summary: Synthetic assets, also known as crypto synths, are essentially tokenized derivatives. In traditional finance, derivative value is derived from an underlying ass...
content: 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 blockchain and creating a cryptocurrency 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. 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 blockchain. 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 blockchain. 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 crypto commodity classes. Synthetic assets, for example, can be used to tokenize bitcoin mining power, allowing everyone to participate in the bitcoin mining and earn interest without having to own and operate the equipment. Further, by staking 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 blockchain 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. 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 crypto 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 blockchain environment. Thus, with the usage of synthetic assets, the user base for cryptocurrency 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 cryptocurrency 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 decentralized exchange (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 staking 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 Optimism and Ethereum. Many user-facing protocols in the Synthetix ecosystem, such as Kwenta (Spot and Futures), Lyra (Options), Polynomial (Automated Options), and 1inch & Curve (Atomic Swaps), tap into Synthetix liquidity to power their protocols. Synthetix is built on Optimism and Ethereum mainnet. 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. 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 blockchain agnostic protocol serving users on Ethereum, Binance Smart Chain Polygon and Fantom. Users who are passively holding Ether or wBTC 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 Ethereum network through the YOLO liquidity pool. The person behind C.R.E.A.M. Finance is Taiwanese entrepreneur Jeffrey Huang, who labeled himself as the “semi-benevolent dictator of CREAM” upon launch. Huang is also the founder of M