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Synthetic assets have been a standard fixture in the traditional financial market. However, with the financial world shifting to a digital approach, it is no surprise that synthetic crypto assets are also cropping up.
Like many other investment vehicles, synthetic crypto assets are quite similar to those in the traditional market. In this article, we will delve into the details of synth assets and how they work.
But, before we get into the nitty-gritty details of synthetic assets, how about a short recap on financial assets.
What is Financial Asset?
A financial asset is a liquid asset that derives its value from a contractual right or ownership claim. This definition can be simplified to mean – a non-physical asset that gets its value from a contractual claim. These assets are referred to as liquid assets since they can always be converted to real valuable cash.
Financial assets are also commonly known as financial securities or instruments. There are several different financial instruments in the market today. Some of the most common ones include stocks, bonds, loans, receivables, and derivatives.
What are Synthetic Assets?
A synthetic asset is a group or mix of assets that possess a similar value as another asset. Synthetic assets are often a combination of financial assets known as derivatives. Typically, synthetics comprise options, futures, or swaps-which are types of derivatives. The options, futures, and swaps are instruments that stimulate underlying financial assets such as bonds, commodities, stocks, and indexes.
Synthetic assets are purposefully designed to mimic alternative assets. They allow investors to take a position to enable them to buy or sell an asset without having the cash value. These synthetic products are custom-designed investment vehicles for large investors.
Understanding the Synthetic Position
A synthetic position describes a particular trading position designed to copy another position’s value in the market. This is often done to re-create an identical profile of risk and return to the other position.
This concept is a little advanced, so let’s discuss a scenario that demonstrates a synthetic options position.
A synthetic options position can be created when an investor or a trader decides to do the following on the same stock.
- Sell a put option at a strike price.
- Buys a call option at the same price
Remember that buying and selling should happen simultaneously. This means that if the strike price were $64 for both options contracts, it would be the equivalent of directly buying the underlying asset as $64 when the options get exercised or finally expire.
Crypto Synthetic Assets
Crypto synth assets are designed to offer crypto investors access to several assets without actually holding the underlying asset. These assets are, however, not limited to cryptocurrencies; they can involve currencies like the Dollar or British Pound, index funds, commodities like oil or gold, and digital assets.
Crypto synthetic assets allow investors to track some assets’ value while maintaining their crypto ecosystem position. With these assets, investors still have all the benefits of decentralization since the data is stored on distributed ledgers. Anyone across the globe has access to these assets using secured smart contracts.
The Impact of Crypto Synthetic Assets
Crypto synthetic assets have a significant impact on the traditional financial system. Because they allow investors to track the values of conventional assets, they are quite advantageous to them. For starters, users can trade their financial assets and derivatives without having to leave the digital world.
The decentralized nature of these assets also means that anyone worldwide can access the global derivatives market. Previously, only a few giant investors had access to this information. However, crypto synthetic assets have opened up the world, creating a community of decentralized investors. Therefore, anyone who understands how synthetic assets work can effectively trade their assets with information on the global market.
Crypto Synthetic Assets Projects
This P2P platform allows users to trade and mint their crypto synthetic assets. The platform is built on the Ethereum blockchain and provides a market that will enable users to trade their crypto-backed synthetic assets, referred to as Synths on the exchange.
Currently, Synthetix has 20 synths available and doesn’t impose any liquidity restrictions. The platform further provides three dApps; Synthetix exchange, Mintr, and the Dashboard, all of which ensure users have a smooth trading experience.
This decentralized platform allows investors to use cryptocurrencies as collateral for creating synthetic assets. The decentralized nature ensures that anyone who is using the Abra wallet can handle the Abra platform.
The platform supports smart contracts that are built on both Bitcoin and Litecoin. Investors who download the wallet take a short position, which means that the platform will be in a long position. Abra then hedges the risk of price movement by borrowing an equal amount of crypto assets from a broker.
UMA demonstrates perfectly how anyone with a smartphone can access the global derivatives market, as we’ve mentioned earlier. The platform allows any two parties to create their own financial products.
UMA is a decentralized platform that uses smart contracts and an honest oracle mechanism. Users on the platform then utilize protocols such as ERC-20 to create their tokenized derivatives. These derivatives offer short, long, or leverage exposure to underlying assets in the real world.
Synthetic assets have been an instrumental investment vehicle for investors in the traditional financial market. However, the system is now shifting to a digital age, and synthetic crypto assets have proven quite useful thus far. Like many other inventions in the crypto space, they are still in their infancy, and we can only expect them to have an even more significant impact as more investors explore this route.