Trading has traditionally been a two-party endeavour in which a seller and a buyer negotiate an acceptable price. However, Defi development has revolutionized this dynamic with the emergence of decentralized exchanges (DEX), which facilitate swaps and liquidity provision without the need for seller-buyer interactions.
What are Synthetic Assets?
Synthetic assets are essentially digital copies of real-world assets. These assets, which can be compared to crypto derivatives, track the price performance of an external asset without the need for backup. Synthetic crypto assets, in particular, monitor the changes in the value of cryptocurrencies instead of more traditional assets such as stocks or commodities. As a substitute for directly owning cryptocurrencies like Bitcoin or Ethereum, synthetic assets allow investors to benefit from the price movements of these digital assets. Synthetic crypto assets are generally produced by combining other financial instruments, such as futures and options contracts, to precisely mirror the value of the underlying crypto asset.
Investors can gain access to the crypto market without the need to own actual cryptocurrencies by utilizing synthetic crypto assets. Furthermore, these assets can be utilized to construct more detailed investment strategies, allowing for hedging against price fluctuation or access to multiple crypto assets simultaneously.
Transformation In Defi Development Through Synthetic Assets
The introduction of synthetic digital assets has revolutionized the Defi Development process by introducing various liquidity options. The tokenization of investments has sought to promote financial democracy and provide greater access to the lucrative investments of the future. Leveraging blockchain technology and self-executing smart contracts, investors can liquidate their assets instantaneously.
Furthermore, smart contracts have enabled the creation of synths, which are debt instruments in various assets. The price oracles determine their exchange rates. Consequently, protocols can provide exposure to a wide range of assets through an oracle with access to a decently liquid market.
Synthetix and Its Working
The development and trading of synthetic assets are made possible by the Synthetix decentralized finance (DeFi) protocol, which was developed on the Ethereum network. Here’s how it works:
To generate synthetic assets, users must first collateralize SNX tokens, the native token of the Synthetix protocol. The value of synthetic assets determines the amount of SNX tokens needed. Smart Contracts hold these tokens. Upon successful collateralization, Synths are issued to the user. These Synths are ERC-20 tokens that mirror the value of their underlying asset. Synths can be traded on the Synthetix exchange or transferred to other Ethereum addresses. The user is required to pay or receive the difference in value between them when they trade Synths. The transaction requires a small fee, which is given to those who stake SNX tokens and take part in governing the network.
The collateral will be liquidated if the value of the collateral drops below a specified level. The SNX tokens will be sold to make up for the deficit. This process serves to guarantee that the Synths remain adequately collateralized and that the value of the Synths is secure.
If one foresees an increase in the value of a given asset but is reluctant to take on the risk of it falling, they can acquire an options contract. This contract is a deal between two parties where the buyer gets an option to purchase or sell the asset at a predetermined price in the future. If the value fails to rise, the buyer can sell the asset at a prearranged price before a specific date. Investors can deposit Ethereum-issued synthetics and derivatives on DeFi platforms such as Curve and Uniswap to provide liquidity and gain rewards.
Future of Synthetic Assets in DeFi Development
The advent of synthetic digital assets is revolutionizing the decentralized finance (DeFi) industry, providing investors with enhanced access and liquidity. With these assets, improved risk management, increased trading volume, and improved liquidity are anticipated. Synthetic assets are thus opening up a new realm of cryptocurrency investment, encapsulating many markets within the blockchain. Protocols such as Synthetix are making traditional currencies accessible for trade on the blockchain. As such, the potential of synthetics is boundless.