Ethereum
$158.88 -7.25%
ETH · 3w

DeFi Explained: Synthetic Assets on Ethereum (MakerDAO, UMA, Synthetix, Market Protocol + Dai Derivatives)

Why Synthetic Assets?

Synthetic assets are financial instruments that simulate another asset’s payoff. In that way, they are synthetic, not the actual asset, hence the name.

Any difference between synthetics and derivatives? Those names are often seen in the same context (e.g. Investopedia’s examples for synthetics and derivatives).

In our case, we are simply using derivatives as instruments that simulate other assets’ payoff and synthetics as derivatives that use a mix of assets/derivatives.

Why should I buy a synthetic asset anyway?

That’s interesting for people who can’t or don’t want to hold the original asset. Think about a user wanting to hold USD on a blockchain. Only a synthetic token can bring a real USD on-chain.

Again, if you buy the synthetic asset, you simply get the same exposure (think of it as price or cash flows) as buying the original instrument(s). Selling synthetic onchain-USD for ETH gives you the same exchange rate as real USD, if done right.

If done right? Risk.

Yes, synthetic assets can go wrong (e.g. countless oracle incidents) and on-chain USD can lose its peg to the real USD. You could argue that with increasing complexity, risks of holding those assets increase as well.

And, even an on-chain USD can be simple or complex. Speaking of which, here comes our first use case: synthetic USD.

USD on DeFi — USDT vs. Dai — Who do you trust?

You might have heard of USDT, USDC, TUSD …. or other USD stablecoins on Ethereum.

All of them are partly or fully backed by real USD (or other real-world assets) and promise to be always able to be returned for USD. Of course they bring the real-worldly challenges of having to trust that promise.

MakerDAO on the other hand aims to bring USD to Ethereum without this counterparty risk. Its stablecoin Dai aims to be running completely within the closed system of the Ethereum blockchain.

Using MakerDAO the users lock ETH (or other toke...

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