Synthetic assets, sometimes referred to as synths, are a combination of cryptocurrencies and traditional derivative assets. In other words, synths are tokenized derivatives.
Decentralized finance on the blockchain is becoming increasingly popular. With this popularity, new forms of assets emerge, which cater to the needs of a wider group of users. Among these new assets are synthetic assets.
What are synthetic assets?
Synthetic assets are essentially tokenized derivatives. In the traditional financial world, derivatives are representations of stocks or bonds that a trader does not own but wants to buy or sell. In essence, if you want to profit from the price fluctuations of a stock that you don’t own, you can do this through a derivative. Synthetic assets, or tokenized derivatives, take this process one step further by adding the record for the derivative on the blockchain and essentially creating a cryptocurrency token for it.
In essence, synthetic assets create a blockchain record for the relationship between the underlying asset and the purchaser. Derivatives are becoming increasingly popular in the cryptocurrency world as they allow investors to bank on the fluctuations of various tokens without having to own any of these tokens in their wallets. In this sense, synthetic assets also gain traction with DeFi enthusiasts because they bring a tool available to traditional traders into the crypto world.
Synthetic assets 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.
With the rise of interest towards synthetic assets, more and more DeFi solutions enter the market. New synthetic asset exchanges are emerging on various blockchains to allow traders maximum flexibility and cheaper gas fees. Synthetix is probably the biggest and most popular synthetic asset exchange. As one of the first exchanges worldwide to be specifically created for trading tokenized derivatives, Synthetix is a leader in this niche market. Cream Finance and MakerDAO are two popular alternatives to Synthetix.