Proof-of-work (“PoW”) cryptocurrencies are securing significant amounts of value. At the time of this writing, the commonly referred to market capitalization of Bitcoin alone is about $1 trillion US dollars. Many PoW blockchains, however, have limited support for decentralized finance (“DeFi”). A gap therefore exists between DeFi as a set of nascent financial protocols and PoW assets as the primary value stores for cryptocurrencies. Wrapping can ferry PoW cryptocurrencies into DeFi. Nonetheless, the trust models from “wrapped” frameworks all introduce an intermediary with a new attack surface. Trustworthy centralized custodians are rare and often involve onerous restrictions. Non-custodial synthetic cryptocurrencies consequently surface as a potential solution. These synthetic assets purport to serve as substitutes for PoW assets by maintaining price pegs with their non-synthetic counterparts. In other words, the strength of the pegs determines the efficacy of a synthetic asset. Empirical evidence from projects that include prominent algorithmic stablecoins has shown the peg to be weak for the current generation of non-custodial syntheticcryptocurrencies. The reason for pegging failure appears to be these synthetics’ lack of value support from outside of their systems such that internal pegging mechanisms become irrelevant when users lose confidence in the systems in their entireties. We propose the τ protocol to solve this problem. The τ protocol synthesizes the process through which PoW cryptocurrencies are mined and introduces external value support as part of its price pegging mechanism. PoW cryptocurrencies synthesized through the τ protocol should demonstrate strong price pegs and form reliable basis for DeFi products.
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