What is a Crypto Synthetic Asset?
Cryptocurrency synthetic assets are also issued by blockchain but they imitate the value and movements of real assets or financial instruments.
In this manner, synthetic assets can mimic different types of trading options such as stocks, currencies, commodities, cryptocurrencies, and real estate etc. Synthetic assets do not own the actual asset they are imitating but use blockchain technology to create them.
Synthetic assets are based on financial derivatives and smart contracts. Blockchain projects that can build decentralized smart contracts use collateral to secure value, track price fluctuations and create flexible derivatives products that are leveraged in the form of crypto synthetic assets.
In this manner, DeFi investors get an additional investment product that removes dependency from conventional intermediaries.
Traditional Vs Crypto Synthetic Assets
TradFi investment products include instruments such as stocks, bonds, and forex etc. On the other hand, crypto synthetic assets are based on blockchain technology that resembles the value and performance of conventional products. Here are some points of distinction between traditional and crypto synthetic assets:
Nature
Traditional financial products are physical in nature such that they are present in the form of paper or tangible products. On the other hand, synthetic assets exist only in digital form.
Accessibility
TradFi products are less accessible while synthetic assets have more reach on account of digital trading platforms.
Propriety
Traditional investment products require physical ownership. On the contrary, synthetic assets use digital propriety.
Liquidity
Liquidity for traditional financial product is often limited. On the other side, synthetic assets have higher liquidity.
Programmability
Traditional financial products are usually not programmable and grant little control to issuers. Synthetic assets have smart contract flexibility.
Custodial Options
TradFi investing usually have strict custodial requirements. On the contrary, regulatory framework for synthetic assets is still developing.
Counterparty Risks
Traditional trading is heavily centralized meaning that it contains little country party risk. On the other hand, synthetic assets exist in digital format that does not have strict account verification policies.
Transparency
Transparency for traditional investors can vary and depend on the percentage of stakeholder. Meanwhile, synthetic assets offer on-chain transparency that allows anyone to access detail and cross-check information available on the blockchain.
Asset Variants
TradFi products have limited options when it comes to different types of investment variants. In contrast, synthetic assets have a wide range of assets types.
Market Participation
Tradition investment usually requires a massive budget to participate. However, synthetic assets are traded across the globe.
Types of Crypto Synthetic Assets
Synthetic Stablecoins
Synthetic stablecoins mimic the value and stability of fiat currencies such as USD or EUR. In this manner, they can operate as a medium of exchange that merchants and online clients can use to purchase or sell goods or services. At the same time, it is also used as a store of value that preserve profits on account of cryptocurrency price volatility.
Tokenized Commodities and Equities
Tokenized form of commodities and equities is also classified as synthetic assets. They can mimic the value of real-world assets such as gold, oil, stocks, real estate, and blockchain products etc.
Furthermore, this type of synthetic product can be traded in a fractionalized form meaning that investors can purchase or sell a smaller fraction of a given tokenized RWA. In this manner, the investment barrier is lowered and the investment participation increases.
Leveraged and Inverse Tokens
Leveraged and Inverse tokens are synthetic assets that are generated to increment or decrease the value of the underlying asset. Inverse token profit when underlying asset price declines and leveraged tokens amplify the profits.
Yield-bearing Tokens
Yield-bearing tokens generate yield for synthetic token holders much like dividend grants. The investors have to use options such as staking or lending to generate passive income through yield-bearing tokens.
Conclusion
Synthetic assets in the cryptocurrency sector are a new concept that is developing and gaining more traction. It offers many advantages such as diversification, leverage, DeFi expansion etc. At the same time, they harbor various risks such as regulatory issues, lack of liquidity, and security concerns.
