What are the challenges with Synthetic Assets?

XCarnival
4 min readMay 25, 2021

In case you haven’t read our beginner’s guide to Synthetic Assets, here’s a little primer on this exciting concept. Synthetic assets generally refer to a blend of assets that have the same value as another asset. Think of it as a mirror asset, representing another asset, much like a derivative. Synthetics combine several derivative products, futures, or swaps — that mimic a fundamental asset — stocks, bonds, commodities, currencies, or interest rates.

For example, instead of buying a stock, an investment firm can buy a call option, sell a put option on the same stock. The use of synthetic assets enables the firm to use multiple financial carriers rather than a single investment asset.

Crypto Synthetic Assets

Crypto synthetic assets offer users exposure to an assortment of assets sans the need to clasp the underlying assets. Like USD or the Japanese yen, they range from fiat currencies to entities like gold and silver and other digital assets.

Using these unique synthetic assets, investors can continue holding tokens that track the value of some assets without needing to leave the crypto ecosystem.

Crypto synthetic assets also offer users all the benefits of decentralization. They are open to all users across borders by using secured smart contracts and other instruments, and the data is stored on distributed ledgers.

How Crypto Synthetic Assets Work

Synthetic Asset platforms are either Ethereum-based or Binance SmartChain based, facilitating investors to build and sell/buy synthetic cryptocurrencies. They rely on smart contracts for functional execution and can encompass an allocation platform, an exchange, and collateral usage, to deliver a marketplace for crypto-backed synthetic assets.

Platforms usually enable users to allocate various synthetic assets, encompassing fiat, derivatives, cryptocurrencies, etc. Examples are bitcoins, US dollars, Tesla stocks, gold, etc.

The Importance of Crypto Synthetic Assets

Cryptocurrency-collateralized synthetic currency prototypes running on smart contracts have tremendous importance in the finance industry. These models give cryptocurrency holders the power to trade traditional assets and derivatives in the digital ecosystem.

Decentralization grants open access to investors globally.

These days all you need is a smartphone and an intermediate understanding of the synthetic asset underworking to benefit from powerful investment vehicles.

Crypto-based synthetic assets have a ground-breaking ability to help investors access world-class assets, leading to revenue generation.

Crypto synthetic assets

  • Decrease the hazards that come with conventional assets.
  • Counter price fluctuations.
  • Assist investors to receive high returns.

What constitutes an excellent synthetic asset?

In some cases, only after a critical mass of liquidity was attained in the underlying, the synthetic product development possible. The economic benefits take a downfall if the synthetics are created in illiquid underlying; hence it’s not advised to do so.

Challenges

With all their novel ideals and potential, Synthetic Assets in the market today also have their share of challenges and roadblocks to mass adoption. Let’s discuss a few of these:

Synthetic Assets Have Limited Entry

As the heading gives away, users can only use a limited number of assets in the market right now. If you are one of those unwilling to sell your assets, you will be refused by existing synthetic markets. At XCarnival, we’re hoping to change this.

The Current Synthetic Asset Portfolio is Honestly Boring

Honestly, preexisting synthetic products don’t catch any of our attention. The US stocks, too, have hardly gotten importance since the consumers have numerous high-volatile options in cryptocurrencies. What the market requires is a broad range of choices for synthetic assets for traders to engage in.

Of course, They’re Also Complex

The synthetic market needs multiple transactions to truly work out for retail users. This is before you get to utilize these products. The users that enter synthetic markets are often from the mining community, enjoying their incentives, and not the end-users that the product team envisioned.

Scaling Participation is Difficult

Conventionally, large traders or investors have had direct access to the synthetic markets. However, platforms like the Binance Smart Chain let small traders access their perks. If the synthetic markets follow suit, they might see more traditional investment managers investing in them.

Future

In other words, what we require are solutions that address these challenges. From making synthetic asset access more decorative to offering more incentives for development — we need it all. A more liquid synthetic asset market, that is gamified to incentivize participation and open to customers without any knowledge of the industry — is the catalyst the sector needs.

Crypto synthetic assets are the future of financial markets. With people increasingly getting a chance to invest and trade in traditional and modern assets, finance has been promoted to a new level! At XCarnival, we’re happy to be bringing the synthetic revolution to the world! Follow us on Twitter & Telegram for more updates!

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