Synthetic Asset

Decentralized finance on the blockchain is gaining popularity, leading to the emergence of new assets that cater to a wider range of users. One such asset is synthetic assets.

What are synthetic assets?

Synthetic assets are essentially tokenized derivatives. In traditional finance, derivatives represent stocks or bonds that a trader does not own but wants to buy or sell. Essentially, derivatives allow traders to profit from the price fluctuations of assets they don’t own. Synthetic assets take this concept further by recording the derivative on the blockchain and creating a cryptocurrency token for it.

Synthetic assets create a blockchain record for the relationship between the underlying asset and the purchaser. They are gaining popularity in the cryptocurrency world because they allow investors to speculate on the price movements of various tokens without actually owning them. This makes synthetic assets attractive to DeFi enthusiasts, as they bring a tool available to traditional traders into the crypto world.

Synthetic assets enable investors to tokenize and trade anything. By using a derivative to tie the value to an existing asset and creating a token for the derivative, investors can easily trade anything on the blockchain. One of the main advantages of synthetic assets is the added security and traceability they offer. Unlike traditional trading on centralized exchanges, all synthetic asset trades occur on the blockchain. This ensures anonymity for traders who wish to remain unnamed and provides security through the recording of all transactions in the distributed ledger.

The growing interest in synthetic assets has led to the emergence of more DeFi solutions in the market. New synthetic asset exchanges are appearing on various blockchains, offering traders flexibility and lower gas fees. Synthetix is the largest and most popular synthetic asset exchange, being one of the first exchanges created specifically for trading tokenized derivatives. Cream Finance and MakerDAO are two alternative options to Synthetix.