There has been a lot of buzz about crypto synthetic assets lately. What are they and what does it mean for the crypto space?
Crypto assets are growing more and more popular, and they are fast becoming a global phenomenon. Unlike traditional currencies, crypto assets are digital and decentralized.
In recent times, the term “digital currency” has been used to describe crypto assets, but it has since been deemed “too ambiguous” and “too broad”.
Increasing attention has been given to the fact that cryptocurrency is “distributed”, “decentralized”, and “digital” – and that it is therefore a new and unique kind of asset.
Much like traditional currencies, crypto assets are not printed by a central bank and they are not returned or redeemed into a physical form, like dollars, pounds, or euros.
Instead, crypto assets are in many cases created by the users during the process of mining. There are two major categories of assets that are often considered “crypto.”
These are cryptocurrencies and derivatives. To mention some examples of crypto digital assets, Bitcoin and Ethereum belong to the most popular ones.
Derivatives refer to contracts that derive value from a cryptocurrency or other underlying asset. There is a number of derivatives in existence, each of which serves a specific purpose.
Decentralized Finance
The universe of DeFi ( Decentralized Finance) is having an effect on people’s lives in ways we never imagined. It’s spreading at a breakneck speed, with new protocols adding to the ecosystem’s diversity.
We’ve seen teams create decentralized apps with comparable capabilities to conventional financial products up to now. Traders swap tokens, lend a portion of their stock in the money market, and use margin and leverage to engage in exchanges.
However, DeFi does not stop there. With decentralized blockchain networks, we can go far further and create apps that flip everything we know about financial markets. Crypto synthetic assets are the earliest and most well-known example.
Crypto synthetic assets offer possibilities for everyone with low to no entry barriers by mimicking the development of another asset. Synthetic assets are derivatives with a DeFi twist that draws value from the underlying equities, currencies, and commodities.
In this post, we’ll look at the various types of synthetic assets and the top five protocols that are influencing the future of crypto finance.
What are Synthetic Assets and How Do They Work?
Synthetic assets are quite similar to conventional market derivatives. Because a derivative gets its value from its underlying asset/index, it is contractually linked to that asset.
Crypto synthetic assets operate in the same manner as real assets, but they utilize DeFi blockchain networks to create a connection in the form of tokens.
Synthetic assets enable traders and investors to purchase artificial assets that reflect and track popular equities or commodities by mimicking the function of conventional derivatives.
Why are Defi and Derivatives such a good match?
We wouldn’t have fractional ownership of an asset if there wasn’t an open finance movement. You can’t purchase a piece of land and expect to make a profit. Investing in real-world assets such as equities or precious metals will not improve your yield.
With DeFi in place, the crypto-financial industry is now seeing a widening of possibilities. Because they make difficult-to-access commodities accessible to both individual and institutional investors in the same manner, Defi and derivatives are a mutually advantageous combination.
We can automate many backend processes and make the exchange platform immutable by using smart contracts.
Trading derivatives from anywhere in the globe would be difficult without Defi, thus having the capacity to integrate borderless transactions and enable everyone in the world makes it the greatest crypto-financial partnership.
The Benefits of Crypto Synthetic Assets
We’re all aware of some unexplored applications for synthetic assets. At the same time, there are also fundamental benefits of synthetic assets, such as permissionless generation and the absence of central party risk. The following are four main benefits of synthetic assets:
1. Tokenization allows any asset to be traded.
Synthetic assets open up new financial markets and provide new sources of wealth. It is accomplished by tokenizing assets that are already traded on conventional marketplaces.
Without a central figure, you may make a permissionless token out of anything and exchange it. You may utilize new synthetic asset tokenization, for example, to generate a token and monitor Co2 produced by the industry.
2. Funding may be a lot simpler with synthetic assets.
It may be difficult to locate liquidity providers for new assets in the early stages, but synthetics are the greatest option for acquiring money through a loan.
A party may raise money by using existing assets and offering favorable interest rates to counterparties. This is similar to secured loans in that the party in need of money agrees to purchase securities and then repurchase them later.
3. Synthetic assets may provide liquidity much more quickly.
Before purchasing a large number of stocks or contracts, every investor should verify the market’s liquidity. Investors do not have to be concerned about liquidity while using synthetic assets.
Their expenses will be cut as well. A credit default swap is a derivative contract that is utilized to infuse cash at a significantly quicker pace. Liquidity increases dramatically in a short amount of time as purchasers hedge their risk and go long on the underlying asset.
4. There are no barriers to entry.
It makes no difference where and from what nation you engage in an open market like bitcoin. It is almost universally available to anybody interested in purchasing synthetic assets.
Because there are fewer obstacles to entry in this sector, investors from many walks of life may generate income flows by owning fractional or full ownership of their chosen financial instruments.
Synthetic Assets: a Few Examples
Synthetic assets do not have to mimic stocks or other derivatives; they may alternatively be crypto-native assets. We may build contracts based on a variety of variables and monitor their development to benefit from each coin.
Here are a few examples of synthetic assets to help you understand them better:
Hash-Power & Mining Capacity Swaps
Managing and running mining equipment on a daily basis may not be your cup of tea, therefore you should look at synthetic hash rate-based assets.
Because working with equipment on a big scale is difficult, retail investors may profit from investing in such assets. Machine tokens may be issued by synthetic assets to represent a virtual component of the mining machine.
Both traders and miners benefit from them since they can better manage their portfolios and protect against future hazards.
Stocks & Indexes
As we mentioned earlier, physical assets can be tokenized using synthetic assets, including stocks, indexes, and even debt instruments like bonds. If we take the S & P 500 index and make a token out of it, traders buying would profit with a higher return as the index goes up.
We have seen Mirror Protocol declare S&P 500 as a synthetic asset on their platform just a couple of months back, so it can be done with any stock and financial instrument.
Exchange of Poop
We used feces exchange as an example to demonstrate how permissionless synthetic assets might be. A few developers developed a fictitious asset in 2019 to monitor the frequency of feces sightings in San Francisco.
It not only sounds and looks ridiculous, but it also demonstrates the power of crypto synthetic assets and their capacity to generate new markets.
Investing in Yield Swaps
This is akin to a hash-power contract in that it allows miners and other proof-of-stake network members to hedge their market risk. A validator would exchange a portion of their yield for cash in staking yield swaps.
This is a win-win situation for both buyers and sellers since the buyer receives the necessary staking revenue without having to invest in infrastructure, and the seller receives a set payment.
In 2021, the top 5 synthetic asset protocols
DEUS Finance
DEUS Finance is a marketplace that offers decentralized financial services. It provides consumers with an immersive experience by giving them worldwide access to all markets. DEUS fiance has you covered on everything – the users can trade both digital and non-digital assets.
By removing middlemen and adding a touch of decentralization, DEUS Finance has become a platform that every crypto user should be aware of.
UMA
If we want to see more retail participants in the derivatives market with fewer risks, we need to see more retail participation in the derivatives market.
One of the easiest methods to do so is to purchase synthetic assets from an open-source protocol like UMA that reflects the underlying value. Its open-source nature aids in the development of trust and transparency.
Any two parties may use UMA to establish bespoke financial contracts and launch ERC-20 tokens on the Ethereum network. These contracts are safe in every manner imaginable because of Ethereum’s smart contracts and reward choices.
UMA provides a trustless, permissionless method for all of its users by removing the traditional frameworks.
Protocol DAFI
The developers and experts behind the DAFI protocol are continuously making efforts to improve and integrate their smart synthetics technology.
Because of its capacity to create synthetic assets and address a pressing problem in the bitcoin market, DAFI is a one-of-a-kind platform.
It offers a number of solutions to address hyperinflation-related issues and promotes blockchain companies to manufacture tokens. The only issue that traders have is that tokens cannot be monetized on the DAFI market.
While this is beneficial to maintaining a robust token economy, it is not beneficial to traders. In recent years, DAFI has collaborated with Gather and Razor, as well as a slew of other networks.
ABRA
The OG of synthetic assets is Abra. It is without a doubt one of the most popular crypto synthetic protocols in the world. The program, which launched in 2014, allowed users to earn interest on popular cryptos.
It is a well-known platform that people in both developed and developing nations appreciate and utilize on a daily basis. The platform enhances the customer experience by offering a variety of customized services and bundles.
Institutional investors have a variety of options for borrowing, including variable loan periods. There’s no need to be concerned about liquidity since it has more liquidity, which means higher pricing and less slippage.
Synthetix
Synthetix is a one-of-a-kind protocol that serves as the foundation for Defi and crypto derivatives trading. Synthetix’s DEX, Kwenta, enables you to purchase assets ranging from cryptos to real-world commodities.
You must deposit your tokens on Defi platforms like Curve or Uniswap since Synthetix is an ethereum-based system. In terms of governance, the business has transitioned from a non-profit foundation to three decentralized autonomous organizations (DAOs) in 2020.
Synthetix is one of the major synthetic asset protocols in 2021, allowing users to access all global assets in a censorship-resistant manner.
Final Thoughts
So, let’s put it all together. When talking about Cryptocurrency, synthesizing refers to the way that different crypto assets are combined to make a new cryptocurrency.
The development of Ethereum and the decentralized financial ecosystem has opened up new opportunities for synthetic assets. The popularity of blockchain technology and smart contracts will certainly grow as more people become aware of its role in decentralization.
It will be fascinating to watch which platforms become very popular in the future and who capitalizes on this opportunity.
While Bitcoin and the underlying blockchain technology are undoubtedly revolutionary, one of the most significant uses of the technology is the creation of a system of synthetic assets that can mimic real-world assets.
The moment has come to make technology available to people who might profit from it.
We hope you found lots of valuable info throughout today’s article!