What Are ‘Synthetic Assets’ in DeFi, and Which Token Standards Are Typically Used to Create Them?

Synthetic assets are tokenized derivatives that mimic the value and returns of another asset without requiring direct ownership of the underlying asset. They are typically created using fungible ERC-20 tokens, as fungibility is crucial for deep liquidity and easy trading.

The tokens are backed by collateral and their price is maintained via a system of incentives, oracles, and arbitrage.