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Synthetic Assets

Synthetic assets, also known as crypto synths, are essentially tokenized derivatives. In traditional finance, derivative value is derived from an underlying asset, such as a stock or bond. These derivatives allowed traders to speculate the price movements of an asset without actually owning it. But crypto synths or tokenized derivatives take the concept of derivatives a step further by allowing them to be recorded on the [5] and creating a token for it.
In the crypto world, crypto synthetic assets are becoming more popular since they allow investors to benefit from the fluctuation of various tokens without possessing any of them themselves. These digital assets are largely preferred for investment nowadays. This is because of two main reasons: security and traceability. Trades are recorded on a distributed ledger, guaranteeing traders anonymity and security.[1]

Overview

Synthetic assets or Crypto synths essentially allow investors to tokenize and trade with anything. Using a derivative to tie the value to an already existing asset and then create a token for this derivative, investors can easily trade anything on the . One of the main reasons why synthetic assets are becoming a preferred method of investing is because of the added security and traceability. While traditionally trading happens on centralized exchanges, with synthetic assets, all trades happen on the blockchain. This guarantees traders both their anonymity, if they wish to remain unnamed, and their security, as all transactions are recorded in the distributed ledger.

Benefits of Synthetic Assets

Transparency and openness are the guiding principles of decentralized finance (DeFi). Unlike traditional finance, which relies on centralized intermediaries like banks and brokerages to facilitate transactions, DeFi utilizes a public ledger to verify and record transactions directly on a digital . This eliminates intermediaries and creates a transparent and open system for all.

DeFi relies on self-executing smart contracts, which cannot be modified. When certain conditions are met, these contracts automatically activate, allowing transactions to be carried out without the involvement of a third party. Smart contracts guarantee the reliability of transactions due to their objective nature.
Synthetic assets disrupt the crypto world by allowing investors to access new and emerging commodity classes. Synthetic assets, for example, can be used to tokenize mining power, allowing everyone to participate in the bitcoin mining and earn interest without having to own and operate the equipment. Further, by or holding these assets for an extended period, one may also be able to obtain rewards or yield. An example is stablecoins. These coins can be staked as collateral and earn interest. This is the reason why big investors are finding these assets more attractive.
Synthetic digital assets are changing the landscape of decentralized finance or DeFi entirely. They are unlocking new opportunities for the industry by providing investors with greater access and improvised liquidity. Using smart contracts and tokenizing investments on the is increasing accessibility and democratizing the finance industry. Synthetic assets are created through smart contracts that create debt in any asset, with exchange rates determined by price oracles. Protocols are able to provide exposure to a variety of assets through a liquid market oracle in this way.

Overall, the use of synthetic assets in DeFi allows for global, borderless transactions that are open and transparent, empowering investors with the autonomy to access, trade, and transfer assets easily.[7]

Importance of Synthetic Assets

With synthetic assets in DeFi, better risk management, increased trading volume and improved liquidity are expected to occur. Synthetic assets protocols are also helping to mitigate challenges related to weak cross-chain communication protocols. With the help of these tokenized derivatives, users can trade in assets without having to own them. Further, it has been witnessed that trading is restricted to only crypto enthusiasts or within the group of people aware of DeFi. Synthetic assets are also focusing on overcoming this limitation. This is achieved by allowing everyone to invest and participate in the traditional market without leaving the environment.

Thus, with the usage of synthetic assets, the user base for overall is going to expand. These are not the only benefits these assets promise, there are many others.

  • No counterparty involved
    Synthetic assets are created through the process of minting, which involves locking up a higher value of as collateral. When these assets are traded against each other, the “sold” asset is burned, and an equal value of the “buy” asset is minted. This process allows for the exchange of value between synthetic assets without the need for a physical exchange or a counterparty. As a result, order books, which are platforms where buyers and sellers of an asset can meet at a specific price, are not necessary for synthetic assets. Instead, the value of the assets can be transferred directly through the minting and burning process. This can streamline the trading process and make it more efficient for investors.
  • Increased flexibility
    Synthetic assets allow investors to gain exposure to a wide range of assets, including stocks, bonds, commodities, and currencies, without directly purchasing the underlying asset. This allows investors to customize their portfolios and tailor their investments to their specific financial goals.
  • Enhanced risk management
    Synthetic assets can be used to hedge against market risks, such as currency or commodity price fluctuations. This can help investors to protect their portfolios and reduce the overall risk of their investments.
  • Lower transaction costs
    Because synthetic assets are created through financial contracts rather than physical purchases, they can often be traded at a lower cost than traditional assets. This can make them an attractive option for investors looking to reduce the costs associated with their investments.
  • Increased liquidity
    These assets can offer more liquidity than traditional asset exchanges and lower underlying costs for traders. This is because synthetic asset exchanges do not have the same price spreads or trading fees as regular asset exchanges, making it easier for traders to buy and sell assets and potentially realize a profit. Synthetic assets can be an attractive option for traders who are looking to speculate on the movement of asset prices without incurring high fees or spreads.
  • Greater accessibility
    Synthetic assets can be purchased by investors who may need more capital to purchase the underlying asset directly. This can make it easier for investors with smaller budgets to gain exposure to a wider range of assets.

Synthetic Asset Exchanges

Synthetix

Synthetix is a (DEX) and a platform for synthetic assets. The protocol is designed in a way that exposes users to the underlying assets via synths, without having to hold the underlying asset. The platform allows users to autonomously trade and exchange synths. It also has a pool where holders can stake their SNX tokens and are rewarded with a share of the transaction fees on the Synthetix Exchange.
Synthetix is the biggest and most popular synthetic asset exchange. Synthetix is building a decentralized liquidity provisioning protocol that any protocol can tap into for various purposes. Its deep liquidity and low fees serve as a backend for many exciting protocols on both  and . Many user-facing protocols in the Synthetix ecosystem, such as  (Spot and Futures), Lyra (Options), Polynomial (Automated Options), and  & Curve (Atomic Swaps), tap into Synthetix liquidity to power their protocols. Synthetix is built on Optimism and Ethereum . The Synthetix Network is collateralized by SNX, ETH, and LUSD, enabling the issuance of synthetic assets (Synths). Synths track and provide returns on the underlying asset without requiring one to directly hold the asset. This pooled collateral enables an array of on-chain, composable financial instruments backed by liquidity from Synthetix. Synthetix plans to releases Perps V2 from SNX, which hopes to enable low-fee on-chain futures trading through the usage of off-chain oracles, and Synthetix V3, which aims to rebuild the protocol to achieve its earliest goal, being a fully permissionless derivatives protocol.
The network was launched in September 2017 by Kain Warwick under the name Havven (HAV). About a year later the company rebranded to Synthetix. [4][5]

C.R.E.A.M Finance

C.R.E.A.M Finance is a decentralized DeFi lending protocol for individuals, institutions and protocols to access financial services as a part of the Yearn.Finance(YFI) ecosystem. C.R.E.A.M. Finance is a permissionless, open source and agnostic protocol serving users on , Smart Chain and . Users who are passively holding Ether or can deposit their assets on C.R.E.A.M. to earn yield, similar to a traditional savings account. The CREAM token allows users to lend, borrow, stake assets and help govern the network, allowing them to vote on assets to support or delist.
In August 2020, the project C.R.E.A.M., which stands for Crypto Runs Everything Around Me, was launched unexpectedly on the network through the YOLO . The person behind C.R.E.A.M. Finance is Taiwanese entrepreneur , who labeled himself as the “semi-benevolent dictator of CREAM” upon launch. Huang is also the founder of Mithril (MITH), the -based social media platform.
In September 2020, it went live on the  Smart Chain (BSC).
The C.R.E.A.M. Finance protocol was created as a  Finance fork. C.R.E.A.M Finance is open-source, permissionless, blockchain-agnostic and offers  rewards to its users in order to inclusively develop its network.
C.R.E.A.M. Finance helps provide liquidity to important DeFi assets through automated market making (AMM), allowing users to borrow and lend supported assets and earn rewards in the form of its CREAM token by supplying any supported asset as collateral. In return, it collects swap, lending and borrowing fees from users.[2]

DAO Maker

DAO Maker started with two people – Christoph Zaknun and Hatu Sheikh. Later, Nicholas Pelecanos joined to manage the Market Making services.
DAO Maker is a platform that aims to redefine venture capital for the masses, by providing scalable technologies and funding support to tokenized startups.
This venture capital fund was first conceptualized in 2017. It has since evolved to create low turnout frameworks, which has enabled many retail investors and individuals to become active in venture capital. When funding through DAO Maker, the risks for both parties – the investors and the startups – are significantly reduced.
The DAO Pad is a multi-investment platform that allows DAO Maker’s community members to stake DAO tokens into the Venture Yield, which allows them to participate in early public rounds of funding, thereby incentivizing the most loyal and active members. Furthermore, the Venture Yield provides up to 22% APR paid out in $DAO to its stakers.
The DAO Maker token (DAO) is the of the DAO Maker ecosystem, which is built on the blockchain and allows holders to exercise control over the ecosystem.
DAO Maker is considered a complete solution, especially in crowdfunding, community building and blockchain marketing. It features all the supportive resources and technology one would expect.[3][6]

UMA

UMA is a decentralized platform for financial contracts that utilizes smart contracts and a “provably honest oracle” mechanism to enable any two parties to establish financial contracts on their own terms. Investors can create their own tokenized derivatives, similar to exchange-traded funds (ETFs), on the platform using ERC20 tokens, providing short, long, or leveraged exposure to real-world assets.
One of the goals of UMA is to increase the adoption of in the derivatives market by providing retail investors with a way to buy synthetic assets representing the underlying value from a transparent, open-source protocol. By leveraging ’s smart contracts and incentive mechanisms, UMA provides a secure and trustless way for users to create custom financial contracts and launch ERC-20 tokens on the without the need for legal frameworks or intermediaries.[7]

Abra

Abra is a decentralized investment platform founded in 2014 and has played a pioneering role in using synthetic assets in the industry. It allows users to purchase, sell, and hold alternative cryptocurrencies by creating synthetic assets. Using Abra, fiat currencies are converted into crypto assets. This conversion process involves pegging the crypto asset to a different asset class, such as fiat currency.[7]

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Synthetic Assets

Commit Info

Edited By

0x2E66379061a2A39ccf38cE73d6144665C7eDC3E1
Jaewon_Cho

Edited On

February 8, 2023

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