Before understanding Synthetics, we need to understand what Derivatives are? It effectively contracts between parties that are bought or sold as bets on (or hedges against) the future price movements of securities they’re based on hence, the name “derivative.” So, derivatives’ prices depend on their underlying assets’ prices, and futures and options are the most used Derivatives in the financial markets.
Synthetics are the derivatives in the decentralized world. Synthetics are used to track the value of any underlying asset in a tokenized form. The real-time price of this asset is obtained from market sources through oracles with low latency and seamless data transfer between the market and the asset token.
This facilitates the possibility of a plethora of asset classes like stocks, index funds, commodities, currencies, bonds, etc., which purely mimic the price action of any other asset in the form of tokens.
A whole ecosystem of synthetics opens a new world of possibilities in the Decentralised derivatives market, which will empower the non-institutional investors of the world to take exposure into asset classes like Commodities or Corporate Bonds, which would be too taxing, capital intensive and, almost impossible in most cases for them in the traditional financial world.