What Are Synthetic RWAs?

Synthetic Real-World Assets (RWAs) are digital tokens on a blockchain that replicate the value and performance of assets from the traditional financial world, such as stocks, commodities, real estate, or currencies, without requiring ownership of the actual underlying asset. Unlike tokenized RWAs, which involve direct backing by a physical or legal asset (e.g., a gold bar or a property deed), synthetic RWAs are created through financial engineering, typically using smart contracts and collateral. They rely on external price feeds, known as oracles, to track the real-time value of the asset they represent, allowing users to trade or hold them as if they owned the real thing—all within a decentralized ecosystem.

The creation of synthetic RWAs often involves over-collateralization, where users lock up cryptocurrency (like ETH or stablecoins) in a smart contract at a value higher than the synthetic asset being minted. This over-collateralization provides stability, ensuring the system can absorb price volatility or market downturns by liquidating excess collateral if needed. The appeal of synthetic RWAs lies in their ability to democratize access to markets traditionally restricted by geography, regulation, or high entry costs, while also offering liquidity and flexibility in DeFi applications like lending, borrowing, or yield farming. By bridging the gap between off-chain value and on-chain utility, synthetic RWAs are a powerful tool for expanding the scope of decentralized finance.