Synthetic Assets in DeFi: Use Cases & Opportunities

Guide to Synthetic Assets in Defi: Use Cases and Opportunities

December 27, 2022 11:41 PM

Synthetic Assets in DeFi

The current market for crypto assets is still in its infancy and suffers from a deficiency of liquidity, in contrast to investments in conventional financial systems, which have developed a liquidity foundation over some time and are generally less than two years old.


Synthetics are financial instruments that are simulations of other instruments. Also, the risk-reward ratio for any instrument may be replicated using a combination of financial instruments. Top synthetic asset protocols consist of several derivatives, which are assets dependent on the value of an asset's underlying value, and comprise:

Forward commitments: forwards, futures, and swaps

Unconfirmed claims: options and credit derivatives, such as CDS, credit default swaps (CDS), and asset-backed securities

What is the quality of a synthetic?

In some cases, it can only be achieved once the required amount of liquidity has been achieved within the underlying. It is not worth developing a synthetic if the underlying products aren't liquid enough, as it will likely diminish the economic benefits. The total return swap is a great example of this.

Why synthetics and Defi?

There are a variety of reasons why synthetics are beneficial to a variety of participants within the "decentralized finance" (Defi) ecosystem.

Scaling assets

One of the most difficult issues in this field is the ability to bring real-world assets onto a blockchain in a secure way. One instance is fiat currency. Although it is possible to create a stablecoin with fiat collateral like Tether, another option is to get exposure to the price of USD without the need to keep the actual asset with a central counterparty.

Scaling liquidity

One of the biggest problems affecting the Defi area is insufficient liquidity. Market makers are extremely important for both established and long-tail crypto assets. However, they lack financial instruments for effective risk management. Synthetics and derivatives, in general, could aid market makers in scaling their operations by hedging their positions and safeguarding profits.

Scaling participation

Although synthetics were traditionally accessible to high-end and large investors, permissionless smart contracts such as Ethereum permit smaller investors to gain access to their advantages. They also permit more traditional investment managers to join the market by expanding their risk management tools.

Synthetics in Defi

There is the widespread use of synthetics within the defence industry. Below, I will present examples of projects that use synthetics and simplified diagrams of the process of creating assets.


Abra was founded in 2014. Abra was founded in 2014 and is now the O.G. of crypto-synthetics. If an Abra user deposits money into their wallets, the funds are then transformed into bitcoin and displayed in USD inside the Abra application. In the example above, Alice puts $100 in her Abra wallet, and the value in bitcoin equals $10,000. As a result, she'll receive the amount of 0.01 bitcoin, which will show as $100. Abra can do this by maintaining an exchange rate of BTC/USD that guarantees that Alice can pay back $100 regardless of price fluctuations in either BTC or USD.


Maker's Dai stablecoin could be the most popular and widely utilized synthetic in Defi. By using Ethereum as collateral, Defi users can create Dai, a synthetic asset with an unofficial peg to the USD.


UMA is a protocol that allows total return swaps using Ethereum, which can provide exposure to a large range of investments synthetically.

The smart contract includes the terms of economics, including termination conditions, terms for termination, and margin requirements in the arrangement with Alice Bob and Alice. Bob. It also requires an order feed oracle that can give the current value of the reference asset used as the basis.

MARKET Protocol

The MARKET Protocol allows users to create artificial assets that follow the value of any particular referent asset using an oracle. The "Position Tokens" provide bounded short and long exposure to the underlying asset and provide the same payoff structure as the bull call spread used in traditional finance. Like Dai, the short and long tokens are used to claim the collateral pool.

Rainbow Network

The Rainbow Network is an off-chain, non-custodial network for exchange and payment that can be used to support all liquid assets. It is comprised of "Rainbow Channels," an alternative to payment channels that allow settlement balances to be calculated by comparing the prices of the other investments.


Synthetix is an exchange platform for issuance and collateral types and an exchange platform that permits users to mint a wide range of artificial assets. It's a platform similar to Maker in that users lock collateral to create a synthetic asset and must repay the loan in order to obtain the collateral. Users can then "exchange" one of the synthetic assets for another through an oracle.

Crypto-native derivatives

Synthetic Assets in DeFi

Synthetic representations of assets that are real are a crucial initial step, but I think the design area for crypto derivatives is huge and mostly unexplored. These include traditional derivatives designed to accommodate the diverse players in the crypto-synthetic asset market and "crypto-native" derivatives unavailable in traditional financial markets.

Hash-Power Swaps

The concept is to have mining companies sell a small portion of their mining resources to buyers, like funds, in exchange for cash. This will provide miners with a stable income stream that doesn't depend on the crypto asset's underlying price. It also allows funds to expose crypto assets without purchasing mining equipment.

Electricity Futures

It is a service that has been available in traditional commodities markets for a while. However, it is now being made available by cryptocurrency miners. The mining company signs a futures contract to buy electricity at a specific price.

Stability fee swaps

The Maker Stability Fee currently stands at 16.5 per cent but was at a high of 20.5 per cent from July 13 through August 22, 2019. CDP holders might wish to limit the impact of increasing stability rates (variable interest rates) in this way. For example, they might make a swap arrangement with a counterparty to pay a fixed amount (interest rate swaps) for a specific period.


It is an opportunity to purchase a cryptocurrency at the strike price of the airdrop price. The buyer of the option will receive a payout structure similar to an option to buy a call in the money, with a price equal to the price paid by the market for that airdrop.

Lockdrop Forwards

It is an agreement between buyers to buy crypto assets released from an open-source lock drop at a specified price. The buyer pays the price to the seller, which is a reflection of the risk of illiquidity as well as the opportunity costs that are associated with the locked asset but allows the buyer to be exposed to a brand new crypto asset without the asset, which is essential to participate in the lock drop.


If you've come this far, think about becoming a CFA! Synthetics are complicated financial instruments that have often put the global economy into trouble. In addition, they may present security risks to protocols in ways we don't yet comprehend. However, synthetics remain a significant function in traditional financial markets and are also becoming an integral part of this Defi movement.

There are still a few days within the field, and we'll need to see more experiments from the financial sector and developers to bring innovative financial products to the market.

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Contact US!

India india

Plot No- 309-310, Phase IV, Udyog Vihar, Sector 18, Gurugram, Haryana 122022

+91 8920947884


1968 S. Coast Hwy, Laguna Beach, CA 92651, United States

+1 9176282062

Singapore singapore

10 Anson Road, #33-01, International Plaza, Singapore, Singapore 079903

+ 6590163053