Synthetic Assets: The Ultimate Guide 2022
Humans have always traded.
Eggs for herbs, copper for textiles, livestock for machinery — you get the picture.
But with the introduction of money as a legal tender, bartering has become uncommon. Not trading though. Trading has kept on flourishing, especially with the increasing sophistication of financial markets.
Today you can trade almost anything: fiat currencies, shares, commodities, derivatives, and increasingly also cryptocurrencies. The majority of us, however, don’t have the possibilities to trade these assets as the barriers of entry remain high.
For that reason, only institutional investors and the wealthy have mostly profited from trading.
Synthetic assets, or synths, are about to change that. In this guide, we explain what synthetic assets are and how you can benefit from them.
What are synthetic assets?
Despite sounding confusing, synthetic assets aren’t all too difficult to wrap your head around.
Basically, synthetic assets are derivatives. This means that they derive their value from an underlying asset or index. Put differently: A derivative mimics the value of a predefined asset.
Derivatives have been created to simplify trading, particularly for assets that might be difficult to move — gold for example.
Now that we understand what derivatives are, the question becomes how synthetic assets differ from conventional derivatives. Well, traditional derivatives are pegged to the underlying asset by means of physical or digital contracts. Synthetic assets, however, are pegged to the underlying asset by means of collateralisation and oracle-derived price feeds on a blockchain.
By tokenising assets on a blockchain, it is possible to create synthetic assets of pretty much anything IRL — in real life — in our physical world.
This means you could theoretically trade anything you can think of — Tanzanian shilling, Apple shares, Bitcoin, uranium … anything.
As you read this, synthetic assets are on the cusp of unlocking untold pools of global liquidity. This represents a seismic shift and will redefine trading as we know it.
What are the advantages of a synthetic asset trading platform?
If you want to trade synthetic assets, you can do so on FABRIC’s synthetic asset trading platform. FABRIC runs on the Solana blockchain, offering you instant trades at negligible fees.
FABRIC has many advantages when compared to online brokers such as Robinhood. Let’s take a look at some of them.
When you buy or sell shares on Robinhood, your trade must go through a settlement cycle, referred to as T+2. T+2 stands for “trade date plus two days”. This means that when you buy shares on Monday, Robinhood will withdraw the corresponding funds within two business days (Wednesday at the latest) from your account and deposit the shares.
Conversely, when you sell shares on Monday, Robinhood will withdraw the shares from your account within two business days (Wednesday at the latest) and deposit the corresponding funds.
On the face of it, this seems fair. But through this system retail investors continuously get the short end of the stick. Here’s how. When a specific group of shares is extremely popular and a lot of retail investors buy it, online brokers such as Robinhood need a specific amount of collateral to execute these orders. When they don’t have this collateral on hand, the settlement cycle system allows them to simply stop accepting buy orders, refusing retail investors the chance of potential gains.
This is exactly what happened in 2021 when retail investors rushed to buy stock from GameStop and other companies.
Fabric doesn’t use a settlement cycle. This means that all of your purchases and orders are executed immediately, in real-time.
Payments for order flow (PFOF)
That’s not the only flaw Robinhood has though. The online broker also receives payments for your data, more specifically, data on your buy and sell orders. This is referred to as payments for order flow (PFOF).
Here’s how the system works. Instead of charging a commission on the shares you purchase, Robinhood accepts your order free of charge and forwards it to market makers — large securities houses or hedge funds — that process it.
Robinhood sends your order to market makers instead of conventional exchanges because they receive more favourable conditions from the aforementioned market makers.
In order to make a profit, market makers need to charge a slightly higher price per share than the real-time market price. This means the share prices on Robinhood are always slightly inflated and you pay more than you should! Wait, but how does Robinhood profit from this? Simple: Market makers refund part of their profits back to the online broker.
As you can see, online brokers might not cooperate with market makers with the best terms for investors, but those with the highest refunds. Robinhood wins, you lose. Fabric doesn’t make use of PFOF. This means the prices you see on our platform are the real-time market prices.
No hidden fees, no shenanigans. Okay, let’s do a rapid round of further benefits Fabric offers.
When using online brokers such as Robinhood or eToro, you’ll realise that the trading of some assets, like stocks for example, is restricted by trading hours.
On Fabric you can trade the assets you love 24/7/365.
On some online brokering platforms you need to adhere to withdrawal limits. Also, some of these platforms charge withdrawal fees. We think this is unfair.
That’s why there are no withdrawal limits or withdrawal fees on Fabric.
Know your customer (KYC) guidelines
In order to trade on online brokers such as Robinhood or eToro, you need to go through a KYC process. This means you need to be 18 years or older and provide details such as proof of identity and address. Also, access to these platforms is sometimes restricted to specific geographic areas.
We have no business scooping up your personal details. On Fabric you can trade regardless of who you are or where you come from.
In order to trade, you need to deposit funds and withdraw gains. That’s why most trading platforms require you to have a bank account. We’re aware of the fact that many remain underbanked and unbanked.
For that reason, you don’t need a bank account to trade on Fabric — just a wallet such as Phantom.
Trading synthetic assets with Fabric
As mentioned previously, Fabric is a synthetic asset trading platform that runs on the Solana blockchain.
Currently, our platform is in beta and should be ready for launch in Q1/2022. If you’re already curious though, you can try our beta version! However, before you do anything, you first need to set up a wallet such as Phantom.
When you successfully set up your Phantom wallet, head over to the fSynth dApp and connect your wallet in the top right corner of your screen by clicking on “connect”.
In the next step, you need to get some dummy tokens. You can claim these (at no cost) by clicking on the faucet symbol in the top right corner of your screen- make sure to claim both SOL and FAB.
Next, you need to deposit some FAB as collateral.
In turn, your collateral allows you to “mint” i.e. create synthetic USD — fUSD (you’ll find this option on the right side of your screen).
Now you can swap this fUSD for any synthetic asset that is available.
The beta version of our platform supports synthetic uranium (fURA), gold (fXAU) and Dogecoin(fDOGE). Once we’re live the DAO will be able to vote on assets they wish to add to the ecosystem.
We’re excited to keep creating value for our FAB users and would love to hear what you all think about 👋
Join The FAB Family
We can’t wait for you to join the community and become a part of the FAB Family.
A big thanks to @J264G for his work on this post 💚