Money is changing. Bitcoin has forced many of us to look at money and value differently. But although Bitcoin was, and is, revolutionary in its own right, Ethereum and the introduction of smart contracts was an even more significant leap forward.
Thanks to the new technology brought about by Ethereum, innovation in the field of decentralized finance (DeFi) is rapidly changing the financial landscape. Traditional financial instruments and services are being replicated on the blockchain while new forms of assets are emerging.
Among these new assets are synths, also known as synthetic assets.
What are synthetic assets?
A synthetic asset is a financial instrument that simulates another asset’s payoff.
Synthetic assets have long been present in the world of traditional finance. They act as sophisticated tools that help bring greater liquidity and new participants to financial markets.
In the crypto sphere, a great example of synthetic assets is stablecoins. Coins like USDT, USDC, and Dai simulate the value of the US Dollar. In essence, stablecoins are an on-chain equivalent of the US Dollar.
Another example is wrapped cryptocurrencies. The wrapped Bitcoin (wBTC) token, for example, is an ERC-20 token that exists on the Ethereum blockchain. It mimics the price movement of Bitcoin and is backed by a large reserve of Bitcoins.
Trading synthetic assets
Synthetic assets essentially allow investors to tokenize and trade almost anything. The possibilities are virtually endless, as people can now own crypto tokens that represent the value of real-world stocks like Tesla or Apple.
Any asset can be tokenized and incorporated onto the blockchain, offering individuals access to never-seen-before investment opportunities and democratizing finance by breaking down any entry barriers. The BTCST token illustrates this perfectly. As an asset that simulates Bitcoin’s hash rate, BTCST allows anyone to have exposure to mining rewards without needing to do any actual mining.
Creating blockchain-based synthetic assets offers more significant advantages when compared to traditional finance. Greater security and transparency are easily achieved, as all transactions are recorded on the ledger without compromising privacy.
There are several established platforms like Synthetix, UMA, and Abra for those looking to trade synthetic assets.
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