The term ‘synthetic asset’ is used to refer to a mix of assets that have roughly the same value as another asset. Based on the traditional markets, synthetic combines different derivative products, including futures, options, or swaps, that stimulate the underlying assets. Some of the participating assets include indexes, stocks, currencies, commodities, interest rates, and bonds.
For instance, instead of purchasing a stock, an investment firm may decide to buy a call option and later sell a put option on the same stock. The implementation of synthetic assets here enables the firm to use many financial strategies instead of focusing on just one investment asset.
The high-end estimate for the value of all derivative contracts is currently estimated to be upwards of $1.2 quadrillion. That amount is exponentially more massive than the global debt ($215 trillion), global real estate ($217 trillion), the world’s supply of gold ($7.7 trillion), and global stock markets ($73 trillion) combined.
On one side, these derivatives can be used majorly to help get rid of price risk from various assets like commodities to debt. On the flip side, derivatives can exacerbate and promote market inefficiencies, which will, in turn, encourage a zero-sum game among the traders instead of creating actual market value.
The use of derivative products enables investors to earn returns without a physical settlement, transfer risk, arbitrage trade, and hedge against price fluctuations.
What Are Crypto Synthetic Assets?
Crypto-based synthetic assets strive to give users exposure to various assets without having to hold any underlying asset. This can range from fiat currencies like the Japanese Yen or the United States dollar, to commodities like silver and gold. Also, it may include index funds and many other digital assets.
Through the use of these unique synthetic assets, the investors can still hold tokens that track the value of some assets without…