Note: This post was originally published on our medium blog on January 12, 2023

Are you new to the world of decentralized finance (DeFi)? Do you want to know how Kresko and synthetic assets fit into it?

In this post, we’ll introduce you to some of the key building blocks of DeFi and explain how synthetic assets fit into the picture.

Decentralized Exchanges

Decentralized exchanges (DEXs) are a fundamental building block of many DeFi services. DEXs or automated market makers (AMMs) are platforms that enable users to buy and sell cryptocurrencies without the need for a central authority.

Previously, users had to use centralized exchanges to trade tokens. Centralized exchanges used a central limit order book (CLOB) model similar to that of traditional exchanges, where a third-party would match buyers and sellers.

Unlike traditional brokers where your assets are held by a 3rd party, in a DEX, traders and market makers always have control over their assets and they cannot be seized by a third party. DEXs offer increased accessibility, transparency, and seizure resistance.

Lending Platforms

One of the core applications of DeFi is the ability to lend and borrow funds without using a centralized intermediary like a bank. Banks earn interest by lending out user funds but do not provide good returns. Additionally, users’ funds are at risk as users have to trust the bank without knowing who they are lending it to.

With DeFi, a software application (smart contract) is responsible for matching lenders with borrowers instead of people. In this case, the actions happen transparently and without the need to trust a 3rd party. Interest rates are set algorithmically based on demand and not by centralized third parties. The interest earned goes directly from the borrower to the lender with minimal fees. Users can earn a higher return on their investment compared to that earned using banks

Lending platforms allow users to borrow funds from other users by providing collateral so that if the borrower defaults, the lender can get their assets back. In turn, borrowers can access the funds they need to make purchases or invest in other opportunities.

Stablecoins

Stablecoins are cryptocurrencies pegged to a stable asset, such as the US dollar (USD) or Euro. They are less volatile than cryptocurrencies like BTC and ETH, which makes them more suitable as a medium of exchange. They also maintain their value and are preferred as collateral when borrowing.

Broadly, there are two types of stablecoins. Tokenized stable assets are assets where a third party issues a cryptocurrency by holding an equivalent amount in a bank. In this case, the issuer acts as a counterparty from whom users can buy stablecoin from. These assets are not decentralized and can be seized by the issuer.

A decentralized stablecoin is created by users (market makers) providing another asset as collateral. Market makers generate the stablecoin in a permissionless manner by depositing collateral. The market makers take on a debt position. This is known as a collateralized debt position (CDP). In this case, the market maker is borrowing from a smart contract that acts as a counterparty.

Decentralized stablecoins cannot be seized as there are no 3rd parties involved.

Synthetic Assets

Traditional brokerages often have high barriers to entry, making it difficult for some individuals to invest in stocks and other assets. This is due to factors such as geography, high account balance requirements, high fees, and cumbersome paperwork.

Synthetic assets provide an alternative solution by allowing users to gain exposure to a specific asset or group of assets through tokenization. They are derivative instruments that derive their value from the price of another asset, like a stock or commodity (e.g. TSLA, Gold, S&P 500, etc.). They can be traded on decentralized exchanges (DEXs) without any geographical restrictions or minimum requirements, which provides global access to markets.

Synthetic assets are a generalized form of stablecoins. That is, instead of pegging the price of the generated asset to 1 USD, one can generate an asset pegged to any arbitrary asset that has a price. Like with stablecoins, market makers can borrow synthetic assets by providing collateral. They can then use it to create liquidity on DEXs, and regular users can trade these assets.

At Kresko, our mission is to make wealth accessible to anyone, anywhere. To that end, we are building a platform for synthetic assets that aims to provide access to financial assets that are not currently accessible.

Conclusion

Access to traditional financial services is often limited by various factors such as geography, high account balance requirements, high fees, and cumbersome paperwork.

DeFi is a new type of financial system that removes these barriers by being open, permissionless, and borderless. This means that anyone on the Internet can access these services without restrictions.

DeFi provides a level playing field for everyone to access financial services and opportunities. By understanding the key building blocks of DeFi, you can take advantage of the many opportunities.

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