The DeFi protocol Synthetix has introduced new tokens that map the price of Brent oil, the most important type of crude oil in Europe.
Unlike Bitcoin and large parts of the traditional stock market, the price of oil has not yet recovered from the corona crash. Since the beginning of the year, the price of Brent crude oil has collapsed by 35 percent.
Price development of Bitcoin (red) and Brent CFDs. Source: TradingView
Like other commodities, oil is traded primarily via futures Ethereum Code contracts. A futures contract specifies the number of units of an asset to be bought or sold and the price and timing at which the asset changes hands. The contract is settled when it reaches its expiration date, at which time the party holding the futures is obliged to buy or sell the underlying asset at the agreed price.
Now oil futures have entered an emerging branch of the crypto-economy: Decentralised Finance, in short: DeFi. The crypto-derivative platform Synthetix recently launched the sOIL token. As a reference price, the sOIL token uses a dynamic weighting scheme based on prices for Brent oil futures on the Intercontinental Exchange (ICE). In addition to the sOIL token, which is used for long positions, Synthetix has introduced „iOIL“ (inverted sOIL) for short positions. The iOIL token has built-in limits, both on the bottom and the top. If a limit is reached, the token price is frozen until the next time the token is moved. In this way possible losses are limited, but the same applies to the return.
Chainlink provides data for Synthetix
The Chainlink protocol serves as data supplier for the price determination. Chainlink collects the price data for Brent oil futures on the futures markets and feeds it into the Synthetix network. The data is collected and transmitted via decentralised network nodes to make manipulation – for example by Sybill attacks – more difficult.
Since September, Synthetix has relied exclusively on the services of Chainlink for the pricing of its synthetic assets („Synths“).
We are confident that Chainlink will continue to be the safest and most reliable Oracle mechanism on the market, providing strong guarantees to the Synthetix protocol that all assets are secured by high quality pricing data with high availability, tamper resistance and transparency,
says the Synthetix blog entry on the release of the oil futures on the DEX.
The big rush on sOIL and iOIL is still to come. Since its introduction on 12 November, the Synthetix protocol has only generated just under 3 sOIL and around 6.5 iOIL tokens.