Synthetic Asset Definition
A synthetic asset, in the crypto world, refers to a mix of assets that have the same value as another asset. Often, these are used to gain exposure to various types of investments without the need to hold the asset itself. Instead, the value is derived from an underlying asset or pool of assets through a contract, essentially mirroring the actual asset’s performance.
Synthetic Asset Key Points
- A synthetic asset mimics the value and behavior of another asset without actually owning it.
- They are created using a variety of financial instruments, including futures, options, and swap contracts.
- Synthetic assets allow investors to gain exposure to different global markets and assets without the inconvenience of dealing with the traditional buying and storing process.
What are Synthetic Assets?
Synthetic assets are a form of derivative contract that mimic the value and behavior of other, often more cumbersome or expensive, assets. In cryptocurrency, these are usually tokens or digital assets created on the blockchain, backed by other crypto assets, and are bought, sold, and traded like any other cryptocurrency.
Why are Synthetic Assets Important?
An investor can have access to assets that can be difficult or costly to obtain. In crypto world, synthetic assets offer investors the chance to gain from the value movements of a certain cryptocurrency without actually having to own and store the real cryptocurrency. This is especially useful in situations where restrictions or limitations may prohibit the ownership of the real asset.
When to Use a Synthetic Asset?
Synthetic assets come into play when an investor wants exposure to a particular asset or market, but for varying reasons, prefers not to hold the actual asset. This could be due to factors ranging from geographical restrictions, exorbitant transaction fees, complex regulatory procedures, or lack of an efficient and secure storage solution.
Who Uses Synthetic Assets?
Crypto traders, investors, and blockchain platforms use synthetic assets. They are a popular choice for those who wish to have exposure to the price action of another asset without having the necessary infrastructure or means to deal with the real physical asset.
How Are Synthetic Assets Created?
Synthetic assets are formed by combining various financial securities to replicate another asset. For example, in the blockchain world, a crypto token can be pegged to the value of gold, effectively creating a synthetic asset that behaves like gold without the need to physically own it. In most cases, smart contracts oversee the creation and management of synthetic assets, ensuring they accurately reflect the value of the underlying assets.
