Concept

A type of synthetic asset (synthetic crypto asset)- and a specific form of crypto derivative/ crypto asset derivative– that allows holders to gain indirect exposure to real-world assets (RWAs) via blockchain-based tokens. Traditional derivatives such as futures and options are tradeable financial contracts that have physical assets or financial assets (or market rates or variables) as underlying. Underlying assets assets might be stocks, fiat currencies, or commodities such as crude oil, wheat, gold or silver. Derivative contracts closely track the market price of such underlying assets, allowing investors and other market participants to gain from changes in price without having to directly hold the assets themselves. Synthetic crypto assets behave similarly and carry many of the above benefits, but also provide additional benefits such as transparency, speed and accessibility to blockchain technology.

Modus operandi

Synthetic crypto assets (e.g., synthetic cryptocurrency tokens) provide more dynamic and innovative solutions compared to traditional types of assets. The blockchain-based cryptocurrency derivatives allow investors and traders to gain exposure to real-world assets, overcoming the traditional access barriers that restrict their ability to hold such assets. Synthetic crypto assets are minted or created on special platforms, where users are required to deposit an amount of  network tokens (e.g., Synthetix Network Token (SNX)) into a network-installed, staking smart contract. The tokens are placed as collateral to back up the value of the newly created synthetic assets, in line with the principle of overcollateralization, that aims to curb the underlying asset volatility. For example, the amount of network tokens staked is a multiple of the value of the synthetic assets at all times (four times, five times, etc.)

The value of collateral is a key determinant of how overcollateralization is maintained. If the underlying assets decrease in value, overcollateralization and the amount of collateral would need to re-adjust to account for the drop in value. In the opposite scenario, stakers would need to stake more tokens, or burn existing synthetic assets (synths). Burning is the process of permanently destroying tokens (decreasing the amount of tokens in circulation). Smart contracts can be designed to carry price data for transactions involving such assets. Using the stored data, synths can track the prices of the underlying assets.

Example

A prime example of synthetic crypto asset is a synthetic token– a type of synthetic asset (synthetic cryptoasset) that represents a token created and issue on a network (blockchain) as a reference to the value/ price of another asset. The holder of the token does not own the asset itself, nor does any related party to the transaction does so. Instead,  the token holder can, by means of ownership, control the collateral used to create the token. As a form of synthetic asset, synthetic token is generally created by overcollateralizing the reference asset (such as a tangible asset, financial asset,  or a crypto or coin) to construct the relevant synthetic assets. Synthetic tokens are changing the scene of decentralized finance (DeFi) and its application. These tokens represent digital versions of real-world assets (RWAs) like stocks, currencies, or commodities, or other types of assets. Once issued, the tokens can be traded on decentralized exchanges (DEXs).