What Are Synthetic Assets in DeFi?
Synthetic assets are complicated investment vehicles, even in the fiat world. In the cryptocurrency world, however, they are even more prevalent, allowing holders to be exposed to assets they don’t actually hold.
Synthetic assets in crypto, often referred to as derivatives or synths, include options like tokenized versions of real-world stocks and synthetic Bitcoin, allowing users to invest crypto in real-world assets without leaving the blockchain. Read on to learn more about synthetic assets in DeFi.
What Are Synthetic Stocks?
Synthetic stocks can be confusing because they aren’t the same as stocks at all. They are smart contracts that the user buys into to expose themselves to a certain asset. However, unlike with stocks, when you own a share of that asset, with synthetics, you don’t actually own anything.
You’re probably asking why someone would want to invest in an asset where they don’t own the stock but are still exposed to it, and the answer is more difficult than you may think. There are many reasons synthetics exist, namely, inclusivity.
Whether you realize it or not, there are so many restrictions on what you can and can’t do all because of the location of your birth—which means choices you didn’t make (that your parents did without consulting you) can have huge effects on your life, even when it comes to investing.
A prime example of this is Americans, who are prohibited from investing in any Iranian business or Iranian stock. This law has been in place since the 1990’s and actually bars investing institutions from accepting Americans when they offer Iranian stock options. This might sound insane, but it’s true, and it’s one of the reasons derivatives and synthetics exist.
Synthetics allow someone who may be barred from investing certain holdings to still have access to that investment, because with synthetics, they don’t actually own it, thus keeping them within the law.
How Do Synthetic Stocks Work?
In the blockchain industry, synthetic stocks work by tokenizing an asset—aka making a digital version of the asset that investors can buy using smart contracts. Tokenization is basically limitless, allowing almost anyone to tokenize almost anything, as long as they can code the process.
When an investor wants to utilize a smart contract to buy a tokenized asset, they do so by depositing a value into that smart contract, typically one with a higher value than what they want to buy. This smart contract not only creates a digital record of the investment, but also makes it trackable by the investee, allowing them to see the outcome of their investment.
Examples of Synthetic Assets
Above, we mentioned that you can tokenize anything you put your heart to, and that’s true. As such, there is a synthetic asset for almost any asset in crypto you can imagine, as well as many real-world assets. Examples include synthetic Bitcoin, which mirrors the price of Bitcoin, and synthetic Tesla, which mirrors the price of Tesla stock.
Should You Invest in Synthetic Assets?
Synthetic assets are highly volatile, and very dangerous. In fact, we consider them to be more of a “bet” on an asset more than anything else. You basically make a decision, based on market sentiment, if the asset will go up, or down long-term or short-term. Just as we would never recommend “shorting” stock to a new investor, we also don’t recommend synthetic assets unless you’ve been an investor for a long time.
Remember, as we mentioned above, with synthetics, you don’t actually own anything, you are just making a guess that the asset you have chosen will change in price, either up or down. This means that you are exposing yourself to risk without having anything to show for it.
Seasoned investors will try to drag you in by saying you lessen your exposure to the asset you are tracking, but you lessen your exposure by not actually having the asset. The reality is, even though it is dangerous to invest in Bitcoin, at least at the end of the day, you have Bitcoin to show for it. When you have synthetic Bitcoin, you own nothing but a smart contract “bet” on what Bitcoin will do. For this reason, many scams have popped up in the crypto synthetics space—because synthetics themselves are practically a scam.
That being said, while we never ever recommend synthetics, we recognize there are some use cases where they may be warranted, as we mentioned above. If these apply to you, proceed with extreme caution.
Where Can You Buy Synthetic Assets?
A Google search about this topic will quickly lead you astray, mostly because, as mentioned above, there are so many scams out there. In our research, the only platforms we found to be viable for crypto synthetic assets are as follows:
· MakerDAO
· Mirror Protocol
Of course, there are more out there, but these are the only few we trust. That being said, scam projects can still pop up on these platforms, and choosing to invest in any sort of synthetic asset may result in losing everything—again, proceed with caution.
Want to trade crypto but not synthetics? Check out this article the 7 best cryptocurrency investment strategies.
How to Get Started With Synthetic Crypto
If you have read all of the above and are still determined to use synthetics, we recommend watching the movie The Big Short. If you still believe after that, then start by setting aside money you would burn if you could, and use this to place your synthetic purchases.
Before purchasing, however, ensure you do your research and become well-informed of the state of the world, as well as various economic markers, allowing your research to guide your purchases. Then, when you have a positive net outcome, you can rejoice in the extra money, but if things don’t go as planned (and they rarely do in synthetics), then you can console yourself because it was money you were planning to burn anyway.
Unwilling to do the research? Just buy Bitcoin, it’s easier, and arguably, just as risky.
