Introduction
In this blog, we shall discuss one of the important topics in the crypto space, crypto synthetics.
We shall discuss its relation with derivatives in the traditional finance system, its advantages, and its possible future.
What is a Synthetic Asset?
In traditional finance, derivatives assets get their values from the underlying asset that they are linked to. Futures, options, forwards and swaps are some forms of derivatives.
Synthetic assets can be considered as derivatives that mimic the value of the underlying asset/s and do so by tokenizing that relationship and storing it on a blockchain. Crypto synths are breaking new dawn in the DeFi world by providing more access and liquidity to investors.
Advantages of Crypto Synths
Like traditional derivatives, crypto synths allow their users to own an asset without having to go through the hassle of possessing the asset. They can profit from the price fluctuation of any asset without actually owning any of them.
Synthetic assets can be minted by anyone with an internet connection by using protocols like Synthetix, Mirror, UMA, etc. on most of the popular blockchains.
Crypto synths can be traded easily on most of the decentralized exchanges available today. As anyone in the world can participate in a blockchain, crypto synths create massive liquidity in the DeFi market.
Crypto synths are also easily transferable. Like ERC-20 tokens, synths can be transferred from one wallet to another seamlessly.
Apart from these advantages, one of the main attractive features of synths is their traceability and decentralized nature. Users can enjoy the security of blockchain technology as they can trace their transactions without relying on any centralized authority.
Crypto synths get the DeFi enthusiasts excited as it brings a very interesting tool in the DeFi space which was available only to the investors in traditional finance.
Risks of Synths
As the use of blockchain involves the use of smart contracts, any fault or bugs in the contract can cause immutable problems.
Many platforms use oracles for information and hence illegitimate information can result in huge confusion.
The risks of using a blockchain in terms of high gas fees or late transaction confirmation can cause some problems among users in times when quick responses are required.
Conclusion
The road of DeFi is full of obstacles and can not be smoothened overnight. It would require the selfless attempt and dedication of every last person linked to the central nervous system of decentralized finance to overcome these challenges and realize the future that we know DeFi can bring.
