How Are Synthetic Assets Created Using Cryptocurrency Derivatives?

Synthetic assets are created on the blockchain using a combination of crypto collateral and smart contracts to mimic the value of another asset. To create a synthetic asset, a user typically locks up collateral (like a stablecoin or the platform's native token) in a smart contract.

This collateralized debt position (CDP) allows them to mint a synthetic token that tracks the price of a real-world asset, such as a stock (e.g. sTSLA) or a commodity (e.g. sGOLD), based on data from a price oracle. These synthetics can then be traded on decentralized exchanges.