The concept synthetic asset refers to a collection of assets that have the same value as another asset. Traditionally, synthetic products combine various derivatives — options, futures, or swaps – that mimic the underlying asset – stocks, bonds, commodities, indices, currencies, or interest rates. Also we’ve discussed crypto derivatives in one of our previous articles.
For instance, instead of buying a stock, an investment firm might buy a call and sell a put on the same stock. The use of synthetic assets here allows the firm to use multiple financial instruments rather than one investment asset.
What is a Synthetic Asset?
Crypto synthetic (or commonly Synthetics) assets aim to provide users with access to many different assets without having to hold the underlying asset. This can be anything from fiat currencies like the US dollar or Japanese yen, to commodities like gold and silver, as well as index funds or other digital assets.
By using these unique synthetics, investors can own tokens that track the value of certain assets without having to leave the cryptocurrency ecosystem. Cryptocurrency synthetic assets also offer users all the benefits of decentralization, as they are open to all users abroad using secure smart contracts and other tools, and the data is stored in distributed ledgers.
Examples of Crypto Synthetic Assets
Synthetix is an Ethereum-based platform that allows investors to create and sell / buy synthetic cryptocurrency on their peer-to-peer platform. This allows users to access synthetic products that simultaneously give them access to non-cryptocurrency assets such as gold, US dollars and stocks. There are currently over $500 million worth of synthetic derivatives contracts concluded.
Synthetix currently has three decentralized applications: the Synthetic exchange, Mintr, which allows users to bet the native SNX token so they can earn commission and monetize Synths, and a dashboard that provides an overview of the entire Synthetix network. The Synthetix team has created a multi-tier issuance platform, exchange and collateral type, creating a marketplace for crypto-backed synthetic assets. Synthetix allows users to issue a variety of synthetic assets, including fiat, derivatives, cryptocurrencies, and various asset classes. Examples would be bitcoins, euros, US dollars, Tesla stocks, gold, etc.
The user provides collateral in the form of SNX tokens to create these synthetic assets. Then the user will be able to exchange one synthetic asset for another, changing the collateral value through oracle without an intermediary.
Universal Market Access is a decentralized financial contracts platform that uses Oracle’s provably fair engine and smart contracts to enable users to create their own financial products.
Essentially, UMA users can create financial products using protocols such as ERC-20 to create tokenized derivatives that give them access to real underlying assets, similar to how traditional exchange-traded funds function.
Why are Crypto Synthetic Assets Important?
Synthetic currency models backed by cryptocurrencies based on smart contracts can make a huge difference in the traditional financial industry. Essentially, these models offer cryptocurrency holders the leverage to trade traditional assets as well as derivatives while remaining in the digital ecosystem.