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.
Glossar
Collateralized Debt Position
Mechanism ⎊ Collateralized Debt Positions represent a core component within decentralized finance, functioning as loans secured by cryptocurrency assets; these positions enable users to borrow assets against their crypto holdings, creating a dynamic interplay between lending and borrowing protocols.
Synthetic Assets
Construction ⎊ Synthetic assets represent on-chain financial instruments whose value is derived from an underlying reference asset, without requiring direct ownership of that asset; this decoupling is achieved through the use of smart contracts and collateralization mechanisms, enabling exposure to a diverse range of markets including equities, commodities, and other cryptocurrencies.
Crypto Collateral
Input ⎊ Crypto Collateral is the digital asset posted by a borrower or derivatives counterparty into a smart contract or custodian to secure an obligation, guaranteeing repayment or covering potential losses from adverse market movements.