What is the essence of cryptocurrency synthetic assets?
At the outset, it should be noted that synthetic assets are closely related to the blockchain and directly based on this technology. This solution is a completely new type of digital asset, and at the same time a response to many needs of the current world of digital currencies. In classical economics, derivatives represent financial instruments such as stocks or bonds. Experienced investors often emphasize that derivatives play a very important and practical role in traditional finance. This is because they open up the possibility of exposure to a given type of financial instrument (underlying asset) without having to own it. So far, the cryptocurrency sector has suffered from a lack of opportunities for similar behavior among investors. Synthetic assets have solved this problem because they are essentially a derivative of the cryptocurrency reality.
The effort of entrepreneurs from the digital currency industry and a number of developers has resulted in a solution that allows cryptocurrency investors to earn on the fluctuations of a huge amount of tokens and cryptocurrencies, without the need to have these assets in their portfolio. Moreover, it is possible to mint tokens that perfectly reflect the behavior of assets that have nothing to do with the broadly understood cryptocurrency sector. A good example to illustrate this state of affairs is that synthetic assets allow you to mint a token that will be a digital reflection of Tesla shares or the price of oil on the blockchain. Summing up this thread, it can be said that synthetic assets create a digital "record" of a derivative in a distributed ledger and generate a dedicated cryptocurrency token for it.
How do cryptocurrency synthetic assets work?
The mechanism of operation of synthetic assets based on distributed ledger technology consists in creating a digital token, which then behaves as a mirror reflection imitating the value of the asset called the underlying instrument. In other words, a newly created token is in fact a record on the blockchain, which is a digital reflection of another asset. The architecture of this technological solution gives traders, in practice, the chance to easily trade potentially any type of asset (underlying instrument) on the blockchain. Additional benefits of trading in this model are a high level of anonymity and full transparency of transactions made by individual investors.
Advantages of cryptocurrency synthetic assets
- You don't need an underlying asset to be exposed to a broad investment spectrum
- These cryptocurrency derivatives have infinite liquidity
- Cryptocurrency synthetics are extremely simple to generate using DeFi protocols.
∙ Synthetics are very intuitive and quick to master. What's more, investors can easily sell the instruments they own using the ecosystem of decentralized finance.
Closing thoughts
It is an indisputable fact that synthetic assets play a critical role both in the classical economy and in the digital currency sector. This type of derivatives significantly diversifies the investment palette in the global financial system, opening up a number of new trading opportunities. Using the financial engineering behind synthetic assets, investors get the opportunity to multiply capital in financial markets without the inconvenience of acquiring a significant amount of assets that transfer value over time. This type of financial derivatives has both its supporters and opponents, however, previous experience shows that synthetic assets may be rocket fuel for the development of the DeFi ecosystem in the near future.
