Synthetic Assets And Customizable Markets

All the way back in 2017, not long after Ethereum became the first blockchain to run on smart contracts, a project called Havven (now known as Synthetix) was the first to customize these contracts in a way that mirrored other assets. 

In 2020, “DeFi Summer” propelled Synthetix into massive success, as users could get exposure to a wide range of synthetic tokens with seemingly “infinite liquidity.” By February 2021, the amount of assets on Synthetix reached ~$3B.

While Synthetix is no longer the leader in synthetic assets, the impact they had on crypto can’t be overstated. Today, the most popular decentralized exchanges use synthetic assets to offer deep liquidity on virtually any asset – even RWAs like stocks, customized indices, commodities like gold and oil, and more.

Ultimately, synthetic assets are a new way of gaining exposure to the price of an asset without actually buying it. While traditional markets like swaps and futures use margin to gain exposure to various assets, synthetic onchain markets offer even more flexibility via crowdsourced liquidity.

Theoretically, synthetic assets can represent any real and financial assets that have active price feeds – stocks, commodities, real estate, FX, etc. While they don’t carry any of the benefits of holding the underlying (for example, you can’t stake synthetic ETH or get dividends from synthetic AAPL), they’re extremely useful if you just need exposure to price. 

For example, someone who wants to hedge exposure to the market in a retirement account where shorting is not permitted can short the S&P 500 onchain with leverage. While alternative methods such as options may be available, these can be expensive for high-priced assets and must be actively managed to maintain proper exposure.

Additionally, someone with a large position in NVDA may want to hedge downside exposure. Since selling shares would create a taxable event, they could alternatively short NVDA with leverage to create their desired hedge without taking on the additional maintenance of option-based hedges.

These are two of many examples of synthetic assets’ utility, and the liquidity for these assets is scaling at a rate that will soon be able to accommodate institution-sized positions.

Today, we’ll look at how they can bring scalability and real use cases to traders of any size.

Synthetic assets require two main components to run: data and liquidity.

As mentioned earlier, any asset with a live and accessible price feed can be used to create an onchain synthetic version. 

This real-time price data is brought onchain via oracles, which pull data from offchain sources into onchain apps. This allows onchain exchanges to support markets for thousands of assets across global markets. Common examples of oracle providers include Pyth and Chainlink. 

In other words, synthetic assets use oracle data as an “anchor.” To reduce reliance on any single data provider, many exchanges pull data from several sources. 

For example, Hyperliquid uses Binance, OKX, Bybit, Kraken, Kucoin, Gate IO, MEXC, and Hyperliquid’s own spot market to calculate real-time crypto prices. This allows for arbitrage opportunities – if the listed price drifts away from the oracle price, traders can profit from exploiting the difference.

For traditional markets, creating reliable onchain data feeds becomes a bit more complicated. Chainlink and Pyth both offer real-time data for stocks, FX pairs, and commodities, but rather than 24/7 like the crypto market, these prices are only available “24/5.” 

Other, more “niche” apps like Parcl (which hosts synthetic real estate markets) use oracles (in this case, from Pyth) to import their own data. Specifically, Parcl Labs sends their own proprietary real estate data feed, covering 70,000+ unique US real estate markets, through Pyth to power Parcl’s market.

Traditionally, the liquidity for individual assets across markets has been managed in isolation. In other words, each asset has designated market makers with specific amounts of capital that can be used to trade that asset. Centralized exchanges and some forms of DEXs (e.g. AMMs) use this model. 

However, synthetic assets aren’t actually “backed” by their represented asset. As we mentioned earlier, if you buy a synthetic AAPL share on a DEX, you don’t actually own a share of AAPL; you own a representation of it that’s actually backed by some form of collateral.

That collateral comes from a shared liquidity pool which anyone can contribute to. For example, USDC can be used to represent the prices of FX pairs, commodities, stocks, and more – all from one shared pool of liquidity that essentially serves as a crowdsourced market maker. This way, all markets indirectly inherit the liquidity of USDC rather than that of their own.

These shared pools typically act as a counterparty to traders – liquidity providers (LPs) earn a share of the pool’s overall PnL, proportionally to their deposits. A notable example is Hyperliquid’s HLP vault, which has generated ~$140M of income for LPs over the past year.

This can be seen as an alternative income source that’s not necessarily correlated with market prices, but instead correlated with volatility, as larger volume translates to more liquidations and trading fees.

Overall, synthetic assets leverage smart contracts’ programmability to turn any form of liquidity into any type of asset.

The flexibility of synthetic assets creates a new paradigm for financial assets. Never before has there been an open system where markets could be created for illiquid and/or long-tail assets with just a central liquidity pool and a reliable data feed.

At the same time, blockchain technology is approaching institutional-grade performance; transactions can be executed in mere milliseconds with near-instant settlement.

This combination of flexibility and performance is a major driver of the ongoing “CLOB wars” (which we covered extensively in our A1 research series).

When it comes to DeFi success stories, Hyperliquid is certainly among the top names to mention.

With over $2.9T of volume generated during 2025, not only is it the largest perps DEX in crypto, but it’s also the top revenue-generating project in all of DeFi with $870M+ in 2025 – trailing only Tether and Circle in the broader crypto space.

Hyperliquid is also a leader from a synthetic asset standpoint; its HIP-3 upgrade enables permissionless listing of perpetual futures markets – in other words, as long as you can source data and stake a certain amount of HYPE tokens (currently 500K), you can list any asset you want and use Hyperliquid’s underlying liquidity pool. 

This extends the development of the Hyperliquid ecosystem far beyond the core team, fostering innovative new projects while supplying them with the liquidity to create new markets. It also creates a free market where projects’ utility is naturally decided by the userbase.

HIP-3 has been a game changer for access to traditional asset classes onchain. Since HIP-3 went into effect last October, 126 new assets have been listed on Hyperliquid, ranging from stocks and indices to precious metals to energy commodities and more.

These synthetic asset markets are continuing to grow in popularity as well; at the end of 2025, total open interest for HIP-3 markets was just over $250M, but by late January it crossed $1B for the first time. The recent volatility in metals reinforced its success; during the 1/30 selloff, Hyperliquid generated $3B in silver volume alone – that’s 2% of the CME total for the day!

Overall, the convenience of synthetic assets from a liquidity and price exposure standpoint, combined with the permissionless innovation of HIP-3 markets, creates a flywheel that could truly make a lasting impact on DeFi adoption.

Without the programmability and permissionlessness of blockchains, we wouldn’t have public synthetic asset markets that anyone can use, build, and earn yield from their contributed liquidity. 

Smart contract programmability enables the creation of onchain markets that not only reflect the price of an underlying asset (e.g. the S&P 500), but also allows it to be backed by a different asset (e.g. USDC) and to be traded with leverage. 

Since the same liquidity pool is used to back all assets, micro cap altcoins and niche commodities draw from the same liquidity source as Bitcoin and the S&P 500. While trading volume for these assets will likely remain low, the guaranteed availability of liquidity not only reduces price slippage but also allows them to be listed in the first place.

In addition to allowing pure price exposure to illiquid assets without slippage, synthetic markets enable users to leverage their exposure to any given asset, resulting in minimized capital requirements and customized hedge sizing. 

While not a perfect solution, the permissionless nature of blockchains allow for new innovations to solve the “bugs” involved. For example, long-tail synthetic perps markets tend to have erratic funding rates which can affect the reliability of a hedge position. However, thanks to programmable markets, anyone can hedge their funding rate exposure on apps like Boros to offset their impact.

Since any synthetic asset can be backed by anything (e.g. a highly-liquid asset like USDC), one of the largest hurdles to building onchain markets – bootstrapping liquidity for each asset – is eliminated. Instead of figuring out how to source liquidity for long-tail assets like altcoins, or illiquid RWAs like real estate that market makers don’t want to (or physically can’t) provide, builders can focus on bringing quality products and UX to their user base. 

Overall, synthetic assets provide easy exposure to crypto markets and traditional markets alike, serving a wide variety of functions for speculators as well as hedgers.

As the space evolves, we expect the variety of synthetic assets to continue expanding to global stocks, commodities, FX pairs, and much more. Early success from leaders like Hyperliquid show that the growth trend is in full effect, and this is surely an area of DeFi to keep an eye on!