In a blog post, Dmitry Berenson, research partner at Zenith Ventures which does research and analyze the cryptocurrency and blockchain industry, talked about the use of synthetic assets in decentralized space, its use- cases and opportunities.
The primary use-case for cryptocurrency was speculation and according to him, it is not a bad thing because it allows the customers to enter and exit the market easily.
Speculation plays a key role in the development of traditional financial markets. For crypto markets to develop, he suggests:
“I believe that crypto assets markets will evolve in a similar manner to traditional financial markets and, as such, will require more sophisticated financial instruments, specifically synthetic assets or synthetics, for both institutional and retail participants.”
According to Dmitry Berenson, “a synthetic is a financial instrument that simulates other instruments.” The reasons for a one to purchase synthetic assets include funding, liquidity creation, and market access.
Synthetics are also useful to multiple participants in the decentralized finance (Defi) ecosystem. It can be very useful in scaling assets, liquidity, technology, and participation. About scaling liquidity, the blog post reads:
“One of the main issues in the Defi space is a lack of liquidity. Market makers play an important role here for both long-tail and established crypto assets, but have limited financial tools for proper risk management. Synthetics and derivatives more broadly could help market markets scale their operations by hedging positions and protecting profits.”
Talking about scaling assets, he wrote:
“One of the biggest challenges in the space is bringing real-world assets on-chain in a trustless manner. One example is fiat currencies. While it’s possible to create a fiat-collateralized stablecoin like Tether, another approach is to gain synthetic price exposure to USD without having to hold the actual asset in custody with a centralized counterparty.”
According to him, synthetic can allow more traditional investors to enter the crypto space by increasing their risk management toolset. Synthetics are already in use in the decentralized financial ecosystem.
Abra is on the top of the list. When an Abra user deposits funds into their wallet, the funds are immediately converted to Bitcoin and represented as USD in the Abra app. Other platforms include MakerDAO, UMA, MARKET Protocol, Rainbow Network, and Synthetix.
The reader can consult Dmitry Berenson’s blog post on Medium to get further insights into synthetic assets.