The crypto industry is evolving, presenting numerous new innovations. As of today, crypto is not merely a transaction tool; it has been applied for various purposes. One of the most recent innovations is a crypto synthetic asset.
These digital trading instruments represent real-world assets, revolutionizing the crypto industry by offering a novel approach to directly access various trading instruments commonly found in traditional markets.
What Is a Crypto Synthetic Asset?
Crypto synths, or crypto synthetic assets, are digital assets created to mimic the value and performance of a specific asset without the need to own or store the asset.
These digital assets are created using derivative mechanisms combined with smart contract technology on blockchain-based ecosystems, primarily used in decentralized finance (DeFi) ecosystems.
Smart contracts on blockchain networks such as Ethereum or Polygon use collateral to secure the asset’s value, track price movements, and create more flexible leverage or derivative products.
In the end, crypto synths become easily tradable and adjustable investment instruments, allowing direct exposure to various assets and transforming how crypto investors or traders access and interact with assets in the financial market.
How Does Crypto Synths Work?
Crypto synthetic mechanism is similar to NFTs, where it utilizes tokenization mechanisms. These assets mimic the value and characteristics of real-world assets through digital financial instruments created on the blockchain network.
The process begins with the creation of smart contracts on the blockchain network. These smart contracts are specifically designed to represent the value and performance of a particular asset, and the use of blockchain at every step ensures transparency.
Furthermore, synths use collateral to secure the value of the asset. This collateral can be various assets, such as cryptocurrencies, stocks, fiat, or other instruments that provide value.
Once the process is complete, users receive a new form of digital asset that they can send, store, or sell on a specific platform.
Crypto Synthetic Asset Types
There are several types of crypto synthetic assets commonly found in the crypto industry. These types include:
1. Commodities and Equities
The first types of crypto synthetic assets are commodities and equities transformed into digital assets through tokenization mechanisms.
These assets represent traditionally traded commodities such as oil, gold, and coal. This type allows fractional ownership, as seen with sOIL or sGOLD on the Synthetix platform, representing real-time silver or oil prices.
2. Stablecoin
Synthetic stablecoins are designed to represent the value and stability of traditional fiat currencies, such as the Dollar, Yen, Yuan, or Euro.
Stablecoins provide a way for traders or investors to transact goods and services without worrying about crypto volatility. An example is SUSD, a synth developed by Synthetix, with a 1:1 value peg to the US Dollar.
3. Yield Tokens
In the DeFi ecosystem, synths also offer returns to holders through staking or lending, providing opportunities for passive income from owned assets.
A common example is cDAI, a digital asset designed by the Compound development team.
4. Leverage and Inverse
The last type of synths is Leverage and inverse tokens, developed to amplify or balance changes in the price of their underlying assets.
This type of crypto synthetic asset generates profits when the underlying asset’s price falls, while leverage tokens amplify both gains and losses.
An example is BTC3L (Binance Leveraged Tokens), aiming to provide three times daily returns based on Bitcoin (BTC) prices.
What is The Difference Between Traditional and Crypto Synths?
The most important difference between traditional assets and crypto synthetic assets lies in their nature and representation.
Traditional assets are typically physical or represented through paper certificates, with varying accessibility and liquidity, often involving transactions through traditional financial institutions.
On the other hand, crypto synthetic assets are digital assets created using blockchain technology through smart contract mechanisms to represent the value and performance of a specific asset.
Conclusion
Synths or crypto synthetic assets are a highly revolutionary innovation. These digital assets not only turn crypto into a regular asset used for simple transactions but also play a crucial role in allowing everyone to access traditional markets more effectively using their own assets.
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