25 September, 2020 

What Are Synthetic Assets And How Do They Work?

Synthetic assets in the classical sense are a collection of assets that are identical to the value of other ones. For example, a set of different futures and swaps are combined into an underlying asset - stocks, bonds, interest rates, etc.
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What Are Synthetic Assets And How Do They Work?

Synthetics In The Field Of Cryptocurrency

If we learn synthetic assets in the context of cryptocurrencies, we should know that they are part of derivatives. What is it?

A derivative is a contract, its value is derived from an underlying asset such as stocks, commodities, currencies, indices, bonds, and interest rates. There are various types of derivatives such as futures, options, and swaps. Different types of derivatives serve different purposes and different investors buy or sell them for different reasons.

What are the reasons why investors trade derivatives?  Leverage, insurance against volatility, speculation on the growth of the underlying asset.

Justified Risks

Derivatives are considered risky by many traders. You should have advanced knowledge in the financial area and have serious strategies to use them.

Synthetix and bZx are protocols for synthetic assets that belong to the DeFi derivatives protocols. Synthetix is a protocol for synthetic assets on The Ethereum.

There are synthetic assets that insure the traders position from negative factors. Risks hedging  creating new positions in other markets that offset the risks of other assets.

What Are The Benefits Of Hedging?

  1. the rate of buying or selling an asset is fixed
  2. insure against revaluation of a currency position
  3. the ability to buy or sell an asset when certain numbers are reached
  4. a more visible position in the future.

Synths: The Use And Varieties

Synths, as we wrote earlier, replace the value of the underlying asset. They also track the value of the underlying assets and make it possible to access these assets without having to have them.

The Variety of synths is currently limited to two types:

  1. normal synths (positively correlated with underlying assets)
  2. inverse synths (negatively correlated with underlying assets)

Synthetic gold sXAU, a synth that monitors gold prices. These assets track real prices using Chainlink's services a platform designed to protect against unauthorized access during data exchange. Based on its smart contracts, we receive price information from several reliable sources to eliminate manipulation.

What Assets Are Supported By Synthetix?

Synthetix supports 4 main asset classes:

  1. Cryptocurrencies. Ethereum (ETH), Bitcoin (BTC), Tezos (XTZ), Maker (MKR), Tron (TRX), Litecoin (LTC), and Chainlink (LINK)
  2. Products. gold (XAU) and silver (XAG)
  3. Fiat currencies USD, AUD, CHF, JPY, EUR, and GBP
  4. Indices. CEX and DEFI

Conclusion: Synths justified risks that require prior studying and understanding.

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