20. What are synthetic assets?
The synthetic assets to be discussed today are often colloquially referred to as synthetics. They are a combination of traditional cryptocurrencies and derivative assets. Synthetics, in short, are tokenised other derivatives. What they are, how they are created – we will explain everything in today’s lesson. Get to it!
What are synthetic assets?
They are closely related to the blockchain. They are a wholly new form of digital asset, catering to the needs of a fairly large group of users. How? We answer with an example. In traditional finance, derivatives represent stocks or bonds to us. You are an investor in them, but you do not own them at the same time. You want to buy and sell them – preferably at a profit. To achieve this, you require the help of a derivative asset.
Synthetic assets are just such a derivative asset. We see them becoming increasingly popular in the cryptocurrency world. They allow investors to make money from the fluctuations of various tokens and cryptocurrencies, without having to hold them in their wallet. How does this happen? Synthetic assets create a ‘record’ of a derivative on the blockchain and make a corresponding cryptocurrency token for it. This is an excellent solution, especially for DeFi enthusiasts, as it gives investors far more options.
How do they work?
They bind the value of an already existing asset and create a token for it on the blockchain. This gives investors the ability to easily trade virtually anything on the blockchain. Additionally, synthetic assets provide great security and traceability. And, as we have a blockchain, we also have full anonymity – an additional advantage of transactions made with synthetic assets.
Synthetic asset exchanges
Synthetic assets are developing alongside modern DeFi solutions. New synthetic exchanges are springing up, providing even more trading flexibility and lower gas fees. Among the most popular and largest is Synthetix. It is the first exchange personalised for synthetics. In second and third place are Cream Finance and MarkerDAO.
Advantages of synthetics
∙ Ease of creation. We can prepare such assets ourselves, using, for example, the Ethereum blockchain.
∙ They are easy to use and intuitive. In addition, they are characterised by marketability.
∙ We do not need to have an underlying asset in the portfolio to move freely between assets.
∙ They are also characterised by so-called infinite liquidity.
Synthetic assets – whether in traditional finance or in the cryptocurrency industry, have a giant impact on trading and investment. Using them, we can profit from transactions without even owning the underlying assets. They are also becoming a significant part of DeFi. So it is not surprising that they have as many supporters as sceptics. The only thing left for us to do is to follow the developments in this sector.
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