What Are Synthetic Assets and How Are They Created Using Smart Contracts?

Synthetic assets are tokenized derivatives that mimic the value of another asset, such as a stock, commodity, or currency, without requiring the holder to own the underlying asset. They are created using smart contracts on a blockchain.

A user typically locks up collateral (e.g. cryptocurrency) in a smart contract, which then mints a synthetic token that tracks the price of a real-world asset. Oracles provide the price data for the underlying asset, and the smart contract ensures the synthetic asset maintains its peg through collateralization mechanisms.