Explain the Concept of ‘Synthetic Assets’ in the Context of DeFi Derivatives

Synthetic assets are tokenized derivatives that mimic the price and exposure of another asset without requiring the user to hold the underlying asset itself. They are created on-chain by smart contracts, often using collateral and oracle price feeds to maintain the peg.

For example, a synthetic stock token allows a user to gain exposure to the stock market on a blockchain. The smart contract acts as the counterparty and ensures the asset's value tracks the real-world price through mechanisms like over-collateralization and incentives.