Unveiling Synthetic Assets: A Game Changer in the Financial Landscape
This article will explore synthetic assets, their role in the broader economic context, and how they transform the financial landscape.
TL;DR:
- Synthetic assets are a fintech innovation backed by underlying assets and pegged to the price of several real-world indices
- Although similar in theory, derivative assets are fundamentally different from synthetic assets
- The Synthetics XST platform on SORA, integrated into Polkaswap, is a unique innovation that allows the community to propose the implementation of new assets through governance
The world of DeFi is a dynamic environment, constantly evolving and introducing innovative concepts. One of them is ‘synthetic assets,’ designed to redefine financial markets and create fresh opportunities for newcomers. This article will explore synthetic assets, their role in the broader economic context, and how they transform the financial landscape.
A Closer Look at Synthetic Assets 👀
In essence, a synthetic asset is a financial instrument — such as futures, options, or swaps — that mirrors the characteristics of another asset. This is similar to having a twin brother living in another universe; although not physically together, your lives can run in parallel, reflecting similar experiences.
Synthetic assets allow investors to gain exposure to certain asset classes without actually owning them. This is made possible by ‘synthesizing’ other financial instruments’ value and backing it with an underlying asset to then mint the synthetic asset based on it.
Distinguishing Synthetic Assets from Derivatives
While synthetic assets and derivatives may appear similar, due to their reliance on the value of an underlying asset, they are distinct financial instruments with different structures and functionalities. A derivative contract obliges parties to buy or sell the underlying asset at a predetermined future date and price. This direct contract establishes a chain between the underlying asset and the derivative product.
In contrast, synthetic assets take an alternative approach by tokenizing this relationship, thereby emulating an investment’s performance without requiring direct ownership. This means that synthetic assets can provide exposure to any asset, globally, within the crypto ecosystem simply by mimicking the target asset’s value. Additionally, synthetic assets need collateral to provide their value, which calls for the need of a base asset that is “burned” to give the synthetic asset its worth, so for example, $1 worth of XST tokens needs to be burnt to mint a single XSTUSD, pegged to the price of a US Dollar.
This distinction becomes clear when one considers trading a stock like Gamestop. Instead of purchasing the actual GME asset, one can trade $sGME (synthetic GME), which behaves like the underlying asset by tracking its price using data oracles such as Band protocol.
Moreover, the tokenization of synthetic assets offers numerous advantages over traditional derivatives. These include the ability for anyone to issue them using open-source protocols, borderless transfers between standard cryptocurrency wallets, frictionless movement between asset classes, and access to worldwide liquidity through any crypto exchange. In essence, synthetic assets are unlocking a new level of liquidity access that extends beyond what traditional derivatives offer.
The Role of Synthetic Assets in Finance
In finance, ‘synthetic’ refers to the process of creating assets that mimic the behaviour of other assets. The ultimate goal is to emulate the cash flows of a specific asset without having to hold the asset directly and thus be exposed to its risk profile.
Synthetic Assets in Decentralized Finance (DeFi)
Synthetic assets have found significant applications in the decentralized finance (DeFi) sector, where algorithmic synthetic tokens have made a strong entry. These tokens replicate the value of other assets, such as currencies or real-world assets (RWA), offering investors an opportunity to gain exposure to a broad array of assets without requiring a portfolio or broker to trade stocks, the space to store RWA, or having to visit a forex bureau to trade currencies.
XST Platform, the First Governance-based Synthetics Platform on a Substrate-based Chain
Leading this wave of innovation is the XST synthetic assets platform on SORA, the first governance-based synthetics platform on a Substrate-based chain. This groundbreaking platform empowers users to propose the synthetic assets of their choice. Through an on-chain voting process, these proposed tokens are created from Oracle data and added to the platform seamlessly, with the style and freedom of making a trade on Polkaswap.
Polkaswap and Synthetic Assets
The much-anticipated XST platform feature available within Polkaswap is now live on the public testnet. This update introduces a wide range of SORA synthetic assets, or XSTs, enabling investors to experience and explore fresh financial prospects. Polkaswap has initially added 30 new XST assets for user testing, derived from oracles providing price feeds from various currencies and assets. However, during the mainnet release, the assets will need to be voted on by governance and will begin with a balance of zero, with users having to mint their assets from scratch.
To learn more about SORA Synthetics (XST), check out this FAQ.
The Unprecedented Advantages of the XST Platform
The introduction of XST trading on Polkaswap has brought forth an array of advantages that are transformative to the digital asset trading landscape. One of the most revolutionary benefits is the capacity to trade XST on a Decentralized Exchange (DEX) without Know Your Customer (KYC) procedures, promoting a sense of anonymity and autonomy for users who value privacy in their transactions.
Moreover, the XST platform promises boundless liquidity. In the traditional sense, liquidity constraints sometimes result in unfavourable trading conditions. However, with the boundless liquidity offered by XST, users can facilitate trades smoothly and efficiently without worrying about market liquidity drying up.
Additionally, an intriguing feature of XST trading is its non-impact on the price of the underlying asset. For instance, a user could make a purchase as substantial as $100 million in XSTBTC without triggering any fluctuation in the BTC price. This unique feature is particularly beneficial for investors dealing with large sums of money who wish to avoid causing price volatility.
Lastly, the platform offers exclusive trading opportunities rarely seen on Centralized Exchanges (CEXs), such as the potential to trade the Chinese Yuan (CNY) with Bitcoin (BTC) on a self-custodial platform devoid of KYC. This capability allows users to explore new trading dynamics, opening up a realm of possibilities beyond conventional trading boundaries without worrying about their social score, or having withdrawals locked, as has been the case in some CEXs recently.
In essence, the XST trading platform is reshaping the future of digital asset trading, offering users innovative trading options coupled with flexibility, privacy, and boundless liquidity.
Synthetic Assets: A Game Changer in the Financial Landscape
Synthetic assets are carving a transformative path in the financial landscape, promoting financial inclusion and enhancing market efficiency. By enabling access to a multitude of assets without direct ownership, synthetics have the potential to revolutionize the way we interact with finance.
However, as with all financial innovations, synthetic assets bring a considerable degree of risk. Therefore, always exercise caution and thoroughly do your research before diving in.
In conclusion, as the financial world evolves rapidly, synthetic assets are stepping into the limelight. Their rising popularity highlights the need for comprehensive understanding; however, when using and understanding their risks, synthetic assets can be a valuable and stable tool to engage in Decentralized Finance, bypassing limitations brought upon traditional financial instruments.
About Polkaswap
Polkaswap is a DeFi application on the SORA network. It is a non-custodial liquidity aggregating, cross-chain AMM DEX designed uniquely for the Polkadot ecosystem. It offers boundless liquidity through its one-of-a-kind Aggregate Liquidity Technology (ALT).
Polkaswap utilizes SORA network interoperability with the Polkadot and Kusama networks, as well as the capability to bridge external blockchains (like Ethereum) to the Polkadot ecosystem.
