debt is zero, call withdraw on the lending protocol to retrieve your original collateral, minus any fees.

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// Example: Unwinding sequence
ISynthToken(synthAddress).burn(burnAmount);
IERC20(daiAddress).approve(poolAddress, debtBalance);
IPool(poolAddress).repay(daiAddress, type(uint256).max, 2, yourAddress); // Repay all debt
IPool(poolAddress).withdraw(wethAddress, collateralBalance, yourAddress);

Tip: Always check for outstanding interest accrued since your last interaction; use type(uint256).max to repay the full debt amount conveniently.

Detailed Instructions

Define the core risk parameters that will trigger automated actions. The primary metric is the Health Factor (HF), calculated as (Collateral Value * Liquidation Threshold) / Total Borrowed Value. A position becomes liquidatable when HF < 1. Set a Safety Buffer (e.g., HF > 1.5) for proactive alerts.

• Sub-step 1: Determine the Liquidation Threshold for your collateral asset (e.g., 75% for wETH).
• Sub-step 2: Calculate the minimum collateral required for your target borrow amount to maintain your Safety Buffer.
• Sub-step 3: Set a Maximum Debt Ceiling for the protocol to limit protocol-level exposure.
• Sub-step 4: Define acceptable Price Deviation thresholds for your oracle feeds.

Tip: Use a conservative liquidation threshold from the protocol's documentation, as it can vary by asset and market conditions.

Detailed Instructions

Build a monitoring agent that queries on-chain data to compute the real-time Health Factor. Use the lending protocol's lens contracts or direct contract calls for efficiency.

• Sub-step 1: Fetch the user's userAccountData from the Aave V3 Pool contract, which returns totalCollateralBase, totalDebtBase, and healthFactor.
• Sub-step 2: Parse the returned values. The health factor is returned as an integer; divide by 1e18 for the decimal representation.
• Sub-step 3: Log the HF and trigger an alert (e.g., Discord webhook, SMS) if it drops below your predefined Safety Buffer.
• Sub-step 4: Monitor the Available Borrowing Power to anticipate if you can safely increase leverage.

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// Example using ethers.js to fetch Aave V3 health factor
const userData = await lendingPool.getUserAccountData(userAddress);
const healthFactor = Number(userData.healthFactor) / 1e18;
console.log(`Current Health Factor: ${healthFactor}`);

Tip: Run this script on a serverless function (e.g., AWS Lambda) with a 60-second interval for cost-effective, real-time monitoring.

Detailed Instructions

Synthetic asset values are derived from oracles. Monitor these feeds for staleness, manipulation, and deviation.

• Sub-step 1: Identify the primary oracle (e.g., Chainlink AggregatorV3Interface) and any fallback oracles used by the protocol.
• Sub-step 2: Check the latestRoundData() for the answeredInRound and updatedAt values. A stale price (e.g., > 1 hour old) is a critical risk.
• Sub-step 3: Monitor the price deviation between the primary oracle and a secondary decentralized source (e.g., a Uniswap V3 TWAP) using a price deviation oracle.
• Sub-step 4: Set up alerts for oracle downtime or if the price deviates beyond a set percentage (e.g., 3%).

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// Solidity snippet to check Chainlink oracle staleness
(, int256 answer, , uint256 updatedAt, ) = aggregator.latestRoundData();
require(block.timestamp - updatedAt <= STALE_PRICE_DELAY, "Stale price");
require(answer > 0, "Invalid price");

Tip: For critical positions, consider subscribing to Chainlink's Market & Data Feeds status page for outage notifications.

Detailed Instructions

When the Health Factor nears 1, you must either add collateral or repay debt. Automate this response to avoid liquidation penalties and loss of funds.

• Sub-step 1: Pre-approve a stablecoin (e.g., USDC) for debt repayment on the lending protocol to save time in a crisis.
• Sub-step 2: Create a Keeper Network job (using Chainlink Keepers or Gelato) that automatically repays a portion of the debt when HF < 1.1.
• Sub-step 3: Alternatively, prepare a script that can be manually executed to deposit additional collateral from a designated wallet.
• Sub-step 4: Calculate the exact amount needed to restore the HF to your Safety Buffer. Use the formula: Required Collateral Increase = (Total Debt * Target HF) / Liquidation Threshold - Current Collateral.

Tip: Test your emergency response script on a testnet with a simulated price drop to ensure it executes correctly under network congestion.

Detailed Instructions

Systemic risks include changes to the lending protocol's parameters and broader market volatility.

• Sub-step 1: Subscribe to governance forums (e.g., Aave Governance Forum) for proposals that may affect Liquidation Thresholds, Loan-to-Value ratios, or asset listings.
• Sub-step 2: Monitor the protocol's Total Value Locked (TVL) and Utilization Rates for your borrowed asset. High utilization (>90%) can lead to increased borrowing costs and liquidity crunches.
• Sub-step 3: Track the Stablecoin peg of assets you are borrowing or using as collateral (e.g., DAI, USDC). A depeg can drastically affect collateral value.
• Sub-step 4: Watch for network congestion on the underlying blockchain, as high gas fees can prevent timely execution of your risk mitigation transactions.

Tip: Use DeFi risk dashboards like DeFi Pulse or DeFi Llama to get an aggregated view of protocol health and market conditions.