A look into the future of broadly understood cryptofinance, synthetic assets or combinations of securities and assets that operate on a blockchain that have the same effect as owning another asset would certainly provide a window of opportunity for investors looking to diversify their investment portfolio. The mechanism of operation of traditional financial derivative instruments is that their value is inherently based on other underlying assets, which most often include currencies, commodities, precious metals, shares or bonds. Synthetic cryptocurrency assets aim to achieve very similar goals without having to own the underlying asset itself. This means that these cryptosynthetics generate a situation in which a given investor can have exposure to any asset, the value of which is incorporated into a digital token. These tokens, which mimic the behavior of the underlying instruments, can be freely transferred by online investors.
Exploiting all the benefits of blockchain, a fundamental technology that is revolutionizing modern finance and that publicly records transactions in a distributed ledger, these digitized assets are legally minted and issued to investors scattered around the globe. Synthetic financial assets are cataloged on the blockchain in a process the digital currency community refers to as tokenization. This system works in such a way that a token or digital certificate representing the real asset is generated and transferred to a given investor in order to incorporate ownership rights on behalf of the investor. The mechanism of creating digital fractional ownership of real assets such as stocks, real estate as well as hard-to-find commodities is likely to open up a whole new world of investment potential for both institutional and retail investors in the near future.
Synthetic finance and DeFi
The ethos of digital assets and decentralized finance (DeFi) is to improve existing models of financial flows and transparency as well as accessibility. Unlike classically understood financial markets, DeFi does not rely on centralized institutions, such as banks or brokerage houses, which largely simply act as ordinary intermediaries between the parties to the transaction. Instead, a distributed ledger records and verifies any transactions directly on the digital blockchain. The foundations of this solution are such benefits as the fact that in this case no investor has to deal with high entry barriers, and every participant in this twenty-first century financial system is equal. As no centralized intermediary body exists, investors have full autonomy and freedom to access, trade and easily transfer their assets instantly.
The decentralized finance sector operates through smart contracts, which are automated and self-executing programs that generally cannot be changed once they are launched. After meeting the set of requirements specified in the code, the smart contract is automatically activated without any need to involve institutional intermediaries, which transparently eliminates any ambiguities in its terms. To illustrate the above state of affairs, an example can be given that a smart contract can be programmed in such a way that the inflation system generates funds to pay investors on a weekly basis or automatically pays prizes to the winner of a bet after meeting the conditions specified in the smart contract. By removing unnecessary third parties, there is much less room for error in this model as issues such as subjectivity as well as dishonesty are eliminated. The objective and transparent nature of smart contracts ensures reliable execution of transactions in any case. Implementing the concept of derivatives into the DeFi ecosystem in the form of synthetic assets opens up the possibility of unlimited and global transactions without borders for investors. This is how synthetic finance based on blockchain technology becomes a reality, allowing any trader to participate in this revolutionary financial system from anywhere on Earth.
Another aspect that is characteristic of cryptocurrency synthetic assets is that they also allow traders to invest in completely new and emerging crypto asset classes. A good example at this point is BTCST. The potential and mining power of Bitcoin has always been limited only to those who could afford expensive mining equipment. With the emergence of cryptocurrency synthetic assets, this situation has changed radically. By tokenizing the BTC mining power or hashrate, any bitcoin user can buy a token and then reap the financial benefits of mining new BTC without having to physically own and operate the mining hardware.
Next, it should be pointed out that the list of features that are specific to the cryptocurrency sector of synthetic instruments is much longer. In this innovative financial model, one of the unique advantages of cryptosynthetics is the ability to earn rewards or profits by investing digital assets by investors over an extended period of time. Strong proof of this state of affairs are stablecoins and BTCST-backed Tau Bitcoin. It is a unique type of synthetic asset where each single coin mimics the value of the underlying real currency, in this case BTC. By using these stablecoins as collateral for individual decentralized finance projects, investors have the potential to generate interest. This attractive feature makes cryptocurrency synthetic assets attractive to more experienced and sophisticated investors.
Plotting new horizons for decentralized finance
Cryptocurrency synthetic digital assets are revolutionizing decentralized finance, while offering masses of investors scattered around the world cheap and easy access and infinite liquidity. Thanks to the constantly evolving process of tokenization, retail and institutional investors systematically gain access to a wide range of investment opportunities that would otherwise probably be too risky or unprofitable. From the perspective of today, it can be safely said that DeFi democratizes the understanding of financial systems and provides greater access to modern and promising investments of the future. Moreover, all transactions are handled entirely by blockchain technology. Therefore, the settlement model between investors is significantly facilitated by self-executing smart contracts. Thanks to this, enthusiasts of decentralized finance have the ability to freely enter and exit investments with almost instant liquidity, which has never been easier.
