Today, I will explain what do synthetic assets mean, how are they used in crypto, and why are they important.
What Are Synthetic Assets?
Synthetic assets are a blend of assets with the same value as another asset. In a traditional sense, synthetics mix some derivative products, like options, and futures, that replicate an underlying asset, such as stocks, or bonds.
For instance, instead of buying a stock, a company may buy a call option and sell a put option on the same stock. This gives the company the chance of using several financial vehicles at the same time, instead of a single investment asset.
How Are Synthetic Assets Used in Crypto?
The goal of crypto-based synthetic assets is to offer you exposure to various assets without having to actually hold the underlying ones, be it gold, index funds, or the euro.
When using a unique synthetic asset, an investor is able to continue to hold tokens that track the value of other assets without having to abandon the crypto sphere. Crypto synthetic assets come with all of the benefits of decentralization since they are available to all users thanks to secured smart contracts.
Why Are Crypto Synthetic Assets Important?
Basically, thanks to this, crypto holders are able to trade traditional assets or derivatives without having to leave the digital ecosystem.
In the past, only a small number of institutional investors were able to gain access to the global derivatives market, but now, anyone who owns a smartphone and understands the basics of synthetic assets can use them.
What Types of Synthetic Assets Are There?
You can use several platforms for this, such as Abra, Synthetix, or UMA.
For example, Abra represents a decentralized investment platform that lets people use crypto they own as collateral for creating synthetic assets.
This means that if someone plans to acquire Apple stocks worth $2,000 via Abra, the company would peg $2,000 of the user’s Bitcoin against the price of the stock. If the price of the Apple stock increases, the equivalent sum of Bitcoin will be added or removed from the contract.
Basically, it would result in a short position on Bitcoin but with a long one on Apple, which represents the hedged asset. At the same time, Abra would have a long position on Bitcoin and a short one on Apple.