Synthetic Assets
DeFi Strategies • Yield Models • Token Income
asset type
On-Chain Representation of External Value — Synthetic Asset
A synthetic asset is a blockchain-based token designed to mimic the price and behavior of a real-world asset — such as fiat currency, commodities, stocks, or other crypto. These tokens are created using collateral and smart contracts, allowing users to gain exposure to external markets without actually owning the underlying asset.
Use Case: Synthetic assets allow users to trade the price action of gold, $BTC, $USD, or even real estate — all from within a blockchain environment.
Key Concepts:
- Price Pegging — Maintaining a token’s value relative to the asset it mirrors
- Collateralization — Backing synthetic tokens with locked collateral to ensure solvency
- On-Chain Derivatives — Financial instruments created and settled entirely on-chain
- Oracle Feeds — External data sources that supply real-time pricing to smart contracts
- FAssets — Synthetic representations of non-smart-contract tokens on Flare/Songbird
- Derivatives — Financial instruments deriving value from an underlying asset
- Smart Contracts — Self-executing logic that governs minting, collateral, and redemption
- Tokenized Gold — Real-asset gold representation on-chain
- Tokenized Silver — Real-asset silver representation on-chain
- Real-World Assets — Physical or legal claims tokenized for blockchain use
- Tokenized Precious Metals — Metal-backed tokens with redeemable value
- Depegging — When a synthetic or stablecoin loses its target price
- DeFi Risk — Smart contract, oracle, and protocol-level vulnerabilities
- Token Interoperability — Cross-chain movement and compatibility of synthetic tokens
Summary: Synthetic assets open borderless exposure to traditional and crypto markets — but they carry oracle risk, collateral risk, and depegging risk that real-asset-backed tokens like $KAG avoid entirely. Understanding the difference between synthetic and backed is essential for sovereign positioning.
Examples of Synthetic Assets:
- $sUSD — Synthetic U.S. dollar backed by collateral (e.g., on Synthetix)
- $sBTC — Synthetic Bitcoin that mirrors BTC’s price on-chain
- $fXRP / $fDOGE — FAssets minted on Songbird to represent XRP and DOGE with smart contract compatibility
- $GLD — Synthetic gold token reflecting the price of physical gold
- $KAG — Not synthetic: Tokenized silver backed 1:1 by audited physical metal in vaults, issued by Kinesis
- $TSLA — Synthetic Tesla stock offered by mirror protocols or derivatives platforms
FAsset Minting Workflow (User Example):
- User mints $fXRP on Songbird by locking XRP through the minting interface
- $fXRP is then used across DeFi apps or held in a wallet on SGB
- Via BiFrost, user can swap $fXRP back into $XRP, $SGB, or $FLR
- Slippage and swap fees are expected to improve as the system fully transitions to the Flare mainnet
Why Synthetic Assets Matter:
- Open up access to traditional markets without intermediaries
- Allow 24/7 exposure to real-world assets inside crypto ecosystems
- Enable programmable trading strategies across DeFi platforms
Real-World Assets vs. Synthetic Assets
Synthetic Asset Classification Reference
mapping synthetic types by backing model and risk tier
Classification Rule: If the token can be redeemed for the underlying asset, it’s backed — not synthetic. $KAG is redeemable silver. $sUSD is collateralized debt. Know the difference before deploying capital.
Synthetic vs Backed Evaluation Framework
assessing exposure quality before deployment
What stands behind the token? If it’s collateralized debt, oracle-fed pricing, or algorithmic balancing — it’s synthetic. If it’s audited physical metal in vaults — it’s backed. This distinction determines your entire risk profile.
Synthetics live or die by oracle accuracy. Check oracle source, update frequency, and fallback mechanisms. A single oracle failure can cascade into depegging, liquidation, or total loss. Backed assets like $KAG/$KAU don’t rely on oracles.
Can you exit? Synthetics require unwinding through the protocol. Backed assets offer direct redemption. FAssets require agent availability. Map your exit before you enter — especially for larger positions or cycle-peak timing.
Synthetics work best during expansion when liquidity is deep and oracles are stable. In contraction, oracle manipulation risk rises and collateral ratios tighten. Rotate synthetic exposure to backed assets before Phase 5. Store in Ledger for sovereign custody.
Synthetic Asset Due Diligence Checklist
verifying safety before synthetic exposure
☐ Smart contract audited by reputable firm
☐ Collateral ratio above 150%
☐ Protocol live for 6+ months
☐ TVL stable or growing
☐ Liquidation mechanics understood
☐ If unaudited — don’t touch it
☐ Multiple oracle sources (not single-feed)
☐ Update frequency matches volatility
☐ Fallback mechanism documented
☐ Historical peg accuracy verified
☐ No prior manipulation incidents
☐ Oracles are the lifeline — verify them
☐ Redemption path mapped and tested
☐ Liquidity depth sufficient for position size
☐ Slippage tolerance calculated
☐ Alternative exit routes identified
☐ Cycle timing aligned with exit plan
☐ Enter with the exit already planned
Capital Rotation Map
synthetic asset exposure across market phases