🔑What is a synthetic liquidity pool?

Synthetic liquidity pools are a new way of thinking about token indices.

Historically, decentralized index-making platforms on Solana and Ethereum mint brand-new tokens that represent the underlying assets of an index. This puts all of the trust in the platform that is managing/holding the user funds since the user does not actually own the underlying assets of the index.

This poses a problem for a few reasons:

• All of the user funds are kept in a wallet controlled by the platform to buy and sell underlying assets for the user

• Any user that wants to create a new index, has to mint the tokens for that index

• A user can only add tokens that the platform chooses to make compatible

• You do not actually own the underlying assets, but rather a token that represents them

• If something happens to the wallet that controls all of the underlying assets like a drain, the platform has no underlying assets backing the index token to sell back to the user

With synthetic liquidity pools, users directly wrap their own tokens into a personal index using a PDA, so their index is backed by underlying assets that they own. The "pool" that is created from their index to their assets is back by the assets pool value. This means that there can be no centralized wallet to drain on Pocket's side. User funds stay in their own wallet wrapped in their NFT receipt. Self-custody.

This means that users can wrap any SPL token that exists on Jupiter for example, and put it into an index without Pocket having to make new tokens compatible.

The synthetic quality of these new pools comes from the fact that each index's underlying assets are backed by the actual underlying asset token pools (ex: USDC-SOL, WBTC-USDC, MSOL-SOL). This puts all of the trust in the real token liquidity.

For example, if you have a Pocket portfolio with SOL & WBTC, the SOL-USDC & SOL-WBTC pools would have to be drained for your funds to be lost. (Or your wallet would have to be drained) Pocket doesn't hold user funds meaning users are putting their trust in the same pools millions of people use every day.