Crypto Synthetic Assets Explained

  • The buying of real-world assets through crypto is facilitated by crypto synthetic assets.
  • It refers to a mix of assets that hold the same value as another asset.
  • However, instead of the asset itself, a synthetic asset serves as a representative without compromising on the value.

There might be different manifestations of new technologies springing up left, right, and center. However, it can only make sense if it solves a problem that people face on an everyday basis. The capacity of technology to become mainstream is contingent upon the intensity with which it can merge with the existing ecosystem of operations.

This statement holds uncompromisingly true when it comes to the world of cryptocurrency. Cryptocurrency, at the end of the day, is an element of finance and is expected to serve as an instrument of transaction. There are a lot of “transactions“ that are expected in the world of finance and it includes digital assets, stocks, derivatives, bonds, commodities, currency, futures, and interest rates.

Many people believe that cryptocurrency might not be able to buy such real-world assets that might not promise humongous profits but are surely dependable. One of the pursuits of crypto proponents was to bridge this gap between the crypto world and the real world, at least in terms of assets.

A crypto synthetic asset aims to give people who possess certain cryptocurrencies an added exposure to a wide variety of real-world assets without having a need to hold them.

Enter Crypto Synthetic Assets

The buying of real-world assets through crypto is facilitated by crypto synthetic assets. To understand what a crypto synthetic asset is, we will need to look into what a synthetic asset means.

A synthetic asset is literally what it means! It refers to a mix of assets that hold the same value as another asset. However, instead of the asset itself, a synthetic asset serves as a representative without compromising on the value. While the synthetic asset and itself is a derivative, it combines various derivatives like futures, options, and swaps that simulate a varied class of underlying assets like currencies, commodities, bonds, indexes, stocks, and interest rates.

What Is The Relevancy Of Derivatives?

It has been estimated that the global value of derivative contracts is above $1.2 quadrillion. This is significantly higher than most other mainstream assets that we can think of. For example, the global real estate is worth about $217 trillion, the global debt, about $215 trillion, the global stock markets, about $73 trillion, and the global supply of gold, a comparatively measly $7.7 trillion.

Derivatives, as much as they can help take the price risk out of assets, can also dubiously enhance market inefficiencies. This encourages a zero-sum game among traders instead of creating market value. In all of this, it cannot be denied that derivatives facilitate huge earnings for investors without mandating physical settlement, transfer risk, arbitration of trade, and hedging against price fluctuations.

How Do Synthetic Assets Work?

Synthetic assets enable investment firms to use multiple financial vehicles rather than confining themselves to a single investment asset. It means that instead of purchasing a stock, an investment firm can purchase a call option and sell a put option of the same stock.

This would mean that the put option represents the stock in itself but it is the investment firm that still holds the stock. Synthetic assets have the capacity to function as both first-level and second-level derivatives. They can either represent the asset itself or even a derivative of the asset.

Introducing Crypto Into The Equation

Now that we are aware of the concept of synthetic assets, how would it be to introduce cryptocurrency into the equation? It cannot be denied that it is a huge risk considering the extreme volatility of cryptocurrency. However, some platforms have decided to take the plunge by introducing crypto synthetic assets.

As you may have inferred, a crypto synthetic asset aims to give people who possess certain cryptocurrencies an added exposure to a wide variety of real-world assets without having a need to hold them. The classes of assets that we have talked about when addressing derivatives hold good for crypto synthetic assets as well.

All this can be done without having a need to leave the crypto ecosystem. The synthetic assets are present as tokens that exist within the crypto realm.

The Advantages Of Crypto Synthetic Assets

We all know that cryptocurrency and blockchain share an inseparable relationship. All the advantages that the blockchain has applied to cryptocurrency, and consequently the crypto synthetic assets as well.

The first and foremost benefit that crypto synthetic assets offer is decentralization. There is no central body that can censor or manipulate your tokens.

The entire process is automated and secured using smart contracts. The smart contract brings a considerable degree of reliability into the process. Since it cannot be tampered with, you can be assured that the returns that you get are accurate.

The reach of crypto and blockchain is global. The ability to trade using crypto synthetic assets is not confined to any border. All you would need is a smart device with access to the blockchain, and you are all set to trade!

The implications of the advantage of global trade are humongous. On one side, it opens up opportunities even for people living in the remotest parts of the world to invest in dependable assets like growth stocks. For companies, this also helps diversify their investment portfolio and grow the number of investors which wars once restricted by political borders.

The Different Types Of Crypto Synthetic Assets

Let us look at the different decentralized investment platforms that use different methods to operate but at their core, use crypto synthetic assets.

Abra is a decentralized investment platform that uses cryptocurrency as collateral to create synthetic assets. The synthetic asset model used by Abra uses smart contracts enabled with Bitcoin and Litecoin.

Let us illustrate the way Abra works with an example. If a user wanted to buy stocks of Apple worth about $1000 through the Abra platform, the firm goes ahead and pegs $1000 worth BTC against the price of Apple stocks. If the stock prices move, the proportional amount of BTC will be added or deducted from the smart contract of the user. Therefore, if the user decides to withdraw the BTC that they deposited in relation to the stock prices, it is proportional to the price of the stock on that particular day/time.

It is interesting to note that the investor takes a short position on BTC and a long position on Apple. Contrarily, Abra takes a long position on BTC while taking a short position on Apple. Although not literally, the process is almost like using Bitcoin as a representative of Apple stocks that changes in value in accordance with the stock prices.

Synthetix is another synthetic asset platform that allows traders not only to trade but even mint synthetic currency on its Peer to peer platform. Since synthetic currency can be minted, the traders not only gain access to synthetic products but also get exposure to non-crypto assets like dollars, stocks, and even gold. Although Synthetix is barely a year old, it holds more than $69 million in synthetic derivative contracts.

Synthetix is a combination of three different decentralized applications. The platform has an exchange, called the Synthetic Exchange and Mintr, That enables users to stake the native token of the platform called SNX, so they can earn fees and mint new coins. There is also a dashboard that presents users with an overview of the entire Synthetix network.

Synthetix is a combination of three different decentralized applications.

What makes Synthetix different and dependable is the combination of the multi-tear issuance platform, the exchange, and a type of collateral. This has created a market for cryptocurrency back to synthetic assets. The class of assets issued by Synthetix includes derivatives, cryptocurrency, Fiat currency, and every other asset class described earlier.

The way Synthetix works is quite simple and straightforward. The user puts collateral in the form of SNX to create these synthetic assets. They can swap or Exchange one synthetic I said for another. The repricing of the collateral is done through an oracle that ensures the process is executed accurately without mandating any intermediaries.

There is another decentralized platform called Universal Market Access. This platform specializes in financial contracts and utilizes a “provably honest oracle mechanism“ which enables users to create their own financial products using smart contracts. Both Synthetix and UMA run on Ethereum.

The Expected Impact

Synthetic currency models collateralized by cryptocurrency are expected to have a humongous impact on traditional finance. It can be looked at as a small yet powerful avenue through which cryptocurrency is making its inroads into the traditional financial ecosystem. It offers Cryptocurrency processors to leverage traditional asset trading while still remaining within the crypto ecosystem.

As we have seen earlier, platforms like Abra and Synthetix open up possibilities for global trade and individual investors. This is in stark contrast to the privileged access that only institutional investors enjoyed in the global derivatives market.

Whether or not crypto collateralized synthetic assets will become a big deal it’s a matter of speculation. However, it can be safely predicted that with the growing acceptance, regulation, and legalization of crypto, it is quite possible that crypto back to synthetic assets will gain prominence.

Conclusion

The entire world of synthetic assets might be in the most nascent stages right now, leave alone crypto-backed variants. It might, however, be a great idea to start off with your crypto synthetic asset platform business right now because the harbinger of today will be the leader of tomorrow, especially in this business where the early bird is bound to get them.

If you are one of those aspiring entrepreneurs who would like to start your synthetic crypto assets platform business, all you need to do is get in touch with a company that specializes in synthetic crypto asset platform development.

Leave a Reply