Introduction of a DeFi protocol for the construction of synthetic assets
Decentralized Finance (DeFi) is a relatively new phenomenon in the financial industry that has changed everything we previously knew about money. DeFi, a permission-free alternative to all our traditional financial services, is gaining popularity with its new concepts. Synthetic assets are one such concept that meets the needs of a larger number of users.
What is a synthetic asset?
a “synthetic asset” is a combination of cryptocurrencies and traditional derivative assets. In other words, they are tokenized derivatives. In traditional finance, stocks or bonds that a trader does not own but wants to buy or sell are called derivatives. When traders want to profit from the price fluctuations of a stock they do not own, they do so through a derivative. Synthetic assets go a step further by adding the record for the derivative to the blockchain and creating a cryptocurrency token for that derivative.
Using synthetic assets allows a company to develop the use of multiple financial models instead of a single crypto investment asset. For example, instead of buying a stock, an investment company can buy a call option and sell a put option on the same stock
By creating a cryptocurrency token for a derivative, synthetic assets create a relationship between the underlying asset and the buyer. Investors can bet on the fluctuations of the tokens without having to own them in their wallets. This feature of derivatives is the main reason for their increasing popularity in the crypto world. Similarly, synthetic assets have gained popularity among DeFi enthusiasts as they provide traditional traders in the crypto world with all the necessary tools.
With these assets, a trader can tokenize and trade anything after adding a derivative to the existing asset.
Increased security and traceability are some of the main reasons for choosing synthetic assets as the preferred investment method. All trading takes place on the blockchain, and all transactions are recorded on the distributed ledger, providing anonymity and security to traders.
New synthetic asset-based exchanges are emerging on various blockchains, allowing users to trade with maximum flexibility and lower gas fees. The largest and most well-known synthetic asset exchange is Synthetix. It was created specifically for trading tokenized derivatives. Synthetix is a leader in the niche market. Cream Finance and MakerDAO are two popular derivative protocols like Synthetix.
What is Synthetix?
Synthetix is the derivatives trading pillar in DeFi that allows users to invest on the chain in a wide range of assets such as currencies, stocks, and commodities. They are backed by Synthetix Network Tokens (SNX), which are tied into a smart contract as collateral.
Synths monitor the prices of various assets and allow crypto users to trade P2C on the Synthetix Exchange without liquidity constraints. This project was launched as a decentralized stablecoin protocol -Havven (HAV).
SNX token and its functions:
SNX is required to create synthetic assets called synths. Users can purchase these tokens on crypto exchanges and deposit them in a suitable wallet. New synths are minted as soon as these tokens are staked.
Synth tokens are assets that replicate the prices of real assets. Stakers create a debt when new synths are minted, and they should pay the same amount to the synths before withdrawing their locked SNX tokens. These tokens do not correspond exactly to the assets represented.
The value of Synths is volatile and changes like investments in stocks, whose price is constantly changing. Users must pay a different Synths amount to receive their masked SNX tokens than the amount they originally received.
A major advantage of Synth is that users can trade different Synth types as long as they have the same market value. A Bitcoin synth can be traded for a Tesla share synth if they have the same value.
Mintr is the primary dApp within the Synthetix network and provides a UI for minting aynths and participating in the ecosystem in general. Users can connect to Mintr via Web3 wallets such as MetaMask, Ledger, Trezor, and Coinbase Wallet. Once connected, users can perform any of the above actions if they have a sufficient amount of SNX in their wallets.
It is an asset pledged by a borrower to a lender as collateral for a loan. A higher collateralization rate is charged to protect the platform from extreme market price fluctuations. For synthetic systems, the collateralization rate is around 750%.
How does SNX stacking work?
- First, a user must buy SNX on any exchange and connect to a Web3 wallet (e.g., MetaMask)
- Go to Mintr, Synthetix’s proprietary portal interface, to create and manage synths
- Connect your wallet to Mintr
- Click on “Mint” and select the synth type you want to mint
- Remember the collateral rate of 750%
- Enter the number of synths you want to mint
- Click on “Mint now
- Confirm the transaction in the Web3 wallet
- After this process, the SNX tokens will be posted automatically
- Users can now enjoy rewards from trading fees. Users can also participate in the inflation of SNX tokens
Why synthetics and DeFi?
Synthetics are advantageous in DeFi for several reasons.
- Synthetics enable the trustworthy exchange of real assets over a blockchain
- One of the biggest challenges in current DeFi isthe lack of liquidity. By hedging bets and protecting profits, synthetics could help markets scale their operations
- Another problem is the technological limitations of smart contract systems. When using synthetic exchanges, traders do not need to directly own an asset
- Since trading on DEXes like Synthetix is direct wallet-to-wallet, there are no withdrawal fees. However, gas fees must be paid.
Why Brugu for Crypto Synthetic Assets Development?
- Brugu provides world-class DeFi development services and focuses on delivering high-performance DeFi solutions, especially in DeFi protocols for synthetic assets.
- Brugu, a leading decentralized financial solutions (DeFi) development company, has more than 6 years of experience in cryptocurrency and blockchain technology
- Brugu has successfully delivered powerful DeFi protocol development solutions for synthetic assets to enterprises and startups worldwide.
- Our blockchain engineers are guaranteed to deliver high-quality DeFi protocols that help your users create and trade their synthetic assets.
- Our customizable and white-label solutions can guarantee that your synthetic assets in the DeFi protocol get the best visibility among crypto investors and traders.