The term “synthetic assets” has become somewhat of a buzzword in the cryptosphere in recent months, due to the potential for synthetic assets to disrupt the way we think about asset ownership and utility.
As blockchain-based derivatives of a range of other financial assets, synthetics have the opportunity to democratize access to practically every financial industry and enable new use cases and innovations that were simply not possible before the advent of blockchain technology.
Synthetic assets could be the crucial piece of the puzzle missing in the DeFi picture — being the asset class that delivers the power of blockchain-based financial products to the masses. Here, we take a look at the current state of play in the synthetic asset space.
What Are Synthetic Assets?
As their name suggests, synthetic assets (sometimes known as “synths”) are permissionless crypto versions of another asset. They are designed to make accessing, holding, trading, and using a variety of underlying assets more accessible through the use of blockchain technology.
As opposed to stablecoins like USD Coin (USDC) and Tether (USDT), synthetic assets aren’t just pegged to the value of a fiat currency. Instead, they are designed to replicate an asset and all of its properties with a blockchain-based alternative. This might include replicating its inflation or deflation, volatility, interest-bearing properties, and more.
Being blockchain-based, these assets are generally open, accessible, transparent, and democratic. Unlike many traditional assets, synthetics can generally be accessed by anyone, anywhere — without needing to jump through numerous hurdles or meet various stringent requirements first. For example, they might allow holders to trade derivatives of private equity, without needing to be an accredited investor.
Nonetheless, exactly what it takes to qualify as a synthetic asset is still up in the air, as the synthetic asset space is still rapidly evolving. But, the vast majority of synthetic assets are simply digital assets that attempt to closely represent the value or properties of another asset — without being directly backed by that asset (unlike most stablecoins).
To date, a huge variety of synthetic assets have been elaborated, including synthetic stocks, exchange-traded funds, precious metals, altcoins, and a wide variety of derivatives (e.g. options, futures positions). These can be traded on a variety of centralized and decentralized exchange platforms in a completely permissionless environment.
Current Players Pushing the Trend
In the last three years, the synthetic assets space has seen an explosion of innovation, and there are now dozens of tools, platforms, and projects primarily building around these new asset classes.
In this time, a number of key players have emerged, each of which is pushing the industry forward in one or more key areas — whether that be synth accessibility, utility, awareness, or something else.
Synthetix, an Ethereum- based ecosystem of synthetic asset products is arguably the frontrunner in the synths space. The platform allows users to easily mint, trade, and leverage a variety of synthetic assets — which can include synthetic commodities, fiat currencies, indexes, and more. The platform also demonstrated the capability to mint synthetic “inverse cryptocurrencies” which have price action that completely opposes that of another tracked asset, e.g. inverse Bitcoin would see its value appreciate if native Bitcoin loses value.
But with the rising congestion and high fees currently experienced by the Ethereum network, other blockchains like Substrate and Terra have seen meteoric growth in the number of synthetic asset projects.
For example, the substrate-based synthetic asset issuance Protocol Shadows has garnered significant attention thanks to its capacity to make synthetic assets much more accessible and powerful. It accomplishes by allowing users to easily mint a wide range of synthetics by simply staking the $DOWS token, while simultaneously providing staking rewards to those that opt to mint synthetic assets. These synthetics can also be traded, loaned, and borrowed — providing a great deal of utility to investors.
With the advent of Mirror Protocol, the Terra blockchain also saw the beginnings of its synthetics ecosystem. The platform is similar to Shadows, in that it allows users to mint a range of synthetic assets (known as Mirror assets) by locking up the platform’s native token ($MIR). But it stands out in that it also offers a powerful web app, which allows users to easily farm, trade, and borrow using Mirror Assets. Today, Mirror is commonly used to gain exposure to a variety of stocks, without needing to first go through a broker.
The Need for Synthetic Assets
Synthetic assets are an attractive proposition. After all, they allow users who are either unwilling or unable to hold underlying assets to still speculate on them and take advantage of some of their benefits.
Likewise, the fact that they are decentralized and permissionless means they can be accessed, used and transferred without relying on centralized intermediaries. This simultaneously helps to minimize central party risk, since no government or institution can put a breaker on trading, limit access, or seize user funds.
As a type of globally accessible derivative, synthetic assets enable a massive variety of new use cases that were simply not possible before. For example, users can mint and trade their own custom put/call options, leveraged tokens, basket funds, or practically anything else they can think up. They’re already been used for a whole range of useful and wacky ideas, including shares in private company stocks and even meme markets, and new use cases for synthetics are being developed frequently.
But despite their potential, they’re not without their challenges. After all, they rely on smart contracts, which means there is always a small chance that some unforeseen loophole could be exploited — which could result in financial losses if used to forcibly mint new assets or revoke access to funds. Likewise, given that most synthetic asset issuance protocols leverage one or more blockchain oracles for their pricing and supply information, the slim risk of incorrect data feeds or oracle failures can cause a host of challenges.
Nonetheless, most modern synthetic asset issuance platforms feature robust fail-safes and backup systems in place to prevent such issues from ever occurring. This, in combination with increasingly restrictive regulations on traditional securities and derivatives, paints synthetics as the ideal alternative.
About Master Ventures
Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.
Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.
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