As the crypto industry continues to expand, the financial world grows increasingly interested in distributed, permissionless systems that allow a faster, cheaper, and trustless way of transacting and participating in the market.
The trading of stocks, currencies, commodities, and other assets are still dominated by the likes of Wall Street, London, Hong Kong, and other traditional financial centers. However, the time for the political and monetary oligarchy is slowly coming to an end and crypo is here to take over.
Not to talk shit anymore, let us begin.
The term “synthetic asset” refers to a mix of assets that have the same value as another asset. Traditionally, synthetics combine various derivative products — options, futures, or swaps — that simulate an underlying asset — stocks, bonds, commodities, indexes, currencies, or interest rates.
To get a better grasp of what synthetics actually represent, it's important to understand what are derivatives.
Derivatives are securities that derive their value from the underlying asset or group of assets. Its value comes from the volatility and price fluctuations regarding the underlying asset and is a financial contract between two or more parties.
The most common underlying assets for derivatives are stock, bonds, commodities, currencies, and interest rates while being bought and purchased through brokerages.
The grand value proposition of crypto is to mitigate the need for brokerages and provide its users' exposure to a variety of different assets without needing to hold the underlying asset, nor to be reliant on the centralized entity.
One way of thinking about it is that synthetics are basically mimicking the underlying asset.
Synthetics allow investors to make use of multiple financial instruments instead of focusing only on one investment asset and are designed to suit the needs of different types of investors. The concept’s contributions to the growth of traditional markets have encouraged their flow into the cryptocurrency ecosystem.
It's not that hard to predict the future, in 10 years from now every real physical thing will have its direct digital signature/representation built on top of distributed systems. It basically implies that every asset, in its synthetic form will be subjected to speculation. I can't wait to see new protocols emerging and fighting to create better, more resilient protocols...
Nice.
Synthetix is a platform that aims to provide a place where users get to bet on the assets in the form of ERC20 tokens. This way, synths can utilize the benefits of ETH protocol while representing that specific underlying asset.
*Holding a synth token is not the same as holding an asset. For example, a synthetic MKR token is the same price as a real MKT token, however, the native rights and possible obligations of a real MKT token are not represented in a synthetic form. You basically just speculate on the price without having a real connection to the asset. *
The tokenomics are quite simple. The protocol uses multi-token infrastructure based on a system of collateral, staking, inflation and fees.
Synthetix uses a multi-token infrastructure based on a system of collateral, staking, inflation, and fees. The system uses two types of tokens–the main Synthetix Network Token (SNX) and synthetic assets or Synths. The system is similar to MakerDAO’s where ETH is locked up to create DAI. In Synthetix, SNX is locked up to create sUSD (synthetic USD). The sUSD acts as debt while SNX acts as the collateral. The main difference between Synthetix and MakerDAO is SNX is staked as collateral to potentially create any synthetic asset–not just sUSD.
And while it sounds perfect, there are some problems regarding the security issues. Given the fact that smart contracts are heavily reliant on oracles as they have to receive the data from the external world, they had to find a way to mitigate potential security risks that could occur with centralized oracles. Imagine someone compromising oracle's price feed - well, you could get fucked and trade your asset for a lot less...
To solve the issue they partnered with Chainlink that acts as a decentralized oracle in which everyone has to agree on the truthfulness of the price.
Fun times ahead boyz.
