Abra’s synthetic currency

Abra is unlike any other crypto wallet or exchange currently in existence. At its core, Abra is a decentralized investing platform that uses cryptocurrencies as collateral to create synthetic assets.

Abra’s synthetic asset model is the first of its kind and leverages bitcoin and litecoin blockchain-enabled smart contracts to reduce friction for anyone interested in buying, selling, and holding other assets such as alternative cryptocurrencies.

Right now the technology provides a seamless investing experience for Abra users interested in gaining exposure to crypto assets and fiat currencies, with more types of assets on the way. 

The implications for this technology are enormous and could eventually lead to creating crypto-backed representations of all kinds of value, including traditional securities. As cryptocurrencies continue to grow in terms of both market capitalization and use cases, a crypto-collateralized synthetic currency model could also provide the underpinnings of a global crypto bank.

By giving investors exposure to cryptocurrencies and fiat currencies through a single mobile app-based wallet, the Abra app is safe and secure, while the underlying platform is scalable. The only thing needed to participate, from anywhere in the world, is a smartphone.

How Abra’s synthetic assets work

The easiest way to understand how Abra’s synthetic assets work is to walk through the steps of a transaction as it would unfold on the Abra app.  In this example, an Abra user wants to store US dollars in their Abra app.  Here is how they would use bitcoin (or litecoin) to store US dollars:

  • The deposit: When an Abra user deposits funds into his or her wallet, the funds are immediately converted to either bitcoin or litecoin and then live on one of those respective blockchains. This is the first thing that happens, and it’s really important to understand. Abra is unlike many other cryptocurrency exchanges in that our core technology is based on decentralized principles. Each Abra wallet is non-custodial, which means the assets deposited by the investor are not controlled by Abra or any other third-party.

 

  • The peg: For the sake of easy math, let’s say that an Abra user deposits $200, which at the time of deposit also happens to be the value of one bitcoin (so, for the purposes of this exercise let’s pretend that 1 BTC = 200 USD at deposit time). As soon as the fiat dollars are deposited, they are converted to one bitcoin. Those assets are stored in a multisignature contract (both Abra and the user are part of the contract) but they are still represented as USD in the Abra app on the user’s screen. The multisignature contract effectively outlines the terms of the peg for both the user and for Abra, essentially creating a crypto-collateralized stablecoin.

 

  • The hedge: So far so good. The deposit now exists on the blockchain and the initial $200 is now pegged to one BTC. But what if the Abra user keeps their balance in USD on the app, and then the value of BTC drops? Well, in order for Abra to cover the difference, there needs to be some kind of hedge in place. Everytime an Abra user opens a smart contract, Abra immediately hedges away its risk, so that the company has the ability to honor all trades at all times. Effectively, when an Abra user funds his or her wallet, they are taking a short position on bitcoin/litecoin and a long position on the hedged asset, and Abra is taking a long position on bitcoin/litecoin and a short position on the hedged asset. To eliminate the exposure of the price moving against Abra we will borrow an equivalent amount of deposited assets from a crypto broker. Still using our hypothetical example, Abra will borrow one BTC, sell it to a different broker in exchange for USD, and keep the $200 in an escrow account.Now let’s say that the price of BTC drops to $160 but the user is still holding USD in his or her wallet. At this point, the user would expect to be able to withdraw $200 USD, regardless of what the price of bitcoin/litecoin is doing. In order to make that happen, Abra would add .25 BTC ($160 x .25 = $40) to the user’s smart contract. The user’s balance is 1.25 BTC or $200. If the user decides to withdraw at this point, then Abra would buy 1.25 BTC back from a broker using the $200 they have stored in the escrow account from the conversion after the original deposit. Of that 1.25 BTC, Abra will use .25 to cover the user and the remainder (1 BTC) would go to pay back the amount borrowed in the first place, along with any interest. The result of all of this happening in the backend is that the user is made whole, Abra is made whole, and the original lender is made whole.

 

  • The trades: In the example above, the Abra user never traded his or her money out of BTC. The great thing about the synthetic currency model is all of the same principles apply regardless of which synthetic asset the user purchases. For example, an Abra user could fund his or her wallet with $200 USD, buy some ethereum, maybe a little digibyte, convert that money back to USD, then convert it to Mexican pesos, and the buy more crypto — in the end, it really doesn’t matter because once the peg and the hedge are established in the multiple signature contract, then all of the adjustments that need to be made will happen via bitcoin scripts in the background. Abra is constantly adjusting, based on user activity, to avoid risk and be able to cover all trades should a user choose to withdraw (or send money to another user). It also means that Abra users have the ability to do their own hedging, or lock in crypto gains, during crypto market declines.

 

  • The payout: When an Abra user wants to cash out and transfer their assets back to a bank account or an external crypto wallet they are effectively exiting the bitcoin smart contract and the assets that were stored as stablecoins on the blockchain are converted back to the currency of choice, which could be natively supported cryptos (we are adding more support all the time for native crypto) or back to fiat currency via a deposit back into a traditional bank.

 

Abra charges a small spread on the transactions that happen between the currencies on the app. The fees charged cover the borrowing costs associated with the hedge mentioned above, and to support the company so we can further develop the underlying technology and add more native cryptocurrencies and create more crypto-collateralized assets. On the subject of fees, it’s important to note that sometimes the companies we work with to enable deposits and withdrawals in and out of the Abra app via credit and debit card as well as bank accounts sometimes charge transaction fees.  In most cases, we simply pass those fees on to the user and are always looking for ways to lower these fees.

What Abra’s synthetic currency model enables

Right now, Abra’s synthetic currency model enables simple crypto investing.

But this is just the beginning. Abra’s synthetic currency model will enable the creation of many other kinds of crypto-collateralized assets.

In the future, the same foundational synthetic currency technology can create investment opportunities out of traditional financial instruments such as stocks, commodities, and bonds. Using Abra’s synthetic currency, exposure to the price action of traditional stocks and indexes could even be fractionalized and made available globally in small dollar minimum amounts.

Besides investing, Abra’s synthetic currency model also allows users to transfer money easily from one Abra wallet to another Abra wallet and anywhere in the world. One of the biggest advantages is that the currency that one user sends can be different from the currency that the second user receives. In other words, user A can send bitcoin from his or her wallet, and user B will be able to receive that currency in ether or zcash, or even one of the fiat currencies such as Mexican Pesos.

The takeaway

Abra is more than another cryptocurrency exchange or another mobile crypto wallet. Instead, it’s like a gateway to a brand new kind of investing, all of which is powered by the unique, decentralized bitcoin/litecoin-based smart contracts.

Abra’s goal is to make investing simple and secure and to help make a more inclusive and equitable global financial system.

It’s time to be your own bank.

3 thoughts on “Abra’s synthetic currency

  1. Hi,
    If I understand correctly, the counter party risk is that if Abra defaults then user funds within the wallet are lost.
    Am I correct?

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