What’s a Synthetic Asset?
What’s a Synthetic Asset?
We’ve told you that CrossFi allows for the creation of synthetic assets or derivative ERC-20 tokens through our multi-asset adaptor protocol which enables us to provide liquidity to the underlying assets. This sounds like a good thing because you’ve heard that providing liquidity allows you to yield farm (and yield farming is good, right?) but some are going to ask, what is a synthetic asset or derivative ERC-20 token?
Let’s step out of the world of crypto for a minute.
Synthetics and derivatives are common in the world of traditional finance because they give flexibility to investors to make more tailored bets on particular assets. A derivative is a contract between parties that is based on the value of an underlying asset, and traditionally include futures, options and swaps and are usually leveraged. Synthetics are engineered financial instruments to simulate any other financial instrument that can be tailored to fit the specific purpose of the investors. All synthetics are derivatives, but not all derivatives are synthetics.
Confused? Good.
Ok, let me give you some examples that aren’t just financial jargon that you may actually understand.
Have you ever worn wrinkle-resistant pants? Wrinkle-resistant pants are made from a synthetic fiber (usually polyester) which gives it the special quality of being wrinkle-resistant. Polyester is a synthetic fiber, engineered from polymers, to simulate a natural fiber (wool, cotton, etc.) but is tailored to fit the specific purpose of the pants — being wrinkle-free.
See the connection? Synthetic asset = asset + special quality; synthetic fiber = fiber + special quality (wrinkle-free in this case).
Let’s do one more.
As mentioned above, a financial derivative is a financial product derived from an underlying asset, which can be a stock, token, or physical asset.
What’s a derivative work look like to normal people that aren’t financial professionals? How about Pokemon Go?
Pokemon Go is a derivative of the original Pokemon card game. It is a product that is derived from the underlying intellectual property of the Pokemon card game. It’s same same, but different.
Ok, let’s get back to crypto.
So why do crypto investors trade derivates? Why do we want to create derivatives? First, leverage, derivatives allow you to leverage your positions and earn (or lose) much more on price movements. Furthermore, derivatives create more products for trading and thereby provide liquidity. Lastly, derivatives can also help you hedge your positions as a form of insurance.
In the FIL context, many FIL stakers are looking to capitalize on the recent explosive growth of FIL, but their FIL is locked up for 540 days. 540 days is a long time in the world of crypto. 540 days ago FIL was worth $2; today its worth $170. We are currently in a frothy bull market, but that might not be the case in 540 days. You may want to hedge your FIL position because you think the market might go down so if a FIL staker wants to realize some of the value of your staked FIL, you can use CrossFi’s MAP technology to take a loan based on the value of your staked FIL by printing cFIL or cUSD, which are both derivatives of FIL and USD respectively.
Synthetic assets are becoming increasingly popular and useful. Coinbase was recently listed through a direct listing, but it was very difficult for the average investor to participate in this IPO. However, several crypto exchanges including Binance and FTX had already created synthetic versions of the Coinbase stock through the token COIN, enabling anyone on those platforms to gain exposure to the Coinbase IPO.
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