The launch of a new synthetic Bitcoin (BTC) product may allow traders to benefit from crypto bull trends without having to own the underlying asset.
Synthetix (SNX), formerly known as the stablecoin provider Havven (HAV), announced Monday it had launched a new synthetic asset on its trading platform that tracks the value of Bitcoin. It gives holders exposure to the BTC price and that of the wider crypto market, without having to purchase the actual asset or use a custodial solution.
Known as sBTC, it is an ERC20 token that can interact with other tokens and dApps in the Ethereum (ETH) ecosystem. It’s Synthetix’s first crypto synthetic asset, joining other ‘Synths’ made for fiat currencies, like the US dollar, euro and Korean won, as well as one for gold, all released last December.
Synthetics are a type of derivative product. In the traditional markets, they are created by using various financial instruments which simulate the same price movements as a particular asset, without having to actually own it. Synthetic ETFs, for example, are created through various swap agreements between a trader and a counterparty, usually an investment bank.
They can be tailored in such a way as to meet the individual needs and requirements of the investor. The advantage of synthetics is they give traders exposure to markets they would otherwise not have access to. Particularly if, like gold or Bitcoin, its a relatively scarce asset that would be difficult to own.
What makes synthetic Bitcoin so special?
The Synthetix sBTC product works slightly differently to the traditional synthetic. The biggest difference is there’s no counterparty. Users mint sBTC by depositing SNX tokens on the platform as a form of collateral; the amount determined by the dollar value at the time of minting. These can be redeemed at any time by returning sBTC tokens, which are subsequently burnt.
“Ethereum still doesn’t have a programmable synthetic Bitcoin as an ERC20 token without major liquidity restrictions or custodial risk, so sBTC is providing real utility,” said Synthetix founder, Kain Warwick, in a press statement. “It’s an example of the benefits of the flexibility of a distributed collateral pool of cryptoassets, which will allow us to continue to offer new trading possibilities not offered anywhere else.”
The collateralization used to underpin value in Synthetix’s synthetics (say that fast three times) is similar to the technique the project used for the USD-backed stablecoin, Nomin.
Synthetix essentially facilitates a stable value without having to hold onto the asset itself, like projects such as Tether (USDT) and USD Coin (USDC) do. The project, which rebranded in December, has highlighted that the method could be used to create synthetic stocks and indices that can also become tradeable on its platform.
Being an ERC20 token, synthetic Bitcoin allows holders to effectively trade BTC value on the Ethereum ecosystem, similar to projects like Wanchain (WAN) and Wrapped Bitcoin (WBTC). That said, synths require a higher gas fee than many other ERC20s.
The use-cases for synthetic virtual assets overlap considerably those of other projects. A stable store of value, and in the case of sBTC, also facilitates cross-chain transactions. The market is already saturated. Synthetix’s unique selling point is the absence of a custodial solution. It’ll need to convince investors that has value in itself.
The author is invested in digital assets, including BTC and ETH which are mentioned in this article.
Crypto Briefing’s CEO is an advisor to Wanchain, and was not involved in creating this article.