Among the plethora of DeFi applications, Synthetic Assets is a transformative tool, enabling users to gain exposure to many assets without needing ownership or custody of the underlying assets. This article will discuss the real-world use cases of synthetic assets.
What are Synthetic Assets?
Synthetic assets are digital assets that derive value from underlying real-world assets.
Financial contracts and derivatives create synthetic assets and replicate physical assets’ risk/return profiles.
Synthetic assets, also known as synths, are easily tradeable and adjustable investment instruments that allow exposure to diverse assets.
Synths are available for otherwise illiquid assets, could be more efficient to hold directly, or have restricted access.
Blockchain platforms issue synths for transparency, security, fractional ownership, and programmability.
Synthetic assets are changing how investors access and interact with various assets in the financial markets.
They are enabling new levels of customization, liquidity, and portfolio optimization for many types of assets.
Why Are Synthetic Assets Important?
The DeFi world is relatively new, and while it offers exciting possibilities, the range of available financial instruments is still limited. In traditional finance, investors can access various financial instruments to deploy diverse strategies by combining different assets. Crypto synths have emerged in DeFi, aiming to expand the availability of financial instruments and investment strategies.
Synthetic assets protocols in DeFi enable the creation of tokenized derivatives, which represent real-world assets. These synthetic assets allow users to trade and gain exposure to various assets without actually needing to own them. By offering this functionality, synthetic asset protocols contribute to improved risk management, increased trading volume, and enhanced liquidity within the DeFi development ecosystem.
Moreover, synthetic assets protocols tackle challenges associated with weak cross-chain communication protocols. They facilitate seamless interaction and transfer of value between different blockchain networks. Synthetic asset protocols enhance interoperability and expand the possibilities for DeFi users by bridging the gap between disparate blockchains.
Benefits of Synthetic Assets
Here are the key benefits of synthetic assets:
- Low costs
- Accessibility
- Fractional ownership
- Liquidity
- Yield generation
- Diversification
- Customization
- Transparency
- Market flexibility
- Automation
Low costs
Synthetic assets frequently have lower costs than directly purchasing and managing the underlying assets. Fees, expenses, minimums, and other frictions are reduced through bundling and passing through attributes of the underlying assets.
Accessibility
Synthetic assets provide access to niche, illiquid, or restricted assets that would otherwise be difficult for most investors to access. Users can include a much more comprehensive range of assets in investment portfolios.
Fractional ownership
Crypto synthetic assets often represent fractional or partial ownership in underlying assets. They provide a way to own assets with high dollar costs or minimums through proportional sharing.
Liquidity
Defi synthetic assets are typically very liquid, allowing positions to be adjusted quickly and easily. Underlying asset exposures can be liquefied through derivatives and secondary market trading.
Yield generation
Some synthetic assets provide potential for income, interest payments, fees, or other yield that could exceed what might be generated through direct ownership of the underlying asset. Users can create additional yield streams.
Diversification
By bundling assets together into single investment instruments, synthetic assets make building diversified portfolios that include alternative assets simpler. Users can achieve new asset classes and risk profiles.
Customization
Users can customize the components of synthetic assets to meet specific investment objectives. Tailored exposures, risk levels, return profiles, income needs, and more can be designed for individual investors or investment strategies.
Transparency
Defi synthetic assets often provide transparency into the underlying assets, terms, counterparties, and other key aspects that determine risk and return. Counterparty risk can be better understood and monitored.
Market flexibility
It is easier to adjust synthetic asset allocations and exposures based on market conditions, relative valuations, or other factors. Positions can stay optimized over time based on market dynamics.
Automation
Some crypto synthetic assets provide features for automation, algorithmic management, rebalancing, and portfolio optimization based on selected guidelines or parameters. Automated management is more feasible.
Real-world Use Cases of DeFi Synthetic Assets
While Synthetic Assets have predominantly been associated with speculative trading and investment, their potential extends far beyond financial markets. Here are some real-world use cases where Synthetic Assets could make a significant impact:
- Risk Management
- Access to Global Markets
- Liquidity Provision
- Decentralized Derivatives Trading
Risk Management
Synthetic assets enable users to hedge against price fluctuations and mitigate risks associated with traditional financial markets. Traders can gain exposure to diverse asset classes and implement sophisticated trading strategies without relying on centralized intermediaries.
Access to Global Markets
DeFi synthetic assets provide individuals worldwide with unprecedented access to global financial markets, allowing them to invest in previously inaccessible or restricted assets due to geographical, regulatory, or financial barriers.
Liquidity Provision
Market makers and liquidity providers play a vital role in facilitating the trading of synthetic assets by supplying liquidity to decentralized exchanges and liquidity pools. In return, they earn rewards through trading fees, incentives, or governance tokens.
Decentralized Derivatives Trading
DeFi synthetic assets serve as the building blocks for decentralized derivatives trading platforms, where users can trade perpetual swaps, options, futures, and other derivative products without relying on centralized clearinghouses or counterparties.
Conclusion
Synthetic assets are a new frontier in finance and the crypto industry. These assets offer a range of benefits, including increased accessibility, flexibility, and diversity.
However, they also come with risks, such as potential liquidity issues and counterparty risk.
Despite these challenges, the use cases for crypto synthetic assets are vast and varied, including everything from risk Management to derivatives trading.
As the industry continues to evolve, it’s clear that synthetic assets are changing the game and paving the way for a more decentralized, accessible, and innovative financial future.
