Synthetic FAANG stocks are trading in DeFi — but do gas fees make them uncompetitive?

Decentralized finance protocol Kwenta has launched a series of synthetic tokens for popular stocks — but current gas prices could make trading them more expensive than buying the real thing.

In a blog post on April 23, derivatives trading protocol Kwenta —an Ethereum dApp which is powered by Synthetix — announced the listing of various synths that track the prices of stocks from the top five tech firms known by the acronym FAANG. These comprise Facebook, Apple, Amazon, Netflix, and Google. Tesla was already available and there are plans to soon add Microsoft (MSFT) and Coinbase (COIN).

The Mirror Protocol on Terra blockchain has a similar setup offering a range of synthetic tokens based on tech stocks, as well as a FAANG index token. Tokenized stocks were first made available on the FTX derivatives exchange and can now be traded on other major platforms such as Binance, however synthetic tokens enable these stocks (or something similar) to be traded in DeFi.

Synthetic digital assets are tokenized versions of real world assets such as stocks, commodities, and indexes — they can also include physical assets such as real estate or vehicles. Their prices follow those of the real world assets, tracked by price oracles, allowing investors to gain exposure to them. The additional appeal is that anyone anywhere can trade them without having to jump through regulatory hoops associated with U.S. stock exchanges.

Synths were popularized by the DeFi protocol Synthetix which allows users to create their own synthetic assets providing there is underlying crypto collateral. The newly listed FAANG synths can be used for liquidity provision in pools provided by Balancer.

In the April 23 edition of DeFi newsletter ‘Bankless’, UMA Protocol founder Hart Lambur (another synthetic asset platform) compared synths to alchemy, adding that they enable anyone to create a financial asset for anything.

“In the same way YouTube allowed new forms of long tail video content to flourish, […] synthetic assets will enable new types of financial products we haven't even imagined yet.”

There is one underlying problem, however, especially with platforms based on Ethereum Layer 1. According to Bitinfocharts, the average transaction cost on Ethereum spiked to its second highest level on Tuesday, April 20, hitting $30.

Etherscan is currently reporting three-figure gas prices in USD for more complex DeFi activities such as swapping tokens on Uniswap. This could make investing in the new FAANG synths more costly than buying the actual stock and paying brokerage fees.

Fortunately, Synthetix is among a number of DeFi protocols implementing Layer 2 scaling solutions. It is currently in the process of migrating the exchange to rollup technology from Ethereum scaling solutions provider, Optimistic Ethereum. Owing to delays in the launch of Optimism mainnet, this is not expected until July 2021.