Systematization of Knowledge: Synthetic Assets, Derivatives, and On-Chain Portfolio Management

Abstract

Synthetic assets are decentralized finance (DeFi) analogues of derivatives in the traditional finance (TradFi) world - financial arrangements which derive value from and are directly pegged to fluctuations in the value of an underlying asset (ex: futures and options). Synthetic assets occupy a unique niche, serving to facilitate currency exchange, giving traders a means to speculate on the value of crypto assets without directly holding them, and powering more complex financial tools such as yield optimizers and portfolio management suites. Unfortunately, the academic literature on this topic is highly disparate and struggles to keep up with rapid changes in the space. We present the first Systematization of Knowledge (SoK) in this area, focusing on presenting the key mechanisms, protocols, and issues in an accessible fashion to highlight risks for participants as well as areas of research interest. This paper takes a broad perspective in establishing a general framework for synthetic assets, from the ideological origins of crypto to legal barriers for firms in this space, encapsulating the basic mechanisms underpinning derivatives markets as well as presenting data-driven analyses of major protocols.