Synthetic assets, sometimes referred to as synths, are a combination of cryptocurrencies and traditional derivative assets. In other words, synths are tokenized derivatives.
What are synthetic assets?
Synthetic assets are essentially tokenized derivatives. In the traditional financial world, derivatives are representations of stocks or bonds that a trader does not own but wants to buy or sell. In essence, if you want to profit from the price fluctuations of a stock that you don’t own, you can do this through a derivative. Synthetic assets, or tokenized derivatives, take this process one step further by adding the record for the derivative on the blockchain and essentially creating a cryptocurrency token for it.
Synthetic assets essentially allow investors to tokenize and trade with anything. Using a derivative to tie the value to an already existing asset and then create a token for this derivative, investors can easily trade anything on the blockchain. One of the main reasons why synthetic assets are becoming a preferred method of investing is because of the added security and traceability. While traditionally trading happens on centralized exchanges, with synthetic assets, all trades happen on the blockchain. This guarantees traders both their anonymity, if they wish to remain unnamed, and their security, as all transactions are recorded in the distributed ledger.