In Brief:

  • Synthetic assets are crypto assets that mimic the value of other assets using smart contracts and collateral.

  • Synthetic assets enable users to access any asset class without owning or trading the actual asset.

  • Synthetic assets have various use cases for DeFi users, such as access, liquidity, diversification, and innovation.

  • Synthetic assets can be created and traded on various platforms on Ethereum and other blockchains.

Synthetic assets are a type of crypto-assets that mimic the value of other assets, such as stocks, bonds, commodities, or even cryptocurrencies. They are created by using smart contracts and collateral to track the price movements of the underlying assets. Synthetic assets allow users to gain exposure to any asset class without having to own or trade the actual asset. This opens up new possibilities for diversification, hedging, arbitrage, and speculation in the decentralized finance (DeFi) space.

What are Synthetic Assets?

Synthetic assets are essentially tokenized derivatives. In the traditional financial world, derivatives are contracts that give the buyer or seller the right or obligation to buy or sell an underlying asset at a specified price and time. For example, a futures contract is a derivative that obligates the buyer to purchase an asset at a predetermined price and date in the future. A call option is a derivative that gives the buyer the right to buy an asset at a certain price and date in the future.

Synthetic assets take this concept one step further by creating tokens that represent the value of the underlying asset on the blockchain. For example, a synthetic asset can track the price of gold, Apple stock, or Bitcoin without requiring the user to own or store any of these assets. The synthetic asset is backed by collateral, such as stablecoins or other crypto-assets, that is locked in a smart contract. The smart contract uses an oracle service to fetch the real-time price data of the underlying asset and adjusts the value of the synthetic asset accordingly.

Why are Synthetic Assets Important for DeFi?

Synthetic assets have several advantages and use cases for DeFi users and investors. Some of them are:

Access: Synthetic assets enable anyone with an internet connection and a crypto wallet to access any asset class in the world, regardless of geographical or regulatory barriers. For example, a user in China can trade synthetic US stocks without having to open a brokerage account or deal with KYC/AML procedures.

Liquidity: Synthetic assets can create more liquidity for illiquid or hard-to-access assets by allowing users to trade them on decentralized exchanges (DEXs) or lend them on lending platforms. For example, a user can borrow synthetic Tesla stock and use it as collateral to take out a loan on Aave.

Diversification: Synthetic assets allow users to diversify their portfolios and hedge their risks by exposing themselves to different asset classes and markets. For example, a user can hedge their exposure to crypto volatility by holding synthetic gold or US dollars.

Innovation: Synthetic assets can also create new types of assets that do not exist in the traditional financial system, such as inverse assets that move in the opposite direction of the underlying asset, or basket assets that combine multiple assets into one token. For example, a user can create a synthetic token that tracks the performance of the top 10 DeFi tokens.

How to Trade Synthetic Assets?

There are several platforms that allow users to create and trade synthetic assets on Ethereum and other blockchains. Some of them are:

Synthetix: Synthetix is one of the largest and most popular synthetic asset platforms on Ethereum. It allows users to mint and trade over 100 synthetic assets (synths) that track various currencies, commodities, stocks, indices, and cryptocurrencies. Synths are backed by SNX tokens, which also serve as governance tokens for the platform.

Mirror Protocol: Mirror Protocol is a synthetic asset platform on Terra that focuses on creating and trading synthetic stocks (mirrored assets or mAssets) that track the price of US-listed stocks, such as Amazon, Netflix, or Tesla. mAssets are backed by UST stablecoins, which also serve as governance tokens for the platform.

UMA Protocol: UMA Protocol is a synthetic asset platform on Ethereum that allows users to create and trade any type of synthetic asset using self-enforcing smart contracts (synthetic tokens). UMA Protocol does not rely on centralized oracles for price data but instead uses an economic incentive mechanism called Data Verification Mechanism (DVM) to ensure honest reporting. UMA tokens are used for governance and dispute resolution on the platform.

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