How Synthetic Assets are Shaping the Future of Crypto Finance

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By Alex Zhao, CEO and co-founder of Standard Hashrate Group

Looking into the future of crypto finance, synthetic assets or, in other words, a combination of securities or assets that produce the same effect as ownership of another asset, would provide a window of opportunity for investors looking to diversify their portfolios. Similar to traditional financial derivatives, which derive their value from other underlying assets like commodities, currencies, precious metals, stocks, or bonds, synthetic assets aim to achieve the same objectives without the necessity of holding the actual asset itself. This means that these crypto synthetics do not exist in the hands of their investors, but instead are cataloged, sold and transferred online.

By using blockchain, the underlying technology that publicly records transactions on an immutable ledger and allows bitcoin to remain secure and traceable, these digitized assets are proven legitimate and issued to investors. The asset is catalogued on the blockchain through the process of tokenization, in which a token or digital certificate representing the real-world asset is issued to the investor to signify ownership. By creating digital fractional ownership of real-world assets such as stocks, precious metals, real estate, and difficult-to-access commodities, a new world of investment potential can be unlocked for both retail and institutional investors alike.

Derivatives and DeFi: A Mutually Beneficial Pair

The ethos of digital assets and decentralized finance (DeFi) lies in openness and transparency. Unlike traditional finance, DeFi does not rely on centralized authorities like banks or brokerages functioning as the intermediaries between transacting parties. Instead, a public ledger records and verifies transactions directly on a digital blockchain for all to reference, eliminating opacity and cumbersome bureaucracy. Since a centralized authority does not exist, investors are empowered with the autonomy to instantly access, trade, and transfer assets with ease.

DeFi works through smart contracts, which are automated, self-executed programs that cannot be altered. Once a certain set of requirements is met, the smart contract is automatically activated without the need for institutional intermediaries, thus removing any ambiguity in its terms. For example, a smart contract can be programmed to release salary funds for a bi-weekly payday or automatically issue payments to the winning party of a bet once the terms are met. By removing third parties, there is less room for missteps since issues of subjectivity and dishonesty are eliminated. The objective nature of smart contracts ensures that transactions are reliably fulfilled. By transitioning the concept of derivatives to DeFi in the form of synthetic assets, the possibility of global, borderless transactions becomes a reality, allowing anyone from anywhere to participate.

Crypto synthetic assets also allow investors to invest in new, emerging crypto commodity classes. Take BTCST for instance. Bitcoin mining power has historically been limited to those who can afford expensive mining equipment, but synthetic assets are innovating to bridge this gap. Through the tokenization of bitcoin mining power, or hashrate, anyone can buy into the token and reap the rewards of bitcoin mining without ever personally needing to physically own and operate the machines. 

Unlike derivatives, one unique selling point of crypto synthetics is the potential to earn rewards or yield by staking or holding on to an asset for an extended period of time. One such example is stablecoins and BTCST backed Tau Bitcoin, a type of synthetic asset whereby a coin mimics the value of an underlying real-world currency, in this case Bitcoin. By staking these stablecoins as collateral for projects, investors have the potential to earn interest. This flexible trait makes synthetic assets attractive for more savvy investors. 

Broadening the Horizons of Decentralized Finance

Synthetic digital assets are revolutionizing decentralized finance by offering access and liquidity to investors. Through tokenization, individuals can access investment opportunities that might otherwise be impractical for their situations, democratizing finance and providing increased access to the promising investments of the future. Since transactions are handled entirely on the digital blockchain and facilitated through self-executed smart contracts, entering and exiting from investments with near instantaneous liquidity has never been easier.

Alex is the CEO of Standard Hashrate Group, the creator of BTCST, which brings exchange-grade liquidity to bitcoin mining.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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