The decentralized finance subset of the blockchain/crypto space has quickly become the most innovative development since the invention of bitcoin. However, there is a subset within DeFi that is setting up to take control of the future of the industry. Synthetic assets are poised to revolutionize the finance industry, but what are they exactly?
What Are Synthetic Assets?
Financial instruments are considered to be synthetic when they are engineered to simulate or imitate other instruments while changing key characteristics. In traditional finance, synthetic assets combine different derivative products such as indexes, stocks, etc. Derivatives can be used to avoid price risk from different assets. Basically, derivatives allow traders to profit from the price changes of stocks that they don’t actually own.
Crypto Synthetic Assets
Crypto synthetic assets are similar to traditional synthetic assets. They are essentially just tokenized derivatives. These cryptocurrency derivatives allow investors to earn based on the price fluctuations of different tokens without holding those tokens in their wallet.
They represent yet another option available in the centralized traditional finance world that has become available through decentralized finance as well. Crypto synthetic assets produce the same effect as ownership of another asset.
Benefits And Ways To Use Synthetic Assets
Synthetic assets in the crypto world operate on the blockchain. Through the process of tokenization, a token representing the real-world asset is offered to the investor. These crypto synthetic assets enable digital fractional ownership of real-world “traditional” assets like stocks, real estate, precious metals, and other valuable items, providing investors with tokens to prove their investment.
Investing In Expensive Assets With Crypto Synthetic Assets
This will allow investing in assets like real estate that have traditionally been inaccessible to many, to now become available due to the fact that it is easier to own a fraction of a real estate property. People will be able to invest in many different expensive assets with less money.
By combining derivatives and DeFi through synthetic assets, truly borderless transactions have become possible and the benefits of derivatives have become available to the masses. Another benefit of synthetic assets is their ability to make bitcoin mining accessible to more people.
Bitcoin Mining And Synthetic Assets
Bitcoin mining requires expensive equipment, which has caused the benefits of bitcoin mining power to remain out of reach for many who cannot afford the equipment to mine bitcoin effectively. However, through the tokenization of bitcoin mining power (hashrate), anyone who wants to can buy the token and directly benefit from the bitcoin mining process without needing to own and operate expensive bitcoin mining machines.
The Stock Market And Synthetic Assets
Is it possible to move the stock market onto a blockchain? Thanks to synthetic assets, it appears so. DeFi innovators led by companies like Synthetix, a leading protocol for crypto derivatives trading, have already created synthetic versions of popular stocks like Tesla, Apple, and Amazon, along with some well-known ETFs. The token versions of these securities have been designed to reflect their prices without the need for a trader to own the actual stocks and ETFs themselves.
As stated in this interview with the founder of XCarnival, a synthetic assets platform developed after Synthetix and Mirror protocol, thanks to crypto synthetic assets, it’s now possible to invest in US stocks without a broker and without opening a US stock account by investing in tokens that reflect the prices of various US stocks.
This is great news for people in some countries, for example China, where people cannot invest in US stocks yet. Thanks to these developments, the financial markets of different countries have become available to people from all over the world, many of whom did not previously have access to them. The globe has now become more financially interconnected than ever before.
Current Use Cases For Synthetic Assets
Currently, synthetic assets are being used for a variety of different purposes. Here are a few of them:
- Reducing Funding Costs — synthetic assets can be used as a tool to obtain financing for assets that are held by someone.
- Providing Market Access — synthetic assets are being used to provide access to the marketplace by recreating the cash flow parameters of various different securities. This way, anyone can enter the crypto and DeFi space.
- Providing Liquidity — by converting real-world assets into tokenized versions of themselves, synthetic assets allow relatively useless real-world assets to gain more usefulness and allows them to be sent around the globe easily. This ultimately provides additional liquidity.
Synthetic Asset Protocols
Crypto synthetic assets have added another layer to DeFi and have enabled more people to benefit from derivatives and derivatives trading.
Unfortunately, many of the existing synthetic assets protocols involve a steep learning curve or are more focused on providing services to people who already have advanced technical capabilities and extensive knowledge of financial markets rather than people who may be new to DeFi, derivatives, and the benefits of synthetic assets.
Alkemy: A Next-Generation Platform For Investing In Synthetic Assets
Alkemy Is a platform within the Konstellation Ecosystem that will enable investors to mint stablecoins by staking the ecosystem’s native DARC tokens and then use the stablecoins to invest in synthetic assets.
These synthetic assets will include index-based products through VegaX and the same type of assets available in traditional finance. This way, Konstellation will be able to contribute to furthering innovation within decentralized finance and will provide an easy-to-use solution that offers existing finance capabilities and more through this platform and other projects within the Konstellation Ecosystem.
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