APX Trusted Synthetic Price Discovery: Deposits & Liquidations

Economic Behavioral Incentives

In order to achieve a realistic price discovery mechanism in decentralized systems — there must be two opposing forces working on the pricing of an asset:

  • Downward Force: Punishing investors for overvaluing an asset

Don’t cheat on collateral deposits

One of the mechanisms through which the APX protocol rewards trustworthy tokenizers is by allowing Auditors to lower their collateral ratios. This is done when tokenizers provide additional documentation, secure themselves with legal obligations, etc…

Upward force

So — whenever a new unit of a Trusted Synthetic is minted, a collateral must be deposited. It’s an integral part of the minting process and inseparable from it.

Downward force

By connecting the mandatory deposit of an asset to a percentage of its value, the person doing the primary emission is disincentivized to overvalue an asset, because that would force them to deposit more money than they would if they properly valued the asset — which nobody wants to do.

Liquidation buyout

Because the minter is guaranteeing the security of an asset with their collateral, they are allowed to perform a “liquidation buyout” of the asset. They can buy 100% of the asset shares from the holders — without the holders having a say in this. To fairly compensate all holders and to “value” the asset on blockchain, a holder can increase the collateral reserve made by the minter to a larger value by adding more collateral into the smart contract.

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