Quick Guide to Decentralized Synthetics
Ever heard of the term decentralized synthetics? Indeed, this is quite a complex and intriguing part of Decentralized Finance (DeFi). But every investor needs to understand the concepts behind synthetics to better position themselves for profit in the cryptocurrency world.
In this article, we’ll give you a basic overview of what decentralized synthetic assets are, how they work, and what platforms are available for investors to use them in.
What is Synthetic Asset?
A synthetic asset is a financial instrument that simulates other assets while having a value similar to them. It is often a mixture of different products such as options, futures, and swaps. This combination of products is then designed to simulate other underlying assets such as bonds, stocks, indexes, interest rates, commodities, and currencies.
In simple terms, synthetic assets allow you to enjoy the values of a particular asset without you actually holding that asset. This is possible through a mixture of products that mimic another asset’s value.
Synthetic tools are often tailored to meet an investor’s needs. They are particularly used to lessen the risk of losing to fluctuating values of different assets. An investor can simply utilize synthetics to trade without putting down capital to actually purchase the asset he wants.
Note that synthetics have been around even before cryptocurrencies. Hence, synthetics are seen in both centralized financial institutions and the DeFi.
What are Crypto Decentralized Synthetics?
Synthetic assets have spilled over to the cryptocurrency world, bringing with it a wealth of trading opportunities for crypto enthusiasts.
Crypto decentralized synthetics are instruments that work similarly to typical synthetic assets. That is, they both allow holders to be exposed to a wider variety of assets without the need to hold these actual assets. These decentralized synthetics are based on cryptocurrency and all the technologies needed to run it, such as the blockchain and smart contracts.
Crypto decentralized synthetics are not controlled by anyone or any particular entity. This allows investors to seamlessly hold tokens tracking values of particular assets without leaving the entire cryptocurrency ecosystem.
How Do Decentralized Synthetic Assets Work?
An investor can purchase company stocks through a decentralized synthetic asset platform. Tokens are then assigned for the purchase as collateral for the creation of the synthetics. The tokenized derivatives are then used to exchange or swap one synthetic asset for another.
All the while, no intermediary reprices the crypto collateral as it is exchanged or swapped through the synthetic asset platform. Blockchain oracle mechanisms are used to accomplish this instead. The oracle mechanism serves as the middleware linking smart contracts and transactions together.
One agent purchases a decentralized synthetic asset. This act then creates an arbitrage opportunity for other market makers to purchase underlying assets as the synthetics’ price moves. Profit motives are what make the synthetics’ price pegged to its underlying assets.
Common Platforms for Decentralized Synthetics
Here are the most common decentralized synthetics platforms used by several crypto investors today:
This is a decentralized peer-to-peer platform that is based on Ethereum. Synthetix users can stake SNX tokens to create Synths and earn fees from it. Synthetic assets that can be issued through the platform include derivatives, cryptocurrencies, fiat, and various asset classes.
The Synthetix platform offers three different decentralized apps: Mintr, Synthetic Exchange, and Dashboard. All these provide platforms for synthetics issuance, exchange, and monitoring.
Abra is an investment platform that uses cryptocurrencies as collaterals for synthetic asset creation. The platform is fully-decentralized and uses smart contracts that allow the use of both Bitcoin (BTC) and Litecoin (LTC).
Universal Market Access (UMA)
The UMA platform utilizes an honest oracle mechanism to create decentralized synthetics and financial products. UMA uses ERC-20 protocols to generate tokenized derivatives, granting them exposure to underlying assets in the real world
In a Nutshell
Crypto decentralized synthetics are financial products that help investors enjoy market values of actual underlying assets without holding any of them. No one controls them in a decentralized crypto finance framework, hence giving investors full freedom to participate in peer-to-peer trading transactions with them. Want to learn more? Download a free Crytpo Guide for Beginners here.
Originally published in ACCOINTING.com. To learn more, visit www.accointing.com.