Decentralized Finance (DeFi) is a game-changer for the current economic system because it fixes many of the problems with the way money is handled now. Synthetic assets, which could provide more liquidity and access to different types of assets, are one of the most interesting opportunities. We’ll talk about synthetic crypto assets and how to invest in them in this article.
What are artificial assets?
“Synths,” which are financial instruments in ERC-20 smart contracts, are similar to “derivatives” in traditional finance. Synthetic crypto assets are also financial instruments.
A derivative is a financial contract whose value comes from the asset, index, or interest rate that it is based on. Synths use a protocol based on smart contracts to keep track of the value of real-world assets and let people trade assets without owning them. Indexes, inverses, cryptocurrencies, and real-world assets like precious metals or fiat are all examples of these assets.
Related: Since 2017, the SEC has been hit with over 200 lawsuits against crypto assets.
Synths are different from tokenized commodities, like the PAX Gold (PAXG) token, which is backed by gold. When you own PAXG, the company holds the underlying gold for you. If you own synths, it means you have a stake in the price of gold. But you don’t actually own the asset that the option is based on.
Any asset can have a synth made for it. For example, sUSD is a synth that tries to copy the value of the U.S. dollar. Another synth that copies the price of a bitcoin is called sBTC.
Synths give crypto investors access to a wide range of assets, such as gold and silver, that aren’t always easy to get. It lets people who own certain types of assets interact with other types of assets in ways they wouldn’t be able to do otherwise.
This means that someone who has a stake in oil could, for example, trade their oil stake for a Bitcoin stake. Or, someone who owns Bitcoin can trade it for silver.
How do I buy and sell fake assets?
There are a few exchanges for fake assets now. Synthetix is the most well-known. Synthetix is a protocol for derivatives liquidity that is decentralised and doesn’t need permission. It is built on the Ethereum blockchain.
Synthetix’s service of “minting synthetic assets” is paid for with two different cryptocurrencies. The ecosystem is run by the Synthetix Network Token, which is the native token for Synthetix (SNX). You can bet on the token to make fake assets. Synths are the second type of cryptocurrency. They can be used to copy any asset.
To make synths, a user must buy SNX and put it on the Synthetix platform. Synthetix then makes the user’s preferred new synth token in exchange.
SNX tokens back synths value. Software rules say that the value of SNX locked must stay at or above 750% of the value of the synth created. Imagine that a user wanted to make a fake U.S. dollar. If the user put in $1,000 worth of SNX, they would receive $133 worth of sUSD.
When a staker puts down collateral using a Mintr app designed to work with SNX contracts, SNX tokens are made. Users who lock their SNX are rewarded with SNX transaction fees for using the Synthetix network and keeping the synth token over-collateralized.
Since SNX is a cryptocurrency, its value is set by the open market. The number of synths in use may change as the price of SNX goes up or down. For example, if the price of SNX goes up, the system will give out SNX tokens that are no longer needed to guarantee earlier synths.
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Take the period when the price of SNX went up. This means that $500 of the $1,000 in SNX that was locked up at first could be given back. The user could make $500 more in SUSD synths with that SNX. This means that more synths can be made when the price of SNX goes up.
- Here’s how you can stake and trade synthetic assets.
- Get SNX tokens on an exchange or trade them for other cryptocurrencies.
For a synthetic asset to be made, the user must put up collateral (for example, SNX for Synthetix). The collateral will be used to give real value to the newly created synthetic asset.
- Oracles keep track of the price of the target asset in real time.
- Users can trade assets like sBTC, sUSD, and other stocks on the Synthetix platform.
- Minters get paid in the protocol’s native asset as a reward for creating exchange-traded assets and making them liquid.
Traditional Derivatives vs. Man-Made Assets
The main difference between synthetic assets and regular derivatives is that synthetic assets use tokens instead of contracts to show the relationship between an underlying asset and the derivative product.
A synthetic asset is a tokenized derivative that copies the value of another asset. So, synthetic assets can give you access to every asset in the world through the crypto ecosystem.
The ability of traditional derivatives to extract more value from assets such as stocks was significant.By letting anything be turned into a token and added to the blockchain, synthetic assets open up a huge number of global liquidity pools.
Synths are unique because they are a “stock” that is represented by tokens, and the value of that stock is based on what an oracle thinks an index is worth.
Related: ETH products increased in August, while BTC products decreased, according to research by CryptoCompare.
Synthetic assets are better than traditional derivatives in a number of ways.
allows you to move freely between stocks, derivatives based on gold or silver, and other assets without holding the asset itself.
Standard cryptocurrency wallets can be used to send and receive synthetic assets.
Every cryptocurrency exchange in the world lets people buy and sell synthetics.
Anyone can make blockchain-based fake assets using open-source protocols like Synthetix.
To sum up, synthetic assets offer more liquidity than traditional derivatives do on international exchanges, swap protocols, and wallets. Using this technology, you could put any asset you could think of on the blockchain. Outside of simple derivatives trading, synthetic assets can be used in what seems like an infinite number of ways to create new markets and sources of value.
But you should also think about the bad things about synthetic assets. One of them is that staking synths have a steeper learning curve than other DeFi projects, which could make some people decide not to use them.
Also, synth staking requires a 750% over-collateralization, which is too expensive for most users and much more expensive than other DeFi projects.
