May 23, 2025

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10 min

What Are Synthetic Assets and How to Use Them

In recent years, the cryptocurrency market has seen a surge in the popularity of synthetic assets — digital instruments that enable users to trade traditional assets without actually owning them. What is synthetic crypto? What are the key benefits of these assets, how can they be integrated into trading strategies, and what potential risks do they present? Let’s explore this topic in more detail.

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What Is a Synthetic Asset?

A synthetic asset is a financial instrument designed to replicate the performance of another asset, typically without requiring ownership of the underlying asset. Rather than purchasing the asset directly—be it stocks, commodities, or currencies—investors can use synthetic assets, meaning they profit from price fluctuations without owning the asset itself.

These assets can be created through various financial instruments, such as derivatives (options, futures), or leveraging blockchain technology, to mirror the traits and returns of the underlying asset. This approach enables traders and investors to gain exposure to the same markets without the need to own the asset itself, offering greater flexibility and accessibility.

How Do Synthetic Crypto Assets Work?

Synthetic cryptocurrency assets operate by mirroring the value of other assets, such as fiat currencies, stocks, commodities, or other cryptocurrencies, without requiring ownership of the underlying asset. These assets enable traders and investors to capitalize on price fluctuations in the underlying assets without having to buy them directly.

Here’s how they work:

1. Smart Contracts and Tokens: Synthetic assets are typically created through smart contracts on a blockchain. These contracts interact with various protocols to track the value of the underlying asset and ensure the synthetic asset reflects that price. For instance, if you wish to gain exposure to gold’s price, you can purchase a synthetic asset tied to gold, all without owning physical gold.
2. Derivatives and Oracles: Many synthetic assets are based on derivatives like futures contracts or options, allowing traders to speculate on the future value of an asset. To ensure accurate and timely data, oracles are employed—external data sources that provide real-time pricing information for the underlying asset.
3. Decentralized Platforms: Synthetic cryptocurrency assets are a key component of decentralized finance (DeFi). On platforms for trading such as Synthetix, users can create and trade synthetic assets without the need for intermediaries. These assets can be linked to a wide range of assets, including cryptocurrencies, stocks, or commodities.
4. Liquidity and Collateral: To create synthetic assets, users typically need to provide collateral, such as cryptocurrency. This collateral helps provide liquidity to the platform, enabling traders to engage in synthetic asset trading. For example, a user may lock up cryptocurrency as collateral and create a synthetic asset that tracks the price of another asset.

Why Crypto Synthetic Assets Are Important in Cryptocurrency Portfolios?

The security of synthetic crypto assets is multifaceted and hinges on several key factors. Let’s explore the primary risks and safeguards:

1. Smart Contract Risks: Synthetic assets are typically created and governed by smart contracts. Any flaws or vulnerabilities in the code can result in the loss of funds or the exploitation of the protocol. While audits and testing help mitigate these risks, it is impossible to entirely eliminate them.
2. Oracle (Data Source) Risks:Synthetic assets crypto rely on oracles—external services that supply price data—to accurately track the value of the underlying asset. If an oracle provides incorrect or delayed data, this can lead to mispricing and potentially significant financial losses.
3. Collateral Volatility: To create DeFi synthetic assets, collateral in the form of cryptocurrency is required. If the value of the collateral drops sharply, there may not be enough coverage to maintain the position, which could result in the position being liquidated at a loss.
4. Liquidity Risks: Some platforms may experience limited liquidity for synthetic assets DeFi, which can make it challenging to buy or sell assets quickly without incurring significant price slippage.

Regulatory Risks: Since synthetic assets often mirror traditional financial instruments, their use could be subject to stringent financial regulations or even outright bans in certain jurisdictions.

To enhance the security of crypto synthetic assets, it is crucial to select reputable, audited platforms that employ decentralized or multi-source oracles. Additionally, diversifying collateral assets, monitoring collateral status closely, and utilizing risk management tools such as limit and stop-loss orders can help mitigate potential risks. A comprehensive approach like this reduces both technical and market risks, making trading synthetic assets more secure and reliable.

Types of Synthetics Crypto

There are two primary types of synthetic crypto assets: those based on cryptocurrencies and those pegged to traditional financial assets.

Cryptocurrency-Based

These synthetic assets are created and backed by cryptocurrencies within blockchain ecosystems. They often utilize crypto collateral and smart contracts to replicate the behavior of other digital assets, such as synthetic versions of Bitcoin, Ethereum, or token indices. These assets are fully decentralized and governed by smart contracts, ensuring transparency and autonomy from centralized authorities.

Traditional Assets Based

These synthetic assets are tied to traditional financial instruments, including stocks, bonds, commodities (like gold and oil), currencies, and more. They provide crypto investors with the opportunity to earn returns and trade these traditional assets via digital coins, all without the need to directly purchase the underlying assets.

Examples of Synthetic Assets

Synthetic crypto assets include:

• sUSD — a synthetic asset that mirrors and tracks the US dollar’s value, with price data provided by the Chainlink oracle.
• Ethena USDe — a synthetic dollar stabilized through delta-hedging Bitcoin, Ethereum, and Solana using futures contracts and stablecoins like USDC and USDT.
• SMARDEX USDN — a synthetic US dollar token developed within the SmarDex ecosystem.

Advantages and Disadvantages of Synthetic Assets in Crypto

Let’s consider the pros and cons of synthetic crypto assets.

How to Create Synthetic Cryptocurrency?

Creating a synthetic token involves several key steps that enable you to craft a digital asset that mirrors the behavior of another asset. Here’s an overview of the main steps:

1. Select a Base Asset: Choose the asset the synthetic token will track — this can be a cryptocurrency, stock, commodity, or even an index. The base asset serves as the reference point for the synthetic cryptocurrency.
2. Define the Collateral Mechanism: Decide how the synthetic asset will be collateralized. Typically, this involves depositing cryptocurrencies into a smart contract, which ensures the stability and security of the synthetic asset crypto.
3. Develop a Smart Contract: Design and implement a smart contract that will manage the synthetic asset. The contract is responsible for issuing tokens, tracking the price of the underlying asset via oracles, and ensuring liquidity.
4. Connect Oracles: Integrate reliable external data sources, known as oracles, to provide real-time price information of the underlying asset. Accurate and up-to-date data is crucial for the correct valuation of the synthetic token.
5. Ensure Liquidity and Trading: Set up mechanisms for the trading and exchange of synthetic assets. This could be on decentralized exchanges (DEXs) or specialized platforms designed for synthetic asset transactions.
6. Testing and Auditing: Conduct thorough testing of the smart contracts and security audits to minimize the risk of code errors or vulnerabilities that could compromise the integrity of the system.
7. Launch and Distribution: Once all testing and checks are complete, launch the synthetic asset to the public. Provide users with easy-to-use tools for interacting with the asset and engaging in trading activities.

By following these steps, you can create a secure and functional synthetic cryptocurrency that mimics the behavior of the underlying asset, enabling greater flexibility and investment opportunities.

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Conclusion

Synthetics cryptocurrency continue to transform the financial landscape, expanding opportunities for all market participants. So, what are synthetics in crypto? They are innovative instruments that require knowledge and responsibility to master, yet their potential for growth and diversification makes them a vital component of the future of crypto investing.