The rise of the blockchain-based open financial world has led to the creation of various new forms of assets. Synthetic assets are one of these newly created assets that are bringing more openness and inclusivity to the financial world. So, let’s understand the concept of crypto synthetic assets.
However, before delving into synthetic (also called wrapped or mirrored assets) crypto assets, let’s first understand the concept of tokens with respect to cryptocurrencies.
The Concept of Tokens
A token is basically a representation of anything in a given ecosystem. If you go to a Chai shop, pay your bill at the counter and get a token that you can exchange for a cup of Chai. In this given scenario, a single token represents a cup of Chai.
However, if that Chai shop shuts down and you’re left with a bunch of Chai tokens, these tokens serve absolutely no value or purpose anymore. Starbucks reward is one good example of tokens. You can accumulate these rewards to exchange them for consumable goods at any Starbucks outlet. However, these rewards are worthless in case all the Starbucks outlets close down. Now let’s get to crypto tokens.
Learn more about tokens: Understanding Tokens: Security Vs Utility Tokens
Similarly, in the world of cryptocurrency, a token represents an abstract value in a given blockchain ecosystem. From a more technical perspective, a token is simply an asset or unit of value representing programmable assets that are managed through a smart contract and an underlying distributed ledger.
For example, ChainLink has LINK token, MakerDAO has MKR, Augur has REP, you get the point. These tokens serve a necessary function in their respective ecosystem and without these tokens or their value, the given application would cease to exist.
Now, let’s get back to the question – what are crypto synthetic assets?
Crypto Synthetic Assets
Crypto synthetic assets are basically tokenized versions of derivatives. In finance, a derivative is an asset that derives its value from an underlying asset. Thus allowing anyone to get exposure to stock through a derivative.
Synthetic assets are basically “mirror” versions of real-world assets that reflect the same price movement as their real-world counterpart. For example, Tesla’s stock is a real-world asset, and if we create a token called mTSLA whose price value behaves exactly the same as the price of a Tesla stock – that, my friend, is a synthetic/mirrored token of Tesla’s stock.
As of now, Synthetic is one of the leading protocols for creating and trading synthetic crypto assets. Mirror Finance is yet another platform for creating tokenized versions of equities such as Tesla, Microsoft, GameStop, etc.