What are synthetic assets?
Synthetic assets are, to put it simply, tokenized derivatives. In classical economics, derivatives are simply representations of stocks or bonds that the investor does not own but wants to buy or sell. In the traditional financial world, if a trader wants to profit from the price movements of stocks that he does not own, he can start trading using derivatives to do so. Regardless of the adopted nomenclature, the fact is that synthetic assets or tokenized derivatives have created a completely new quality and take the process described above a step further, adding the parameters of the derivative to the blockchain and essentially creating a digital reflection of the derivative stored on the blockchain.
Expanding on the model in which digital derivatives operate, it should be stated that, in essence, synthetic assets create a specific type of blockchain-based digital record for the mutual relationship between the underlying asset and the buyer. Derivatives are gaining popularity in the world of cryptocurrencies primarily because they allow traders to multiply capital by anticipating the fluctuations of a wide range of tokens without having to hold any of these digital units in their wallets. Due to the convenience of trading and the lack of the need to have a dispersed portfolio of tokens, synthetic assets are also rapidly gaining popularity among traders investing in the DeFi sector. This is because these blockchain-based digital financial instruments incorporate well-known investment tools into the realm of cryptocurrencies.
Benefits of synthetic assets on the blockchain
One of the biggest advantages of synthetic assets based on blockchain technology is that they provide investors with the opportunity to tokenize and trade potentially any type of asset that plays the role of the underlying instrument in this case. The mechanism of operation of this financial solution consists in the fact that a derivative is used to link the value of a minted token with an already existing asset. As a result of this process, a digital entity that functions on the blockchain perfectly reflects the behavior of any asset. Thanks to this solution, investors can easily trade literally anything on the blockchain without having to own the underlying asset. There are at least a few reasons why synthetic assets are becoming an exceptionally attractive investment method. The most rudimentary advantages of this type of trading include the increased level of security and anonymity of investors.
Back to traditional finance again. It should be pointed out that the trading model in which investors make transactions takes place on centralized exchanges. For synthetic assets, the concept is fundamentally different. Investors using DeFi protocols do not need to register any accounts or reveal their identity. In this variant, all trade takes place with the participation of smart contracts that operate fully automatically on the blockchain. This guarantees investors both a high level of anonymity and security as all transactions are recorded in a distributed ledger on the blockchain.
Closing thoughts
We are currently observing a constant increase in interest in synthetic assets among investors scattered around the world. The growing demand for trading blockchain-based synthetic financial instruments is fueling the explosion of the DeFi app ecosystem. New financial apps that offer access to synthetic assets appear on a range of different blockchains to then enable investors to trade across different technological environments and offer cheaper transaction fees.
