What Is a Synthetic Asset in the Context of Financial Derivatives?

A synthetic asset is a financial instrument whose value is derived from and tracks the price of another underlying asset, but the holder does not actually own the underlying asset itself. In decentralized finance (DeFi), synthetic assets are created using smart contracts that collateralize a derivative position, allowing users to gain exposure to assets like stocks, commodities, or fiat currencies on the blockchain without holding the physical asset.