What Are Synthetic Crypto Assets and Why Should You Invest in Them? By DailyCoin

What are synthetic crypto assets and why should you invest in them?

Decentralized Finance (DeFi) has become a game changer for the current economic system, addressing many of the flaws in existing financial systems. One of the captivating opportunities is offered by synthetic assets which have the potential to provide broader liquidity and access to different asset classes. In this article, we will look at synthetic crypto assets and how to invest in them.

What are synthetic resources?

Synthetic cryptocurrencies are financial instruments in ERC-20 smart contracts known as “Synths”, which are comparable to traditional finance derivatives.

A derivative is defined as a financial contract whose value derives from the underlying asset, index or interest rate. Synthesizers use a smart contract-based protocol to track the value of real-world assets and allow you to trade assets without actually owning them. These assets range from indices, inverses, cryptocurrencies and real world assets such as precious metals or fiat.

Synthesizers are distinct from tokenized commodities, for example the PAX Gold (PAXG) token backed by gold. Owning PAXG means that the company holds underlying gold on your behalf. Owning synthesizers implies exposure to the price of gold. However, you don’t actually own the underlying asset.

Synthesizers can be created for any resource. For example, a synthesizer designed to mimic the value of the US dollar is called sUSD. sBTC is another synth that replicates the price of a.

Synthesizers provide exposure to a wide range of assets that are not always accessible to the average cryptocurrency investor, such as gold and silver. It allows asset class holders to interact with other assets to which they otherwise would not have access.

This implies that an oil holding owner could, for example, exchange their oil position for a Bitcoin position. Or a Bitcoin holder can exchange their asset for silver.

How can I trade synthetic assets?

There are some synthetic asset exchanges today. The most established is Synthetix. Synthetix is ​​a decentralized and permissionless derivatives liquidity protocol built on the blockchain.

Synthetix uses two cryptocurrencies to offer its synthetic resource mining service. The ecosystem is powered by the native Synthetix token, the Synthetix Network Token (SNX). The token can be staked to create synthetic assets. The second cryptocurrency is synthesizers, which can mimic any asset.

A user must purchase SNX and deposit it on the Synthetix platform to produce synthesizers. In return, Synthetix generates the user’s new favorite synth token.

SNX tokens return the value of synthesizers. According to the software rules, the locked SNX value should therefore remain equal to or greater than 750% of the synthesizer value created. Suppose a user wanted to coin a synthetic US dollar. If the user has deposited $ 1,000 of SNX cryptocurrency, he receives $ 133 of sUSD.

SNX tokens are minted when a staker deposits collateral using a Mintr application dedicated to interacting with SNX contracts. Users who block their SNX receive rewarded SNX transaction fees for their participation in the Synthetix network and for their continued over-collateralization of the synth token.

Since SNX is a cryptocurrency, the open market decides how much it is worth. As the price of SNX goes up or down, the number of synthesizers in use can vary. For example, if the cost of SNX increases, the system will issue SNX tokens which are no longer needed to guarantee previous synths.

Consider the case where the cost of SNX has increased. This suggests that $ 500 of the $ 1,000 in SNX initially locked could be released. The user could use that SNX to create an extra $ 500 in sUSD synthesizers. This means that the higher the SNX price, the more synthesizers can be created.

Here is the procedure to follow if you wish target and exchange synthetic assets.

  • Get SNX tokens on an exchange or trade other cryptocurrencies with them.
  • To create a synthetic asset, the user must deposit a guarantee (for example, SNX for Synthetix). The collateral will be used to support the synthetic asset minted with real value.
  • Oracles track the price of the target asset in real time.
  • Users can use the Synthetix platform to trade assets such as sBTC, sUSD or other stocks.
  • Miners keep a reward for minting and creating cash for exchange-traded assets paid for in the protocol’s native resource.
  • Synthetic assets vs. Traditional derivatives

    Synthetic assets and conventional derivatives vary mainly in tokenizing the relationship between an underlying asset and the derivative product rather than using contracts to establish the chain.

    Simply put, a tokenized derivative that mimics the value of another asset is a synthetic asset. Therefore, synthetic assets can give exposure to every resource in the world from within the crypto ecosystem.

    Traditional derivatives have been revolutionary in their ability to unlock additional value from assets such as stocks. Synthetic assets open up countless global liquidity pools allowing you to tokenize and add anything to the blockchain.

    Synthesizers are unique because it is a “stock” represented in the form of a token and the value of that stock is determined by an oracle’s judgment on an index.

    There are multiple advantages that synthetic assets have compared to traditional derivatives.

  • Allows you to move freely between sharesderivatives based on gold or silver and other assets without holding the underlying asset.
  • Synthetic assets can be sent and received using standard cryptocurrency wallets.
  • Synthetics can be traded on every cryptocurrency exchange in the world.
  • Synthetic assets based on blockchain can be coined by anyone using open source protocols, such as Synthetix.
  • To sum up, compared to traditional derivatives, synthetic assets provide more liquidity on international exchanges, swap protocols and portfolios. Using this technology, any imaginable asset could be brought onto the blockchain. Synthetic assets offer the potential for seemingly limitless markets and combinations for new sources of value beyond just trading derivatives.

    However, there are a few drawbacks of synthetic assets also to consider. One of them is that the learning curve associated with staking synths is higher than in other DeFi projects and may put off some users.

    Additionally, synth staking requires 750% over-collateralization, which is prohibitively expensive for most users and significantly more expensive than other DeFi initiatives.

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