Synthetic assets get real: Competition for scalability, new markets heats up

Two new synthetic asset and derivatives platforms look to take a slice of Synthetix’s pie.

Synthetic assets, one of the most promising use cases for decentralized finance (DeFi), is becoming an increasingly competitive landscape as two new projects aim to bring scalability and new markets to traders.

On Friday, decentralized derivatives exchange Injective Protocol began a push into synthetic assets with the launch of a 24/7 synthetic gold market on their Solstice layer-2 testnet.

“It's fairly interesting to explore gold for the first commodity futures on Injective because Bitcoin and Gold has fairly interesting market dynamics,” Mirza Uddin, Injective head of business development told Cointelegraph. “I think it's natural to introduce that dynamic to the DeFi space.”

Synthetic asset markets like Injective’s often feature a notoriously tricky liquidity problem. To create assets that track real-world price movements, there must be a readily available pool of liquidity to accommodate for those fluctuations. Injective aims to overcome these hurdles with well-funded investors serving as early users:

“We will first onboard our investors who are also market makers and build up strong liquidity support across all markets. So we will first bootstrap liquidity with our existing investors,” said Uddin.

“Our upcoming liquidity mining mechanisms will also further incentivize market makers to join the platform and create the most competitive spreads,” he added.

Uddin also shared with Cointelegraph that Injective is pursuing an aggressive roadmap including testnet upgrades by Q1 2021, and a full mainnet launch Q2 2021.

The Injective announcement follows the launch of another synthetic asset platform, the Mirror Protocol, which currently focuses on US tech stocks.

Mirror requires a 150% collateralization ratio to mint synthetic assets like mAAPL, and is built on the Cosmos blockchain.

However, one of the earliest and most successful synthetic asset platforms, Synthetix, has a host of upgrades planned to compete with these upstart protocols.

Synthetix is among the many DeFi giants currently planning to deploy layer-2 scaling solutions, and a recent blog post laid out how "virtual synths" can enable greater synthetic asset liquidity. 

According to their website, Synthetix currently has $850 million in total value locked.