This "synthetic" balance does closely remind me of "uninsured" balance I proposed for XLN (Lightning, extended with credit lines to solve capacity problem) https://github.com/fairlayer/wiki/blob/master/04_four_balanc...

The difference is synthetic balance is offered to be enforced from the collateral from the escrow. In XLN I proposed to try to enforce it by taking it from the other party's onchain balance.

Both options would work together even better ("synergy" haha)! From the first example:

1. blockchain dispute resolution code tries to take USDC from Alice's onchain balance (since Alice owes 750 to Bob).

2. if Alice still owes something, try to convert any other Alice's onchain balance into USDC using oracles, then return to Bob.

PS. will finish reading the paper sometime soon, so not sure if got it wrong.

Overall, happy to see new solutions coming to payment channels that do not imply full collateralization (via cross-asset synthetic collateralization as in here). Full prepaid collateral is stupid and limiting the growth.