When you hear the word synthetic, what comes to mind? If it’s about hair, it’s probably not an option, but when it comes to fibers, synthetic is a great help. But what about in the crypto world? Of what significance is synthetic in the crypto blockchain? First, let’s start by analyzing a market. What would you think of a market if there were no variety? Or what would a sandwich bread be without all the filings inside? So, in cryptocurrency, there are synthetic assets, which can be considered the fillings or variety in the crypto world. What then are synthetic assets?

In the crypto world, synthetic assets, also called crypto synths are simply tokenized derivatives. You might be wondering what tokenized derivates are, let's examine these crypto synths from an illustrative point of view for a better understanding. Think about a derivative whose value is derived from a contract that links it to another asset. Then, we can use trading products like futures to trade the movement of that value. For example, you want to purchase a company’s shares because you think the company will perform well. However, you are unable to purchase it using a standard brokerage account for certain reasons. What you can do is buy the company’s share tokens on a marketplace for synthetic assets.

Derivative value is traditionally obtained in finance from an underlying asset, like a stock or bond. With the use of these derivatives, traders could forecast an asset's price changes without really holding it. Tokenized derivatives, sometimes known as crypto synths, expand on the idea of derivatives by enabling their recording on the blockchain and generating a cryptocurrency token associated with them.

Synthetic assets are gaining popularity in cryptocurrency because they let investors profit from token fluctuations without actually owning any of the coins. Oftentimes, investors prefer to invest in these digital assets. This is mainly for two benefits: traceability and security. A distributed ledger is used to record trades, providing traders with security and anonymity.

Importance and Risk of Synthetic Assets in Crypto

Reduced transaction cost: Synthetic assets can frequently be traded for less money than traditional assets because they are produced through financial contracts as opposed to actual acquisitions. They may therefore be a desirable choice for investors trying to save expenses on their holdings.
Decentralized: any asset can be minted in nearly infinite quantities on decentralized synthetic asset exchanges as long as it is adequately collateralized. This means that as long as the total value of the tokens is backed by collateral with an identical value, the exchange is free to generate as many tokens as it wishes.
Increased liquidity: unlike conventional asset exchanges, these assets may provide traders with reduced underlying costs and greater liquidity. This is because traders may buy and sell assets more easily. For traders who wish to speculate on asset values without paying exorbitant fees or spreads, synthetic assets may be a compelling choice.
Increased Availability: investors who might require additional funds to buy the underlying asset directly can buy synthetic assets. This can facilitate exposure to a greater variety of assets for investors on a smaller budget.

The benefits of synthetic are not limited to the above. However certain risks are also attached to the ownership and liquidity of these digital assets.

Dependence on a single blockchain. This simply means it is insufficiently decentralized. Not everything that is marketed as decentralized ultimately turns out to be such.
A notable difference in value between the synthetic asset that tracks the underlying asset and the actual asset itself.
The risk of liquidation. Should the user neglect to augment their collateral and the collateral value is insufficient, the position may be liquidated, perhaps leading to a complete loss of their initial investment.
The risk associated with smart contracts. Synthetic asset apps, like all DeFi protocols, could contain significant flaws that could expose user’s account to fraudulent activities, like stealing user money.

Conclusion

Investors looking to reduce risk and apply a variety of investment strategies across a broad range of assets are likely to become more and more interested in crypto synthetic assets as their market value rises. This tendency may push up the number of cryptocurrency trades and draw traditional investors into the decentralized finance space.

Furthermore, since the field of synthetic assets is new, it is accessible to creative, forward-thinking concepts. The DeFi protocol-related metrics, including the total value locked at a predetermined expiration date or the number of users, give these synthetic tokens their worth. Hence, when it comes to synthetic assets, the possibilities are endless!