Synthetic Stock Trading Popularity Growing in DeFi Sector

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In Brief
  • Synthetic versions of Tesla, Apple, Amazon and other big stocks and ETFs have been trading on blockchain projects.

  • Some see decentralized finance (DeFi) as purposefully disruptive to the financial system.

  • Binance recently came under fire from German financial authorities for issuing stock tokens.

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The Trust Project is an international consortium of news organizations building standards of transparency.

The prevalence of trading synthetic versions of Tesla, Apple, Amazon, and other big stocks and ETFs has grown on decentralized finance (DeFi) projects like Mirror Protocol and Synthetix over the past year.

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The tokens are engineered to reflect the prices of the securities they track. But it does so without any actual purchases or sales of the real stocks and ETFs involved. So far, volumes are only a small fraction of those on regulated exchanges. 

For years, many on Wall Street have wondered about the feasibility of moving the stock market onto a blockchain. Now DeFi projects have gone ahead and built synthetic versions of some of the most popular equities. 

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The power of DeFi

In a way, the anti-establishment ethos of the crypto world is being applied to subvert the stock market. Do Kwon, the co-founder and CEO of Terraform Labs, the South Korean company that created the Mirror Protocol, certainly sees it that way.

Kwon said that DeFi “is so powerful in unlocking financial services for disenfranchised people around the world.” He added that “waiting for fragmented regulatory frameworks to crystallize before innovating is counterintuitive.”

For Kwon and other supporters of these synthetic assets, the rules and various barriers of the financial world are there to be disrupted. It can open up opportunities for wealth creation currently only available to a fortunate few, he said. Apart from being able to trade anonymously 24 hours a day, seven days a week, from anywhere, users are also unhindered by capital controls. These include know-your-client rules imposed on broker-dealers and other frictions of the traditional financial system.

Stock token scrutiny

Meanwhile, scrutiny has also increased for other synthetic assets and other DeFi projects.

As part of recent regulatory woes with different countries, Binance drew the attention of Germany’s financial regulator (BaFin). It did this by offering stock tokens that are tied to the share performance of popular U.S. companies but backed by the actual equities.

Binance may have violated securities rules when it issued these tokenized shares, BaFin said in April.

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage. He can best be described as an optimistic center-left skeptic.

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