What are Crypto Synthetic Stocks and how to Trade Synthetic Assets

an image of someone trading - crypto synthetic stocks

Everyone talks about stock investments as one thing to key into. Yes, they are great, but crypto synthetic stocks are even better.

2020 made a lot of investors realize that the “free market” is not free after all with the saga around WallStreetBets (WSB), Gamestop (GME) and Robinhood, and TD Ameritrade. If you want financial freedom, you can’t place all your investments in traditional finance markets; they are not censor-free or frictionless.

Crypto and the blockchain keep showing ways to transform finance, investment, and banking, and one of the promising solutions, among several others, is synthetic assets. This article will focus on synthetic assets with more focus on crypto synthetic stocks.

What is a Synthetic Asset?

In simple terms, a synthetic asset is a tokenized derivative. Ok, I guess that is not so simple. Let me explain what a derivative is then we will get synthetic assets for crypto.

A derivative is an asset that gets its value from another asset using contracts. Synthetic assets are different from traditional derivatives because instead of using contracts to connect the underlying asset and derivative, they substitute with a non-sensitive element – a token. 

What are Crypto Synthetic Assets?

Crypto synthetic assets combine derivative products to imitate the value of traditional assets so that crypto can be integrated and tracked with traditional finance. They are blockchain assets like ERC-20 tokens, so you can transfer them using standard crypto wallets.

With crypto synthetic assets, you have mirrored assets like stocks that you can trade in real-time, with real value, and at all times regardless of stock market official hours. 

Decentralized Finance (DeFi) has always sought to bridge financial gaps, and this is one solution that has bridged the gap between wall street and everyday investors.

Crypto synths give you access to a variety of assets without needing to hold the underlying asset. For example, you can trade synthetic GME ($sGME) without holding $GME when you want to trade Gamestop stocks.

Why Leverage Crypto Synths Instead of Traditional Derivatives?

Crypto synths allow cryptocurrency holders to trade traditional assets and their derivatives while remaining in the crypto ecosystem. By enabling tokenization of anything, crypto synthetic assets can unlock unlimited pools in global liquidity as they bring such assets into the blockchain.

They reduce the barrier to entry for things like trading stocks; they make trading anything a reality. Anyone with a working smartphone or computer can access synthetic assets and turn them into powerful investments.

Also, they give you unlimited and uncensored access to any asset imaginable. Remember the Robinhood – Gamestop saga from last year? You can avoid being affected by such censorship with synthetic stocks on DeFi.

Types of Synthetic Assets

Synthetic assets could be anything from fiat currencies like the USD to commodities like gold, silver, and index funds. In most use cases, they include fiat, stocks, cryptocurrencies, and different asset classes. This article will focus on crypto synthetic stocks.

How to Profit From Synthetic Stocks

The best way to profit from synthetic stocks is by using established apps (in the next section). With such applications, you can:

  • Create synthetic assets by depositing collateral to back the minted asset with real value
  • Trade synthetic crypto and popular synthetic stocks
  • Provide liquidity for exchange-traded assets that are paid in the protocol’s governance asset and earn rewards

Best Apps for Trading Synthetic Stocks

1. Mirror Finance

Mirror Finance - an app for trading synthetic stocks

Mirror Finance is a DeFi protocol that allows the creation, use, and exchange of crypto synths that track real-world assets. Those synths are used in smart contracts and bring real-world assets into the blockchain with 24/7 access to financial markets.

Mirror is built on the Terra blockchain, and synthetic assets (mirrored assets) created on the protocol are called mAssets.

To create synthetic assets, you have to provide greater than 150% collateral in mAssets or Terra stablecoins. If the value of the synthetic asset you mint rises above your collateral threshold, the collateral will be liquidated to guarantee a balanced system.

2. Synthetix

A screenshot of the Synthetix network showing some crypto synthetic assets.

Synthetix is Ethereum-based and allows you to trade synthetic crypto on its platform. It enables investors to gain access to synthetic products that, in turn, give them access to non-crypto assets, including gold, stocks, and fiat.

You can view Synthetix’s synth network, connect your wallet and start working on trading assets; you can issue various synthetic assets based on but not limited to Bitcoin, USD, and Tesla stock. Also, you can stake the platform’s SNX token to earn fees.

To create synthetic assets, you have to provide collateral in the form of SNX tokens. Then, you can swap or exchange any synthetic asset you want for another.

3. Linear Finance

A screenshot of Linear Finance - a website for creating and managing crypto synthetic stocks and other assets.

Linear Finance is still a new project compared to the two listed above. It hopes to provide a better system than Synthetix in speed, transaction costs, greater accessibility, rewards, and a few other areas.

On Linear, users can trade synthetic assets like gold, stocks, cryptos, and index funds. To mint synthetic assets, you need to over-collateralize the assets using IUSD stablecoins to ensure that the system doesn’t break even when there’s high volatility.

Also, Linear offers exchange and inflation rewards when you maintain a specific ratio of the IUSD collateral to synths. There’s also the liquidity pool that rewards users with $LINA for providing liquidity.

Conclusion

Do you want uncensored access to the stock market? If yes, crypto synthetic stocks are the best route to go. In this brief article, I have explained all the basics – and some – about crypto synthetic stocks and synthetic assets, in general, in the simplest way possible.

The best way to fully understand it is by practicing. Synthetix and Mirror Finance are the current market leaders in this space, but newcomers like Linear Finance also show some potential.

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