Bitcoin Tokenization and the Synthetic Assets Market

Synthetic tokens like owBTC are already responsible for moving millions in bitcoin synthetics in decentralized exchanges.

Synthetic assets (Synths) are those whose value is tied to another asset, but whose functions can extrapolate it. Synthetics track the value of underlying assets and allow the exposure to the assets without the need to stop the real asset, that is, it is possible to issue a token backed by a ‚real‘ asset and create from it a synthetic asset.

As mentioned, tokenized and synthesized assets give traders price exposure to the asset without the need to actually hold the underlying asset. In this synthetic market, Wrapped Bitcoin Circuit (wBTC) and renBTC are the most traded synthetic tokens.

Tokenized assets have another utility – they can be traded without friction between each other, which means that the wBTC can be easily exchanged for another synthetic, such as synthetic silver or other types of synthetic bitcoin in any decentralized exchange. It also means that anyone with an Ethereum portfolio now has access to any real-world asset that had already been tokenized.

Among the synthetic tokens, the wBTC is the most prominent, representing US$ 700 million in synthetic bitcoin tokens traded at decentralized exchanges.

Over US$ 1 billion in Bitcoin was tokenized for DeFi

Types of synthetic tokens

There are basically two different types of Synths, Normal Synths and Inverse Synths. Normal Synths are positively correlated with the underlying assets, while Inverse Synths are negatively correlated with the underlying assets.

An example of a synthetic asset is Synthetic Gold (sXAU) which tracks gold price performance. Price oracles track real world asset prices using services such as Chainlink or other oracles. An intelligent contract oracle feeds price information through various reliable third-party sources to prevent tampering.

An example of a Reverse Synthetic Asset is the Inverse Bitcoin (iBTC) that tracks the reverse performance of the Bitcoin price. There are 3 key values related to each Inverse Synths – the entry price, lower limit and upper limit.

Let’s consider the Inverse Synthetic Bitcoin (iBTC) as an example. Suppose that at the moment of creation, Bitcoin (BTC) is priced at $10,600 – this will be the entry price. If Bitcoin is lowered from $400 to $10,200, the iBTC will now be worth an additional $400 and will be priced at $11,000. The opposite will also be true. If Bitcoin goes up to $11,000, the iBTC will now be worth $10,200.

The Inverses Synths trade in a range with an upper and lower limit of 50% of the entry price. Thus, a limit is applied to the profit or loss that can be obtained by trading with Inverse Synthetics. Once the limits are reached, the exchange rates of the tokens are frozen and the positions are liquidated. Once deactivated and settled, these synthetics can only be exchanged in decentralized exchanges (DEX) at fixed values.

Tokenized assets and the synthetic market

Trading in synthetic bitcoins (sBTC) has grown a lot during the year 2020. Among the six synthetic bitcoin token projects, the Wrapped Bitcoin (wBTC) takes the lead, as it currently represents over 79% of the market with 117,183 wBTC. Followed by RenBTC, 13.56% according to Dune Analytics.

RenBTC exceeded US$ 250 million in circulation, while tBTC, its closest rival, represents a total of 2,564 ETH synthesized in its protocol.

When they are issued, most wBTCs and other synthetics are traded in DeFi protocols so that users can earn interest rates on loans, trading rates, or yield farming – the search for the best possible income opportunity on Decentralized Exchanges (DEX) platforms.

US$ 1 billion in Silk Road Portfolio Bitcoins moves for the first time since 2015

How synthetic assets are created

The idea behind the creation of Synths is similar to the creation of DAI in Maker. You must first commit Ether (ETH) as a guarantee in the intelligent contract of some DEX before being authorized to create the synthetic asset based on the posted guarantee.

The idea of tokenizing bitcoin is relatively simple. Following the same principle as the DAI, one must leave Bitcoin in deposit blocked by some mechanism, issue tokens on another network and apply Bitcoin as a related token on the other end.

Each token on the other network will represent a specific amount of Bitcoin. The anchor between the two assets must be maintained and the process must be reversible. In other words, it will be possible to destroy the tokens in question by unlocking the „original“ bitcoins in the Bitcoin blockchain again.

Bitcoin Tokenization and the Synthetic Assets Market
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