What is synthetic dollar?

A token that targets a dollar value using a hedged position rather than by holding dollars.

The common construction pairs spot crypto collateral with an equal short position in perpetual futures, so a price fall in one leg is offset by a gain in the other, and the funding paid on the short is the source of yield (see delta neutral). It is not a fiat-backed stablecoin and should not be treated as one: it depends on exchanges staying solvent, on the hedge staying executable, and on funding rates that can turn negative. Backing and venue exposure are published by the issuer. See perpetuals and stablecoin.

These are usually marketed alongside dollar-backed tokens and often carry a visible yield, which is the reason to be clear about what is producing it.

How it works

The issuer takes deposits, buys spot crypto with them, and opens an equal-sized short in perpetual futures on that same asset. If the asset falls 20%, the spot leg loses 20% and the short gains roughly 20%, so the combined position holds its dollar value. That is what makes the token dollar-referenced without a dollar in sight.

The yield comes from funding rate payments. On a perpetual contract, when the contract trades above spot the longs pay the shorts periodically, and historically that has been the more common direction. The issuer is short, so it collects.

Three exposures follow, and none of them exist in a fiat-backed token.

Funding can invert. When the market is bearish, shorts pay longs, and the yield becomes a cost that erodes backing rather than adding to it.

The hedge lives on exchanges. The short position and the collateral behind it sit at derivatives venues, so a venue failure or a forced deleveraging is a direct loss. See auto deleveraging and counterparty risk.

Redemption is not universal. Direct redemption at par is generally available only to permitted counterparties, so a retail holder exits by selling into the market at whatever price the market offers.

Example

Illustrative arithmetic. The issuer holds $100 of an asset spot and is short $100 of the same asset in perpetuals. The asset falls 30%. The spot leg is worth $70 and the short has gained roughly $30, so the combined position is still about $100 and the token holds its reference. Now suppose funding runs at negative 0.01% every eight hours, meaning the short pays. That is roughly 0.03% a day, about 11% annualized against the position, paid out of backing rather than into it. The peg mechanism still works. The yield has become a drain.

Why it matters when you buy

If you hold one of these between trades, you are holding a hedged derivatives position rather than a cash equivalent, and the exposure is to exchanges rather than to a bank. The guide on stablecoin yield risks covers where a published yield actually comes from, and the guide on stablecoins covers the alternatives.

Related terms

• delta neutral — the position that holds the value
• funding rate — the source of the yield
• perpetuals — the contract the hedge uses
• stablecoin — the category it is often shelved under
• counterparty risk — the exposure it adds
• depeg — what failure looks like from outside

Questions

Is a synthetic dollar a stablecoin?

It targets a dollar value, which is the family resemblance, but there are no dollars behind it. The backing is a hedged position on exchanges, and the failure modes are entirely different.

Where does the yield come from?

From funding payments collected on the short leg of the hedge. It is not interest on a deposit and it is not guaranteed, and it can reverse into a cost.

Can I redeem one for a dollar?

Generally only if you are an approved counterparty of the issuer. Retail holders normally exit by selling on a market, at the market's price rather than at par.