Long

2024

DeFi

Bitcoin

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The end of 2024 and the start of 2025 have been dynamic for the crypto industry, with anticipation of the first pro-crypto US government, the prospect of creating US Bitcoin reserves, and the IRS issuing new regulations for DeFi brokers. It would be logical to expect most policy advocates and investors to believe crypto taxes will be the only issue in the industry in 2025. However, this is an incomplete view of a rapidly growing and multi-faceted asset class that continues to gain traction and increase its use cases across retail and institutional users.
In terms of crypto’s technological aspects, industry insiders are watching staking, particularly liquid staking. It enables investors to maintain liquidity so they can use their assets for borrowing, lending, and trading while generating rewards. This development is expected to have a net positive implication, especially for ETFs, where cryptocurrencies such as Ether can produce passive returns from staking.
The rise in liquid staking’s popularity has led to increased DeFi activity and other prominent effects. Demand for Ether has increased in parallel with the number of users participating in liquid staking and DeFi protocols, which has markedly contributed to its price surge. Additionally, traders can use liquid staking tokens as collateral for borrowing, enhancing overall DeFi collateralization and potentially leading to increased borrowing volumes.
<h2 id="b-synthetic-tokens-tracking-stocks-enable-seamless-transactions-and-provide-constancy-b">Synthetic tokens tracking stocks enable seamless transactions and provide constancy</h2>
A notable trend accompanying these developments is the rising prominence of synthetic tokens, which play a critical role in DeFi activity, providing a cushion against crypto market volatility and allowing for seamless transactions. Synthetic tokens are blockchain-based assets representing another asset’s value, such as stocks, fiat currencies, commodities, or other cryptocurrencies. They are backed by collateral or derived through algorithms and smart contracts. Tokens tracking the value of stocks are poised for further growth. Some of the biggest winners in 2024’s stock market rally have direct connections to rapid AI advancements. The rally saw the Nasdaq gain 33%, and it wasn’t the only US index notching double-digit gains. Chipmaker Nvidia was one of the big winners but not the only one. MicroStrategy’s stock continued its gains after climbing 346% in 2023. In 2024, the company’s share price<a href="https://www.cnbc.com/2024/12/25/ai-crypto-top-tech-stocks-applovin-microstrategy-palantir-nvidia.html" target="_blank" rel="noopener noreferrer nofollow"> increased by 467%</a> after deploying a highly successful Bitcoin acquisition strategy.
Examples of synthetic assets tracking stock values include jNVDA, which tracks Nvidia prices, jMSTR (tracking MicroStrategy stock), jAAPL (Apple stock), jTSLA (Tesla stock), and jMETA (Meta stock). Users of <a href="https://jellyverse.org/" target="_blank" rel="noopener noreferrer nofollow">Jellyverse’s </a>fully decentralized synthetic asset protocol, jAssets, can mint all of the above and more. These tokens protect against volatility. Others do so by tracking the value of real-world assets like commodities and precious metals. Users can issue jAssets and diversify their portfolios by locking up cryptocurrencies as collateral in an ingenious over-collateralized system, which guarantees that the collateral value exceeds that of the synthetic assets. This maintains reliability and stability within the platform, which also enables its clients to optimize capital efficiency via collateral such as USDT, USDC, ssETH, JLY, FRAX, wETH, SEI, and wBTC with adequate ratios starting at 110%.
<h2 id="b-assets-pegged-to-the-us-dollar-hedge-against-market-downturns-b">Assets pegged to the US dollar hedge against market downturns</h2>
Synthetic tokens pegged to the US dollar reduce exposure to the price swings typical of cryptocurrencies like Bitcoin or Ethereum. Stablecoins pegged to the dollar are typically less volatile and more predictable than cryptocurrencies. Many synthetic tokens are collateralized using other assets to stabilize their value. Over-collateralized systems provide a buffer against volatility, ensuring the synthetic token maintains its intended value even when collateral fluctuates.
Synthetic tokens can be used to create hedging strategies. For example, synthetic assets tracking fiat currencies or commodities allow investors to hedge against crypto market downturns without leaving the blockchain ecosystem.
<h2 id="b-algorithmic-rebalancing-maintains-stability-b">Algorithmic rebalancing maintains stability</h2>
Some synthetic token protocols use mechanisms like algorithmic rebalancing or incentive structures to maintain stability. These can help reduce reliance on the volatile nature of the underlying crypto collateral. In fact, rebalancing mechanisms are a key element in the context of maintaining a token’s leverage factor within a targeted range. For example, common perpetual futures’ effective leverage tends to change frequently because price fluctuations of the underlying asset impact the margin-to-notional ratio. This fluctuation is counteracted by reactively rebalancing the ratio when the targeted leverage range reaches an outer limit. It’s rebalanced by directly adjusting the underlying perpetual futures contract’s borrowed funds.
Long positions are rebalanced reactively when the asset depreciates. For example, the ETH 2x Long token is a leveraged token providing 2x exposure to Ether price movements. A 7.5% drop in Ether’s price from T0 to T1 leads to a 15% margin reduction. The leverage factor will then reach 2.18x, approaching the target range’s upper limit. The deviation is detected by the keeper network, which initiates rebalancing, reducing the amount of borrowed funds by 15%. The factor returns to 2x as the margin-to-notional ratio is rebalanced. Reactive rebalancing does away with the need for margin management.
<h2 id="b-industry-prospects-in-and-beyond-2025-b">Industry prospects in and beyond 2025</h2>
Synthetic tokens provide exposure to less volatile markets by tokenizing traditional assets like stocks. This diversification reduces the overall reliance on the inherently volatile cryptocurrency market. Increased regulatory clarity will benefit the crypto and digital asset sector in 2025, and greater institutional and retail adoption is sure to follow. Donald Trump has proposed to eliminate capital gains taxes on XRP, Cardano, and other cryptocurrencies issued by US companies. If his proposal is accepted, more investors will be drawn to the space, promoting innovation in the industry.
The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.

Synthetic Tokens Tracking Real-World Asset Prices Protect From Volatility

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