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How synthetic assets provide security to crypto trading

Let’s be honest. Crypto trading doesn’t exactly have the best track record of providing security to its users. The market is constantly fluctuating and user privacy remains a huge issue. In this article, we’ll take a look at synthetic assets and how they have the potential to make trading on the blockchain feel a little less daunting.

The volatility of crypto trading: A brief history

There’s no denying that volatility is a huge obstacle when it comes to the mass adoption of crypto trading. Things can change in a matter of seconds and most people don’t want to put themselves in a position where they could lose a lot of money in very little time.

Have you ever heard of the phrase ‘what comes up must come down’? It’s an accurate description when it comes to trading pretty much any DeFi product. With extreme drops happening left, right and center, the crypto market in particular is incredibly difficult to predict.

In November 2021, for example, the TVL of all cryptocurrencies slipped from nearly $3 trillion to around $1.7 trillion. Even in March 2022, the market is still recovering from this extreme drop.

Depending on the trading strategies they have in place, drops in the market can affect users in different ways. Price swings are to be expected for users who adapt the buy-and-hold strategy. These traders plan to stay in the crypto game for the long run; they believe that their investments can withstand the lows of the market and ultimately come out on top.

For users trading cryptocurrencies as a get-rich-quick strategy, however, market lows can seem like the end of the world. These users tend to place a lot of money into one asset, with the intention of selling as soon as they can make a profit.

Whilst this technique does have the potential to succeed, nothing is guaranteed in the crypto market. Experts recommend that traders should keep their cryptocurrency investments to under 5% of their portfolio. That way, even the worst market drop will only feel like a small bump in the road.

The rise of synthetic assets

Almost everything you need to know about synthetic assets is in their name. Synthetic assets are a combination of cryptocurrencies and traditional derivative assets. They function by mirroring another asset’s payoff. This means that if TESLA stock goes up in value, so will the value of the synthetic asset mirroring the stock.

Although synth investors are given the chance to earn profit and get exposure to the price of an asset, it’s important to remember that they don’t have the same rights as shareholders. Synthetic assets are only representations of the real-world asset, so benefits such as dividends aren’t included in the deal.

A lot of questions have risen about how synthetic assets fit into the global stock market, given the fact that they avoid the various rules and barriers of the financial world. They can be minted by anyone using an open-source protocol, such as Synthetix or Mirror, from anywhere in the world.

Their rise in popularity is largely due to the fact that they have opened up opportunities for wealth creation that, until recently, were only available to a fortunate few.

Are synths the way to ensure crypto stability?

By this stage you’re probably wondering how synthetic assets work. Surprisingly, the process is pretty simple, so let’s break it down together. The value of synths remains true to the value of traditional assets through the incorporation of oracles.

Oracles are on-chain APIs that send data from the outside world to the blockchain. They feed the traditional asset’s price to the trading platform in real-time, enabling the synthetic to track value accurately. Synthetic assets then create a blockchain record for the relationship between the underlying asset and the trader making the purchase.

When it comes to trading on the blockchain, every transaction is documented on a public ledger. As long as users have the right privacy protocol in place, they can remain completely unnamed on the public ledger, which lessens their risk of having their transactions hacked or tracked by unwanted eyes.

Although synthetic assets are just as volatile as traditional cryptocurrencies, platforms such as Synthetix give users the opportunity to purchase an options contract. These contracts give the buyer the option to buy or sell an asset at a future date at a predetermined price. Even if the value of the asset fails to rise, this contract allows you to sell it at a certain price up to a certain date. Pretty cool, right?

Mass adoption + synthetic assets

According to the Economic Times, there are over 4 million unique addresses using DeFi applications across the world. Whilst this might seem like a significant amount of users, it only represents a very small percentage of the global population.

Synthetic assets, however, have the potential to bridge the gap between the decentralized world and mass adoption. Their accessibility is the main reason for this.

To give you a better idea of what we mean, let’s go back to our comparison between the US stock market and the synthetic asset market. There aren’t any specific citizenship requirements to invest in the US stock market, but there are certain conditions that investors need to satisfy.

For example, non-US citizens must provide identification documents, pass a KYC screening, and follow a number of laws that are intended to protect US interests. That’s a lot of time and effort, if you ask us.

The synthetic asset market, which is unregulated by any particular organization or government, is much easier to enter than the stock market. Pretty much all you need to get started is an internet connection and a basic knowledge on how trading works.

On top of that, synths can be traded and transferred openly. This means that anyone in the world can send and receive them using standard crypto wallets.

As of March 2022, the TVL (total value locked) in DeFi protocols is 78.39 billion dollars. When DeFi applications eventually reach the mainstream market, chances are this figure will rise significantly.

If you’d like to learn more about synthetic assets and how you can get started with trading them safely, check out our previous articles at https://medium.com/@SaharaProtocol!

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Sahara Protocol’s publication is our editorial for a mission to bring privacy back to blockchain finance. We cover blockchain, privacy, trading, synthetic assets, DeFi, and project updates in articles you’ll actually want to read and follow.

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Sahara Protocol

Sahara Protocol

A DeFi-ecosystem that connects real world value with blockchain, in complete privacy.

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